The Tax Plan Isn’t As Bad For Student Loans As We Thought, But You Should Still Prepare
When Republicans passed the final version of the tax bill on Wednesday, Dec. 20, they promised a radical overhaul of the tax code on behalf of average Americans. That bill, to the surprise of many, has maintained many essential deductions that were previously on the chopping block. So if you're a student, take a moment to rejoice that the tax plan isn't as bad for people with educational debt, and then start preparing how to handle your student loans under the new tax bill. Whether you're a former, future, or current student, here's what you should do when it comes to tackling education under the next tax plan.
Important provisions like tax-free tuition waivers and deductions such as the student loan interest deduction and educational assistance deduction were threatened by both House and Senate original bills. But the final bill, approved on Wednesday, Dec. 20, maintained these important provisions, due in large part to a massive uproar.
Despite the fact that these provisions have been saved, it never hurts to prepare, especially because student loan debt continues to increase.
The new tax plan will go into effect as early as February 2018. (President Donald Trump has yet to sign it, and will reportedly do so on Jan. 3, 2018.) That means your paychecks will start showing changes in the next few months, but you won't be filing under the new system until 2019.
According to Student Loan Hero, roughly 44 million Americans collectively owe more than $1.45 trillion in student loan debt, a number which increases year-over-year: students in the class of 2016 graduated with an average of $37,172 in student loan debt — a 6 percent increase over last year.
What almost happened.
Put succinctly, the original tax proposal may very well have crippled students.
Both the House and Senate versions of the bill would have eliminated the ability to deduct the interest paid on your student loans, to the tune of $2,500 (meaning that upwards of $2,500 you put toward your student loan payments could be deducted from your taxable income). Additionally, students getting tuition assistance from their employers would have had to count that assistance as taxable income, meaning they would have been taxed at a higher rate based on money they never really received.
And one of the most damaging aspects of the bill, in education terms, was the proposal to make tuition waivers — which allows graduate students to attend their programs for free in exchange for teaching or research-related work — taxable income, meaning that graduate students would similarly be paying taxes on money they never received.
What's going to happen now.
Tax-free tuition waivers for graduate students, student loan interest deductions, and the deduction on educational assistance from employers are all safe. So for current and former students, things are looking good. (Aside, perhaps, from your taxes if you're in a low- or middle-income bracket, which is a whole other story.)
You may want to pay more on your loans.
According to Reuters, you should consider paying more on your loans if your 2017 payments thus far don't qualify for the $2,500 maximum deduction on student loan interest. Mark Kantrowitz, publisher of college matching website Cappex, told Reuters that paying more before Dec. 31 would boost your deduction, likely meaning more money in your pocket with your refund. This might be a good idea to do every year through the time that individual tax cuts expire in 2025, because by 2027, a large portion of low- and middle-income earners will see their taxes increase.
If you want to refinance, go for it, but only if you're in good financial standing.
Refinancing your student loans is, per Forbes, one of the best ways to manage paying back your loans on time. Refinancing, when done right, will allow you to pay off your existing loan(s) at a lower interest rate. This is probably a good idea, because you may see in increase in your taxes by 2027, meaning less money to put toward your educational debt.
But you shouldn't refinance if you don't have secure income, already have a relatively low rate, may need to make an income-based payment plan, almost done with your loans, or working toward federal loan forgiveness, according to Student Loan Hero.
If you're not yet a student, here's how the tax plan affects saving for school.
The way you save for higher education will change — but largely for the better.
According to CNBC, the tax plan no longer allows Coverdell Education Savings Accounts, which, per the IRS, allowed individuals and families to deposit $2,000 per beneficiary, per year. Coverdell ESAs essentially allowed tax-free savings to cover education of all levels, but they will now be phased out.
Now, those who want to save (for themselves or others) will use a 529 tax-advantaged savings plan. Formerly only allowed for college savings, you'll now be able to use 529s for levels of education from K-12 through higher education.
Per CNBC, funds from 529s "can be withdrawn tax-free to be used for K-12 private school tuition and college expenses. The final bill allows all families, regardless of income level, to deposit $10,000 per beneficiary, per year into these accounts." Not only does the tax plan expand the amount of money you can put into a 529, but it also allows you to use tax-free money in your 529 for almost all forms of education: from kindergarten through higher education, and including apprenticeship programs, according to The Washington Post.
But, by and large, it's probably OK to keep doing what you're doing. For now.
About 12 million people take advantage of student loan interest deductions, per Reuters. Currently, you can deduct up to $2,500 in interest per year, saving upwards of $600, and that won't change under the new tax bill. Nor will your ability to work in exchange for free tuition (if you qualify for a program like that).
Given how many Americans hold significant debt due to their pursuit of education, that means the average American is likely seeking relief from this burden. And, at least for now, this tax plan is a good thing for you and your wallet.