When it comes to the new GOP tax bill and its impact on those paying for higher education, the good news far outweighs the bad.
For instance, the bill did not affect the student loan interest tax deduction, which likely inspired a collective sigh of relief among former students everywhere who are working to pay off college debt.
Another upside, the tuition waivers that graduate students receive will continue to be tax free, as will employer provided tuition assistance.
“For the average person, I don’t think [the new tax bill] will change their desire or ability to save,” said John Pearson, of Connecticut-based Barnum Financial Group.
But there were a few changes in the bill that may impact students and also family members who are helping to pay for higher education. Here are some of the most noteworthy developments.
Loss of Deductions on Home Equity Loan Interest
By some accounts, the loss of the tax deduction on home equity loan interest could have a noticeable impact on families. Here’s why: In the past, when comparing interest rates, it was often cheaper to take a home equity loan to pay college expenses than it was to take an education loan.
But the new tax law eliminates the ability to deduct the interest on home equity loans until 2025. As a result, it could cost families slightly more to use this approach to fund higher education.
“Without the benefit of the annual tax deduction on the home equity loan, families should shop around to compare other rates and options,” advises Joe DePaulo, CEO and co-founder of College Ave Student Loans. “You may find a lower rate or a repayment plan that better suits your life and monthly budget.”
Those who continue to use home equity loans to fund education will now need to look at the after-tax interest rate on those loans.
“Before you might have been getting tax benefits so the net cost was only three percent instead of what may now be four percent,” Pearson said.
Home equity loans may continue to be the funding method of choice for many people, added Pearson, because unlike student loans, they can be discharged in the event of a bankruptcy. Student loans are never forgivable in bankruptcy.
College Endowments Tax
While this provision in the GOP tax bill is not aimed directly at students, experts say someone will likely have to pay the cost of the new tax on college endowments.
Under the new bill, private universities with endowments valued at $500,000 per student or more must pay a 1.4 percent tax on endowment earnings. It’s estimated that about 30 colleges may be subject to this new measure. There’s also some concern that it may discourage philanthropic giving to schools.
“Bottom line, the excise tax on endowments is going to cost the colleges and universities money,” said DePaulo. “How and if that is passed down to the student is unknown; however, students and families should be prepared there could be changes.”
Discharges for Death or Disability Are Now Tax Free
Though death and disability are not subjects most people like to think about, the reality is that the new tax bill has made some positive changes on this front. Under the new tax code, discharges of student loan debt due to death or permanent disability is now tax-free.
“Previously the debt cancellation was included as income on the bill,” said Priya Mishra, managing attorney for Houston-based Top Tax Defenders, a back tax resolution firm.
Alimony is No Longer Taxable
There’s mixed opinion about how beneficial this change may be when it comes to families paying for higher education.
By some accounts, it could make it easier for custodial parents to get need-based aid through FAFSA (Free Application for Federal Student Aid.) If alimony is not part of an individual’s tax returns, then the parent in this situation may qualify for financial aid or more aid than they have in the past.
However, Pearson points out that as part of the FAFSA application process, there are many forms of non-taxable income that applicants must include for consideration, such as child support, municipal bond interest and more. Alimony may be among the non-taxable income that must be reported.
“There’s been no ruling on it yet, but given the precedent with child support, alimony may still be considered,” said Pearson.
Also keep in mind, FAFSA will require submitting tax returns from a prior year, so there will be a one-year delay before this provision truly pays off.
If credit is on your mind, you can check your three credit reports for free once a year. To track your credit more regularly, Credit.com’s free Credit Report Card is an easy-to-understand breakdown of your credit report information that uses letter grades—plus you get two free credit scores updated every 14 days.