In a weekend announcement, President Obama outlined his priorities related to simplifying the tax code and raising funds to cover the cost of his recent plan for free community college for all students. While more details are expected to be released in tomorrow’s State of the Union address, streamlining and simplification of current education benefits is a big part of the overall goal. Most of the proposed education changes redirect resources to a more robust American Opportunity Tax Credit (AOTC) and away from other tax benefits. Specific suggestions include:
- Make the AOTC a permanent part of the tax code.
- Consolidate the Lifetime Learning Credit and the tuition and fees deduction into the AOTC.
- Increase the refundable portion of the AOTC to $1,500.
- Exempt Pell grants from taxation and from AOTC eligibility calculations, allowing students to more easily utilize both.
- Repeal the student loan interest deduction for new borrowers.
- Eliminate tax on student loan debt forgiveness under income-based repayment plans.
- Reduce tax cuts for 529 college savings accounts, and repeal tax incentives for the Coverdell education savings program.
- Expand AOTC eligibility from four years to five years, and allow part-time students to be eligible for some benefits.
These proposals would all require congressional action to implement, and are likely to be part of broad discussions on reforming the tax code. While several of the individual pieces have gotten bipartisan support in the past, early indications are that the entire package of proposals is not likely to receive support.
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