College Students Get $40 Billion in Tax Credit

WASHINGTON, D.C.--The tax and budget legislation that President Clinton signed into law on Tuesday includes $40 billion in tax breaks for college students and their families over the next five years, representing the largest change in federal higher education assistance since the establishment of the student loan and Pell Grant programs three decades ago.

The bipartisan budget deal, which is scheduled to erase the federal deficit by 2002, was the result of summer-long negotiations between Congressional Republicans and the White House. While the legislation contains child tax credits and capital gains tax cuts--longtime Republican priorities--the pact largely reflects the Clinton administration's higher education goals.

In a press conference on the White House's South Lawn last week, President Clinton praised the new law.

"At the heart of this balanced budget is the historic investment in higher education--the most significant increase in education funding in more than 30 years," he said.

The budget package includes a revised version of the President's Hope Scholarship program, a large plank of his 1996 re-election platform. That program provides dollar-for-dollar tax credit to first-and second-year college students for the first $1,000 spent on tuition, fees and books. In addition, the scholarship includes a credit for 50 percent of the next $1,000 spent on college.

Juniors and seniors will benefit as well. The new law establishes a tax credit for the third and fourth years of college that starts at 20 percent of the first $5,000 spent and rises over time to 20 percent of $10,000.

Although the tax credits became law with the President's signature, their effective date is June 30, 1998--which means tax relief from college costs will not be available until the 1998-'99 academic year.

Republicans on Capitol Hill were pleased that Clinton dropped some of the more controversial parts of the Hope Scholarship program. The scholarship originally required students to maintain a B average, but the new law contains no GPA requirement.

"We were glad that the President agreed to keep the IRS out of college administrative offices around the country," said Ari Fleischer, spokesperson for the House Ways and Means Committee.

Current and future college students are not the only group that will benefit from the new law. Former students burdened with debt from college expenses will be able to deduct interest on their student loans beginning January 1,1998.

The legislation phases in an income tax deduction of $2,500 a year for the first 60 months of payments. The deduction is phased out for individuals with annual incomes above $50,000.

Nan Nixon, Washington-based director of federal relations for the University, who lobbied in favor of the new legislation cited two specific provisions for which Harvard fought.

"We were very much in favor of the student loan interest deduction and the loan forgiveness provision," she said. In the past, when private institutions forgave student loans, the money was treated as taxable income for the individual.

"The new law brings parity," Nixon said, because student loans forgiven by public universities had not been taxable under the old system.

Nixon also said the University wants to see an increase in Pell Grants, a program that benefits lower-income students and families who will for the most part not benefit from the new tuition tax credits.

"Right now that's tied up in the Labor, Health and Human Services Appropriations bill," she said, but added the administration is pushing to raise the maximum grant to $3,000, an 11 percent increase.

Clinton and Congressional Republicans expressed differing views on the long-term impact of the educational tax credits. Clinton said the program would make significant strides toward expanding access to college to all Americans.

The program "makes it possible for the 13th and 14th years of education to become as universal as high school is today," he said

Nan Nixon, Washington-based director of federal relations for the University, who lobbied in favor of the new legislation cited two specific provisions for which Harvard fought.

"We were very much in favor of the student loan interest deduction and the loan forgiveness provision," she said. In the past, when private institutions forgave student loans, the money was treated as taxable income for the individual.

"The new law brings parity," Nixon said, because student loans forgiven by public universities had not been taxable under the old system.

Nixon also said the University wants to see an increase in Pell Grants, a program that benefits lower-income students and families who will for the most part not benefit from the new tuition tax credits.

"Right now that's tied up in the Labor, Health and Human Services Appropriations bill," she said, but added the administration is pushing to raise the maximum grant to $3,000, an 11 percent increase.

Clinton and Congressional Republicans expressed differing views on the long-term impact of the educational tax credits. Clinton said the program would make significant strides toward expanding access to college to all Americans.

The program "makes it possible for the 13th and 14th years of education to become as universal as high school is today," he said