The Republican tax reform law—officially called “The Tax Cuts and Jobs Act" (H.R.1)— as previously written contained several significant provisions affecting student loans, graduate students, and tuition. Specifically, the student loan interest deduction, tax-free tuition waivers for graduate students, and tax-free employer-paid tuition were all on the chopping block. Fortunately, these items that had been targeted for elimination were saved at the last minute. Some parts of the new tax law, though, will impact student loans and education. Read on to learn about a few provisions that are staying the same and some that aren't.
These parts of the tax code won't change under the new tax law.
Under the new tax law, the deduction for student loan interest, which is up to $2,500 per year, remains intact. You may claim this deduction without itemizing your taxes, but it's only available for certain borrowers, and depends on your income. Once your modified adjusted gross income reaches a certain amount—$65,000 for singles, or $135,000 for couples—the benefit is reduced, and it's completely phased out for singles who earn $80,000 and up, and couples earning $165,000 or more.
Around 145,000 graduate students in the U.S. get waivers that eliminate all or part of their tuition fees, normally in exchange for some kind of work. These kinds of waivers are ordinarily given to teaching and research assistants. Under the new tax law, graduate students still won't have to pay income taxes on the tuition waivers they get from their schools.
Employers sometimes help their employees pay for tuition. Currently, workers may deduct up to $5,250 in employer-paid tuition from their taxable yearly income, and the award is also tax-free under the new tax law. Also, the American Opportunity Tax Credit and the Lifetime Learning Credit, remain in the tax rules.
These parts of the tax code will be different under the new tax law.
Federal student loans are typically dischargeable if the borrower is totally and permanently disabled. Also, a student’s death (or a parent's death in the case of a parent PLUS loan) wipes out any outstanding amount owed on federal student loans. Prior to this bill, the forgiven amount counted as taxable income.
Under the new tax law, though, if a student loan borrower becomes permanently disabled, the forgiven amount is excluded from taxable income. The law also excludes the amount of the loan forgiven in the event of death. These exclusions are applicable after December 31, 2017, but will not apply to discharges after December 31, 2025.
Certain states, though, might consider forgiven student loan debt as taxable income, even if the federal government does not.
Currently, money invested in a 529 account is tax-free, but may be used only for college expenses.
Under the new tax law, money from a 529 account can be withdrawn tax-free to cover to cover the cost of sending a child to a K-12 public, private, or religious elementary or secondary school, as well as to cover some expenses related to homeschooling. All families, no matter their income level, may deposit $10,000 per beneficiary, per year into these accounts.
Additional changes to student loans and higher education are being addressed in the "PROSPER" Act (Promoting Real Opportunity, Success, and Prosperity through Education Reform Act), which is an overhaul to the Higher Education Act.