President Clinton’s proposed college-tuition tax breaks may sound like a great deal for middle-income families, but the fine print could cause a few headaches.
Clinton will highlight his higher education agenda in his State of the Union message today and in his budget proposal due later this week. His goal: “making two years of college education as universal as a high school diploma.”
Republicans in Congress are receptive because an educated work force is critical to economic growth.
When Clinton steps up to a microphone, he can make his plan sound simple: a $1,500-a-year “Hope Scholarship” tax credit for the first two years of college, up to $10,000 a year in tuition tax deductions for lifelong learning, penalty-free IRA withdrawals for education and an expansion of Pell Grants for low-income students.
But the plan has many moving parts. It also involves a major new role for the Internal Revenue Service in higher education at a time when that agency is struggling to meet the demands of modernization.
How these moving parts will mesh with one another, with an already complicated financial aid system and with an even more intricate tax system is a source of concern for supporters and critics of the plan alike.
For starters, many taxpayers don’t know the difference between a tax credit and a tax deduction - much less which would be better for them in a given circumstance. (A tax credit is subtracted directly from taxes owed, while a tax deduction is subtracted from income before it’s taxed.)
In Clinton’s plan, families must pick either a credit or a deduction for the first two years of college tuition. Making the wrong choice could cost them hundreds of dollars.
For example, a family earning $60,000 with a $3,000 tuition bill would save $1,500 with the credit and $840 with the deduction.
The $1,500 tax credit - which at first sounds smaller than a $10,000 deduction - would actually be better for the vast majority of families.
“The workings of it are definitely hard to understand,” said Julie Schorr, student government president at Miami-Dade Community College’s Kendall campus. “I think people should be able to receive information about the choices, explicitly laid out according to which would benefit you more.”
Though college trade associations strongly support the president’s plan, their officials are also concerned about its many wrinkles.
“Student aid is a complicated business,” said Terry Hartle, a lobbyist for the American Council on Education. “What’s being added to the mix is that we’re going over to the tax side of the equation. We all know that when the IRS gets involved, it’s never as simple as one would wish.”
Here are several possible complications to keep in mind:
Lag time. Tax refunds would not come until the spring after tuition payments are made. A family having a hard time scraping up tuition money would not get any up-front help. David Pierce, president of the American Association of Community Colleges, sees a market for “bridge loans” to tide students over until the tax refund comes. But loans would probably involve some fees and interest costs.
IRS as grade monitor. To get a second year of the $1,500 Hope Scholarship tax credit, students must maintain a B-minus average. Sounds reasonable, but how is the IRS going to know? Grades are confidential, and colleges or families would have to supply the information. It would mean an extension of the IRS into an area that it normally doesn’t get involved in. What’s more, students would also have to vouch to the tax authorities that they’re drug-free. Colleges and Republicans have objected to these provisions.
Four-year bias? Though Clinton has put a lot of emphasis on guaranteeing a community college education for all, most of the benefit of his six-year, $36 billion tax-cut package would probably go to students in four-year colleges. Economist Norton Grubb of the University of California at Berkeley said benefits for community college students are likely be smaller because many study part-time and pay less in tuition. That means less to claim on the tax form.
Uneven benefits. Under the president’s plan, families making up to $80,000 would be able to claim a tax deduction of up to $10,000 a year for tuition. (The deduction would be available throughout a person’s lifetime.) But the size of the benefit is weighted toward upper-income people. For example, a family making $60,000 and paying $3,000 in tuition would get a tax break of $840, while a family making $35,000 and paying the same amount in tuition would get only $450. The reason: tax deductions are worth more to people in higher income brackets.
Martin Sullivan, an economist with Tax Analysts, a nonpartisan research group in the Washington suburbs, said Clinton’s plan would provide lots of work for accountants. “It clearly adds to the complexity of the tax code, of individual financial planning, and student aid,” he said.
U.S. Assistant Secretary for Post-Secondary Education David Longanecker acknowledged that many details remain to be clarified. But he said the president’s basic goal is to help the children of middle-class families get the education they need to stay in the middle class.
“Right now we’re having a public policy discussion with folks who know all these distinctions between tax credits and tax deductions,” Longanecker said. “It will be incumbent on us to make these details clear to people. That’s always a dilemma.”
MEMO: This sidebar appeared with the story: The speech President Clinton will deliver his State of the Union address at 6 p.m. today. It will be carried on ABC, CBS, NBC, CNN, C-SPAN and many PBS stations.