With the fall semester rapidly approaching, anxious parents and students are watching what Congress will do about the rates on federally backed student loans. Rates doubled July 1, but the Senate has agreed on a plan that would tie interest rates for college loans to financial markets.
While millions rely on loans, there are other options to help pay for college. A couple of federal lawmakers, however, say the current tax breaks for higher education are too complicated.
So Sen. Marco Rubio, R-Fla., and Rep. Aaron Schock, R-Ill., have introduced a bill that would eliminate the current assortment of education tax credits and deductions and consolidate them into one higher education credit.
The proposed "higher education and skills obtainment" credit would be a $2,500 nonrefundable tax credit. Expenses that would count toward the credit would be tuition and enrollment fees, course-related books, and required supplies and equipment. In addition, eligible education expenses would be expanded to cover those paid by students enrolled in job skills training programs identified by the Workforce Investment Act.
There would be income limits on who would qualify. Only students who attend school at least half-time could claim the credit, which would only apply to four years of schooling. And since the credit would be nonrefundable, it could zero out any tax due but taxpayers wouldn't get any excess credit back as a refund.
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But, say Rubio and Schock, their tax credit would reduce some of the complexity that now exists as students, or their parents, try to coordinate the current tax benefits for higher education.
The educational tax breaks that would be erased from the tax code if the higher education and skills obtainment credit is enacted are the American opportunity credit, a partially refundable credit of up to $2,500; the lifetime learning credit, a $2,000 nonrefundable credit; and the potential $4,000 above-the-line deduction for education expenses.
Now taxpayers must determine if they are eligible for any of these three tax breaks and, if so, figure out which one provides the most tax benefit.
Schock and Rubio say that in addition to simplifying tax considerations for students, their proposed single educational tax credit will save Uncle Sam around $4 billion a year. Part of the budget savings would come from the bill's anti-fraud provisions, but most would come from repealing the refundable American opportunity tax credit.
Do you or your kids use education tax breaks to cover college costs? Do you think Rubio and Schock are on the right track by simplifying the process? Or would you prefer to keep the current system, particularly the refundable tax credit option?
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Veteran contributing editor Kay Bell is the author of the book "The Truth About Paying Fewer Taxes" and a co-author of the e-book "Future Millionaires' Guidebook."