Here's how the proposed tax bill could impact college affordability
With United States House Republicans introducing a sweeping plan for tax reform last Thursday that outlined a set of tax cuts for businesses and a restructuring of the income tax system, students became concerned — especially because the bill contains a number of changes to the current tax code, some of which may directly impact college affordability.
The bill would eliminate two of three existing tax credits for students: the Lifetime Learning Credit and the Hope Scholarship Credit. The Lifetime Learning Credit offsets 20 percent of the first $10,000 of education expenses for individuals making $65,000 or less annually. The Hope Scholarship Credit offers a $2,500 credit for individuals making $80,000 or less annually. Cutting these two programs is estimated to save the government $17.3 billion in the next decade.
The American Opportunity Tax Credit — the third student credit — is expanded in the new bill. This offers a $2,500 credit every year for four years to people who spend $4,000 or more on tuition and fees annually. With the new bill, the program would be available to students for a fifth year with a reduced $1,250 credit. This program cost the government nearly $18 billion in 2016, making it roughly ten times as costly as the other two combined.
Advocates of the bill argue new federal programs negate the need for these credits, which were created before any significant federal student loan repayment plan was available. The Obama-era student loan repayment program would stay in place under the proposed plan. This program allows students to apply for federal loan aid, which is doled out depending on income. In general, the program caps the amount paid by students at 10 percent of their discretionary income. Individual plans offer loan forgiveness after 25 years. More than five million people are currently paying back their loans with this program.
The Obama-era program, however, does not cover loans from private lenders, which make up 9 percent of all student loans for the current school year.
The GOP plan also eliminates the tax-exempt status of tuition reimbursements up to $5,250 a year, meaning that they would be taxed as income. Students whose education is funded by employers will be affected by this change.
In the view of LSA senior Grant Strobl—chairman of conservative Young Americans for Freedom— the economic benefits of an education negate the need for the tax credits and deductions changed in the bill. He said the return on investment of a college degree is far greater than its cost.
Public Policy junior Lauren Schandevel, communications director for College Democrats, however, believes the bill will primarily harm students and discourage some from pursuing higher education.
“I think this will disincentivize lower-income students from attending higher education institutions. I think it’s already unappealing for these students to have to deal with the insurmountable debt,” Schandevel said. “This will really affect middle-class students … and it will affect low-income students who won’t apply in general.”
Outside of education-related changes, one of the central initiatives of the new plan is a reduction of the corporate tax rate from 35 percent to 20 percent. Businesses will receive roughly $1 trillion in net tax cuts, or two-thirds of the total cuts.
The plan also eliminates the current seven income tax brackets and replaces them with three at 12 percent, 25 percent and 35 percent. The 39.6-percent tax rate for millionaires will remain.
The bill would roughly double the standard income tax deduction for middle class families, raising it to $24,000 from $12,700 for married couples and $12,000 from $6,530 for individuals.
The bill is estimated to cost $1.5 trillion in the next decade. This statistic is meeting opposition from the more fiscally conservative wing of the Republican Party — notably Sen. Bob Corker, R-Tenn., who has threatened to vote against any plan that adds to the deficit. However, House Republicans are under pressure to produce a major legislative achievement before the year is over, and this factor may outweigh their deficit-related concerns in the end.
Supporters of the bill argue the benefits of a corporate tax cut will trickle down to workers and create jobs. Opponents say the benefits will largely fall on the rich — people at the executive level of the businesses eligible for the tax cut.
Schandevel falls into the latter group.
“I think GOP leaders are appealing to their billionaire and corporate interests and constituents instead of their actual constituents in their districts who will really suffer from this bill,”
Schandevel said. “I think trickle-down economics has been a way to rationalize to the middle class — and maybe among politicians — why they’re giving corporations and billionaires such a tax break. But I think it’s been proven not to work. And I think it’s not something that you can claim for a bill like this.”
Strobl disagreed. He said he believes the corporate tax cut will propel economic growth, which will benefit all Americans.
“I think there are nothing but winners for this tax plan, especially America,” Strobl said. “The provisions in the tax plan — incentivizing capital to flow back to the United States,
incentivizing investment capital in the United States — will lead to more jobs and higher wages for all Americans.”
Public Policy professor Stephanie Leiser, who has been working in tax policy for more than a decade, said the empirical research on the exact effects of a corporate tax cut is inconclusive and emphasizes the impact of the bill on the deficit.
“The biggest downside of (the bill) is that it’s going to increase the deficit,” Leiser said. “They’re either going to increase debt or cut programs. Increased debt is nothing more than future taxes on our kids or grandkids, etc. Or cutting programs is obviously going to impact people who benefit from those programs right now.”
Strobl believes the projected increase in the deficit would be offset by economic growth created by the new plan. He said the broadening of the tax base will increase tax revenue in ways not considered in currently circulating static analyses, which will eliminate the problem of increasing the deficit.
The authors of the bill have made an effort to reduce this cost by striking a number of tax credits and deductions from the tax code in an effort to broaden the base of taxpayers. Some of these credits and deductions are aimed at making education more affordable for college students, and their absence could make it more difficult for some students to afford tuition. Currently, individual taxpayers making less than $80,000 annually can deduct up to $2,500 in student loan interest from their taxes each year. The new plan would eliminate this deduction. The Obama administration also proposed ending this deduction, but it stayed in the tax code nonetheless.
The Congressional Joint Committee on Taxation has stated the deduction costs the U.S. government approximately $2.4 billion annually, making it a comparatively small deduction. According to the IRS, approximately 12 million people claimed the student loan interest deduction in 2015, which is more than a quarter of the 40 million Americans with student debt.
Leiser said the bill will indeed make it more difficult for some students to pay for college. However, she said other costs, such as rising tuition costs, have a far greater effect. Leiser believes students should not support the bill in its current form, not only because of the benefits they would lose, but because of the increase in the deficit and how it could potentially impact public institutions in the future.
“This is just kind of chipping away at the overall affordability, which is already becoming more and more of a problem just because of tuition increases,” Leiser said. “The impact on students of tuition increases dwarfs the effect of these tax credits, but the tax credits are a little bit of a mitigating factor. But you’re kind of fighting against the tide here.”