How Will the New Tax Laws Affect College Financing?

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Will new tax laws affect your college financing plans? | Burlingham/iStock/Getty Images

If you or a loved one are trying to figure how to best pay for a college education, you may have turned to sources such as a 529 Plan, student loans, grants, and scholarships. However, the new tax laws may have you worried about the impact on college financing. You might not fully understand what will and won’t change and if you’ll be affected when it comes to paying for college.

The Cheat Sheet spoke to Bryan Bibbo, AIF®, a financial coach at The JL Smith Group, to get some answers. Here’s how the new tax laws will affect college financing.

The Cheat Sheet: How did the new tax law impact financing plans for college?

Bryan Bibbo: The good news is that parents who are using their child/children’s college tuition as a federal deduction (such as the American Opportunity Credit or the Lifetime Learning Credit) has remained unchanged. These credits are still subject to earning limitations before phasing out. In addition, the student loan interest deduction remains untouched at $2,500 per year, which is also still subject to earning limits phase-outs.

CS: How are 529 plans affected?

BB: One of the biggest changes affecting 529 plans under the Tax Cuts and Jobs Act of 2017 is the usage of these plans. Previously, 529 plans were used to store a college nest egg while allowing it to grow tax-free with a tax-free distribution as long as the proceeds were used for college education. While this is still true, the new tax laws have created an opportunity for families to use up to $10,000 a year per student for grades K – 12 education costs. This new legislation affects the federal tax treatment of these funds; however, every state is different on the deductions and amounts for a tax-free status.

CS: Are there any deductions tax payers will no longer be able to take advantage of?

BB: The Tax Cuts and Jobs Act of 2017 eradicated the miscellaneous itemized deductions on the Schedule A for itemized deductions. Previously taxpayers could have used this deduction for the cost of certain educational expenses when the taxpayer’s income was too high to qualify for the other tax credits as well as continuing education expenses through work. This deduction will no longer be available under the current tax laws.

The Tax Cuts and Jobs Act of 2017 has impacted how college endowment funds are taxed. Prior to the law, any income earned by private college endowments were tax-exempt which assisted with college funding and reserves. Now private colleges with endowment treasuries in excess of $500,000 per student will pay a 1.4% excise tax on investment income.

CS: What impact will the new tax laws have on student loans?

BB: The new tax law changed the rules regarding student loans. Previously, upon death or disability, a cancellation of debt would be issued. Under the new law, discharged student loans are no longer seen as taxable income if applying for the death or disability discharge.

CS: How can parents and students prepare for the upcoming tax season?

BB: Education credits are generally claimed by the parents of undergraduate students. Students and parents can prepare by working together to determine the amount of eligible expenses to claim any qualifying credits. Some states provide a tax benefit for contributing to the state 529 plan. Taking advantage of the state tax deduction is beneficial if your state qualifies. For taxpayers who canceled debt on student loans, the possibility of claiming an exclusion makes a big difference. You will want to consult with your tax professional to see if you qualify.

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