College & Workforce Readiness

Half of Undergrads Benefit From Tax Credits and Deductions

By Caralee J. Adams — November 16, 2011 2 min read
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It’s not as direct as getting a grant check, but it’s just as real when it comes to cost savings for college: education tax benefits.

Nearly half of American undergraduates cut their college expenses by an average of $700 by taking advantage of tax credit or deduction, according to a new report released by the U.S. Department of Education’s National Center for Education Statistics yesterday.

Looking at students in 2007-08, the NCES estimates 47 percent either saved money through the Hope tax credit, the lifetime-learning tax credit, or the tuition and fees deduction. These savings are traced back to tax legislation from 1997 and 2001.

The tax benefits were more likely to help middle- or high-income students, as just 29 percent of lower-income students received the education tax benefits, the NCES found. Poorer students who did benefit from the tax breaks saved an average of $600 in savings, while low-middle income students saved $900, high-middle saved $1,000, and the highest-income students saved $700. The report notes the most common reason lower-income students didn’t receive the education tax benefits was they had no net tuition after subtracting the grant aid and veterans benefits they received.

Among the undergrads that received an education tax benefit, the cost of college on average for a year was $14,300, so expenses were reduced by 5 percent with the $700 savings.

For 2010, there are two tax credits available to help offset the costs of higher education by reducing the amount of your income tax:

Lifetime Learning Tax Credit - a credit of up to $2,000 for qualified education expenses paid for all eligible students. There is no limit on the number of years the lifetime-learning credit can be claimed for each student. The adjusted-gross-income limit to qualify is $120,000 for married joint filers. The money claimed must have been used for tuition and fees. This credit is available for undergraduate or graduate programs and for courses to acquire or improve job skills.

The American Opportunity Credit (this replaces the Hope tax credit for 2011 and 2012) - a credit of up to $2,500 for qualified education expenses paid for each eligible student, for a maximum of four years. Qualified families must make less than $180,000 in adjusted gross income. The credit can be applied to course-related books and supplies, in addition to tuition and fees.

Just how the education tax benefits will fare in the recent deficit-reduction talks is being watched closely. An article today in Inside Higher Education notes that unlike federal financial-aid programs that are seen as potential targets for budget cuts, these benefits distributed through the tax code have been virtually invisible.

Students are claiming nearly $15 billion in tax savings through the American Opportunity Tax Credit that took effect in 2009, the College Board reported last month. At the same time, Pell Grants have expanded to a $37 billion annual expense. Although both programs take away money from the government, they appear to be perceived politically in different ways, the article notes.

A version of this news article first appeared in the College Bound blog.


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