For a lot of families, college is about to get a lot more expensive. Over the past 10 years, tuition and fees have increased at an annual rate of 4.9% more than inflation (CollegeBoard Trends in College Pricing 2009).
To be sure, that 4.9% represents a very substantial and painful gap between growth rates of college costs and most families’ income. However, the absolute increase in the prices charged by colleges is not the pending cost increase I’m referencing. No, it’s the tax law that will cause many families (most of whom earn less than $250,000) to spend more of their income on college. Unless the federal government intervenes, there are at least five tax changes that will soon raise the “college tax.”
• Tuition & Fees Deduction – Many middle-income families could deduct up to $4,000 of tuition and required fees from their taxable income. This deduction went away at the end of 2009.
• Student Loan Interest Deduction – Presently, eligible taxpayers can deduct up to $2,500 in student loan interest for as long as the loans are outstanding. Beginning in 2011, taxpayers can only deduct interest for the first 60 months that payments are due.
• Coverdell Education Savings Accounts (ESA) – Eligible taxpayers can currently deposit up to $2,000 per year to these very powerful education savings vehicles. In 2011, this deduction reverts to pre-2001 levels of $500 per year. In addition, families can no longer use Coverdells to pay pre-college expenses such as elementary or high school tuition that can make these accounts valuable planning tools.
• Employer Provided Educational Assistance – Under current law, companies can pay up to $5,250 of education expenses on behalf of eligible employees. Companies get to deduct the payments and employees do NOT have to report the payments as income. In 2011, this provision expires completely.
• Expiration of “Bush Tax Cuts” – At the end of 2010, ordinary and capital gains rates will be increasing for ALL taxpayers. So, whether you pay for college using your family’s income or accumulated assets, college is going to cost you more.
