Bakersfield College

Analysis of How ‘Tax Cuts and Jobs Act’ Affects Higher Education Funding and Financial Aid

Author: Kevin Ott
Contributor: Jennifer Achan
12/2017

There have been many news reports expressing tremendous anxiety about the new tax bill’s detrimental changes to higher education. However, these fears are overblown. Almost all of the legislative items that had a direct effect on higher education did not survive the conference between the House and Senate and did not make it into the final bill.

For example, the biggest concern as it relates to tuition waivers was the news going around in early December that the bill would tax graduate student tuition waivers as income. The House Bill contained that provision, which only applied to graduate students. The final version of the bill does not have this.

After reviewing the full text of the Tax Cuts and Jobs Act, the points below describe the bill’s impact on higher education. At this point, most of these items will only have an indirect effect. For any references to “critics of the bill,” this analysis uses a Dec. 4 2017 article and a Dec. 18 article from InsideHigherEd.com that summarizes the concerns of the higher education community.

Many of the Concerns of Higher Ed Did Not Survive the Conference Bill

The higher education community was concerned about the following provisions that were in the House version of the bill:

  • Reform of American Opportunity Credit and Repeal of Lifetime Learning Credit (p. 581 of bill)
  • Repeal of Exclusion for interest on United States savings bonds used for higher education expenses (p. 592)
  • Repeal of Deduction for Qualified Tuition and Related Expenses (p. 590)
  • Repeal of Exclusion for Educational Assistance Programs (i.e. education assistance from an employer to employee) (p. 593)
  • Repeal of Exclusion for Qualified Tuition Reductions – a reduction for certain education provided to employees and their spouses and dependent of certain educational organizations (p. 591)
  • Repeal of Student Loan Interest Deduction (p. 589)
  • Termination of the Private Activity Bond, which could affect funding that colleges get for building (p. 832)

As you can see in the final bill, all of the repeals above were included in the House version of the bill, but when it reached conference, they were all struck down. This can be verified by going to each of the bill’s page number listed above and scrolling through the evolution of each piece of legislation as it progressed from House to Senate to conference, which produced the final bill.

What did pass through conference, however, is the 1.4 percent excise tax that will tax the endowment of private colleges. A newer article from InsideHigherEd.com, linked above as “Dec. 18 article,” details how this affects private colleges.

Limitation of Deduction for State and Local Taxes

As noted in p. 88 of the bill, the deduction for state and local taxes will be limited to $10,000 ($5,000 for married individuals filing separate). Effective date: taxable years beginning after 12/31/16.

This will increase tax revenues for states, which in theory might help community colleges funded by state budgets. However, the Inside Higher Ed piece said it didn’t like this deduction limit for the following reason: “The fear is that wealthy taxpayers in states that invest substantially in public colleges and other services will push to cut spending generally, since they will no longer receive a tax break on their state and local payments.”

Frankly, it is a little hard to predict what people will do in response to the deduction cap, so the fear may (hopefully) be unfounded. Time will tell.

Doubles the Standard Deduction for Tax Filers

The standard deduction will be doubled. Inside Higher Ed had a similar complaint about this as its remarks about the state and local taxes. They believe the doubling of the standard deduction is “a change that charitable groups say would hurt incentives for donating to tax-exempt entities like colleges.”

Reforms to the Discharge of Certain Student Loan Indebtedness

Refers to p. 587 of tax bill (sec. 1203 of House bill)

Present law states that taxable income generally includes student loan discharges, but it allows an exception to this rule is the forgiveness is contingent on certain rules about the student’s employment. The tax bill modifies this rule by including discharges on account of death or disability, so that such discharges are also excluded from taxable income.

Effective date: Applies to discharges of loans after 12/31/17.

Modifications to Coverdell Savings Accounts and 529 Plans

No new contributions are permitted into Coverdell savings accounts after 12/31/2017. The definition of higher education expenses for Section 529 plans was expanded to include expenses related to home schooling.

Change to Charitable Deductions and the College Sporting Event Deduction

The new bill (p. 618) does not eliminate charitable deductions as has been reported from earlier versions of the bill. It actually increases the percentage limit for charitable contributions of cash to public charities from 50 percent to 60 percent.

However, as noted on p. 618 of the tax bill, buying tickets to college sporting events can no longer be deducted as a charitable contribution.