College Ave Corner

Beyond Home Equity: Paying for College Under the New Tax Bill

Most journeys start with the word “yes,” and a college education is no different. So let’s begin there. Yes, the new tax bill passed in 2017 affects college financing plans for 2018 and beyond, and yes, there are still many ways to finance an education effectively within the limits of the new bill.

What Hasn’t Changed

The final version of the tax bill passed in December of 2017 keeps in place the American Opportunity Tax Credit (AOTC).

The good news is the final version of the new tax bill keeps in place some key provisions, including the American Opportunity Tax Credit (AOTC). The AOTC allows those financing a four-year college education to receive a tax credit up to $2,500 in qualified education expenses per student on their federal tax returns. This tax credit is still available to those who meet the following income limits:

  • $90,000 modified adjusted gross income for single taxpayers
  • $180,000 for married taxpayers filing jointly

Families can continue to deduct up to $2,500 of student loan interest on their federal tax return. This deduction is only available to those who meet the following income limits

  • $80,000 modified adjusted gross income for single taxpayers
  • $165,000 for married taxpayers filing jointly

There is also no tax on employer tuition assistance programs up to $5,250 per year or tuition waivers for graduate students, and the Lifetime Learning Credit remains unchanged.

What Has Changed

The most talked-about change in the new tax bill as it relates to college financing is the removal of the HELOC (Home Equity Line of Credit) interest deduction. This deduction has officially been suspended from 2018 to 2025, so those enrolled in or applying to schools right now will need to make a decision about borrowing against home equity in their college financing plans.

The federal financial aid system (governing Pell grants and FAFSA) does not take home equity into account, but some select private universities do require it as part of their initial financial aid assessment. How these schools figure this equity into their assistance formulas tends to be proprietary information and methods can vary.

So, without the benefit of that tax deduction, is a HELOC still a good idea for you?

Regardless of the type of school you attend – public or private – the interest will now cost you and that could add up over time. And remember that home equity loan interest rates tend to be low, but they may be variable.

In knowing the risks it can’t hurt to ask yourself some broader questions, like: “Is my job secure?” “Could my financial situation change or make it difficult to pay down this debt within the next ten years?” “How might this affect my retirement savings?”

What To Do Now

A HELOC is just one option; scholarships, grants, and federal loans should be the first options families consider when budgeting for college. If these resources fall short in covering full costs, a private student or parent loan, like the ones we offer here at College Ave Student Loans, can help. Work-study opportunities can also fill in the gaps.

What’s On the Horizon

There could be some indirect effects of the new tax bill as it relates to expenses at the institutional level. For example, private colleges and universities are now required to pay a new 1.4% excise tax on certain endowment earnings. That cost could be passed down to students in the form of tuition bumps, assistance limits, or program removals, but how or when – even if – this might occur remains speculative.

The best approach to change is flexibility and preparation. When you look at all of the possible ways to pay for college, you can create a plan that works for you.

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