President Outlines Plans for Higher Education in State of the Union

During his State of the Union Address, which had the broad theme of “middle class economics,” President Obama outlined his agenda, including several higher education recommendations such as realigning tax priorities and a proposal for free community college.

Among his proposals, the president is seeking to combine six current higher education tax benefits into a single tuition credit. While he categorized the six benefits as “overlapping,” there are actually only four overlapping tuition benefits. The additional two benefits, the tax-preferred Sec. 529 college savings plans and the student loan interest deduction (SLID), are not tuition benefits, they are actually benefits that help students and families save for college and repay student loans. NAICU has submitted its own recommendations to Congress on consolidating the tuition benefits.

Specifically, President Obama proposed:

• Making the American Opportunity Tax Credit (AOTC) permanent. The $2,500, partially refundable, tuition tax credit is currently set to expire at the end of 2017.
    
• Increasing the amount of AOTC refundability (cash available to individuals with incomes too low to pay taxes) from 40% to 60%.
    
• Eliminating the Hope and Lifetime Learning Credits and the tuition deduction.
    
• Eliminating SLID in its entirety.
    
• Eliminating the 2001 tax benefits to Sec. 529 college savings plans – this would include tax-free withdrawals, and the ability for private colleges to offer their own plans. Within a few days of the State of the Union speech, the White House had backed away from this proposal. The plans are seen as a tax benefit for the middle class and enjoy widespread support. In addition, when families who have the ability to save are incentivized to do so, it allows colleges and universities to better target need and merit aid.

The tax proposals would need to be introduced as legislation in the House and Senate. Currently, both chambers have different ideas on the best way to consolidate the higher education benefits, and it’s unclear when these legislative efforts might be considered.

America’s College Promise – Free Community College

On the spending side, the President highlighted a $60 billion investment over 10 years in a federal-state partnership to provide two years of free community college. This benefit would be available to “responsible” students at “high-quality” community colleges in states that commit to funding 25 percent of the total price tag. States would also have to take several federal prescribed reform steps including coordinating high school, community college, and four-year college alignment; and allocating funding based on performance.

The proposal reflects the “middle class economics” theme by targeting free community college tuition to families under $200,000 AGI. To qualify, students will have to attend community college at least half-time, maintain a 2.5 GPA, and make steady progress towards completing a certificate or associate’s degree. Eligible programs at community colleges will have to be either academic programs that fully transfer to local public 4-year colleges and universities; or occupational training programs with high graduation rates and demand by employers.

As with the other higher education proposals included in the President’s FY 2016 budget these ideas will need congressional action to be implemented.

For information on the tax provisions
please contact Karin Johns

For information on the community college proposal
please contact Stephanie Giesecke