Great news for student loan borrowers! Last night President Obama signed a fiscal cliff deal into law, alleviating the concerns of borrowers over the potential devastating affect of the fiscal cliff. The deal will marginally raise taxes for the wealthiest Americans in order to preserve longstanding tax breaks for lower and middle class citizens.
Cuts in education were among those previously scheduled to expire if it weren’t for the intervening new legislation. This isn’t a permanent solution; the fiscal cliff package has simply postponed the cutting of benefits for college students and preserved tax relief programs. However, this is an important step, allowing the government to buy some time in order to save education programs on a permanent basis. The federal budget is scheduled for finalization by the first of March and hopefully a new deal will be reached by then.
So how does this affect you? Here’s a list of the student loan tax credits and deductions that have been preserved by yesterday’s deal and a little info about what’s going on with each of them.
American Opportunity Tax Credit
This tax credit was put in place by the Obama administration in 2009 and can be claimed for up to $2,500 by individuals making less than $80,000 per year and couples making less than $160,000 per year. It applies to students attending school at least halftime and can be used for tuition, books and supplies. This credit applies to about half of all American college students. The fiscal cliff deal has extended the life of the credit by five years.
Student Loan Interest Deduction
Qualifying students can deduct some or all interest paid on their student loans. The credit is good for as much as $2,500. Thanks to the fiscal cliff deal, there is no longer a five-year limit for claiming this deduction.
Tuition and Fees Deduction
Up to $4,000 can be taken off the taxable income of qualifying borrowers; that money may be used towards a number of higher education related expenses. Previously scheduled to expire, the fiscal cliff deal has extended this deduction through 2013.
One significant and always imperiled program that is not addressed by the fiscal cliff deal is the Pell Grant Program. This is a great grant program for low-income students; unfortunately, a system of government with inner workings that are anything less than bizarre has yet to be devised and this wonderful program has always struggled politically; the maximum amount provided by the grant continues to fail to at all keep up with inflation. According to student loan expert Mark Kantrowitz, the program is likely to face drastic cuts if a new budget deal isn’t reached by the March 1st deadline.
Progress tends come in pretty small increments; while there is still much work to be done, these tax extensions are an important step in the right direction, one that will help millions of students this year. For anyone who needs more assistance in navigating the overflowing student loan seas, there are student aid organizations with the expertise to help.