Tax Breaks for Higher Education Could Do More for Working Families


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Perhaps T.S. Eliot was on to something when he deemed April the cruelest month. Spring is a mix of heady excitement and apprehension as they await word from universities across the county. For their parents, the season brings a hyper-awareness of their own finances since tax season and tuition bills loom concurrently. ITEP’s new brief, “Higher Education Income Tax Deductions and Credits in the States,” provides an overview of the ways state governments have sought to encourage more residents to pursue and pay for higher education through their income tax codes.

The soaring cost of college and the ensuing sticker shock has spurred government at all levels to action. Over the past few decades, many states have created tax incentives to encourage families to save for college via 529 plans. Others have focused on higher education costs, providing tax breaks for student loan and tuition payments, or room and board fees. The federal government offers two deductions for college costs, the student loan interest deduction and the tuition and fees deduction. Most states allow residents to use these deductions in determining taxable income for state filing purposes.

While the goal of bringing higher education to more citizens is laudable, many of the tax incentives that states have created don’t help the working class families who need the most help accessing college. As the report notes,

The benefits of [many] higher education tax breaks are modest. Since they tend to be structured as deductions and nonrefundable credits, many of these tax provisions fail to benefit to lower- and moderate-income families. These poorly targeted tax breaks also decrease the amount of revenue available to support higher education. And worse yet, they may actually provide lawmakers with a rationale for supporting cuts in state aid to university and community colleges.

For instance, of the many tax breaks documented in the brief only seven are credits. Of those seven credits, only three are refundable, which means they are capable of benefiting low-income families who earn too little to owe state income tax. For low-income families, far too many of the tax breaks offer no assistance at all.

States could provide more support to these families by transforming current deductions into refundable credits. They could also improve the targeting of existing tax breaks through the introduction of additional means-testing.  The two deductions offered at the federal level can only be claimed by taxpayers who earn less than $80,000 in Modified Adjusted Gross Income ($160,000 for married couples). Similar limits could be applied to the deductions offered for contributions to 529 savings plans, which vary in size and scope according to the state.

Read the full brief here.

Downloadable Maps:

State Tax Treatment of Federal Deductions for Student Loan Interest and Tuition and Fees

State Tax Deductions and Credits Related to Higher Education Costs

State Tax Deductions and Credits Related to Higher Education Savings

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