Paying for College

The American Opportunity Tax Credit

Tax credits are good, obviously, but I have to chuckle at this one. "The American Opportunity Tax Credit Act gives working families and students a $2,500 per year tax credit for students attending college." So says the The White House Blog. Don't get me wrong. I would enjoy a $2,500 tax credit just as much as anyone else, but why is the president making such sweeping statements about the effect of such a credit? He says that the Act will "help more people receive college degrees in the country." Maybe more accurately, it will help college students buy books for a semester or two, depending on their major.

I'm all for anything that can help cut down on the absurdly high cost of higher education, but why doesn't Congress investigate the huge increases in tuition and room and board at colleges across the land? I've noted the astronomical prices of colleges in past posts here, and no one in power seems to be concerned about looking into why the public is being forced to endure the hardships related to attending these schools. One look at the swamp of student loan debt should be enough to set off some serious alarms.


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Let's look at three sources of information about The American Opportunity Tax Credit: a college newspaper story, the White House Blog, and some actual student comments.

First, here's a news item from The Badger Herald:

President urges Congress to extend tax credit for students

Financial benefit allows families to get $2500 per year; $1000 refundable

President Barack Obama asked Congress Wednesday to extend a tax credit for college students and their families to help more people receive college degrees in the country.

The American Opportunity Tax Credit was included in the American Recovery and Reinvestment Act of 2009, according to a report from the United States Treasury Department.

The tax credit allows for families to receive up to $2,500 for each student, and $1,000 per year is refundable in tax credits, the report said.

Obama asked Congress to extend the credit today at a press conference at the White House.

“I am calling on Congress to make this tax credit permanent so it’s worth up to $10,000 for four years of college,” Obama said. “Because we’ve got to make sure that in good times or bad, our families can invest in their children’s future and in the future of our country.”

The American Opportunity Tax Credit was formed to improve upon and take the place of current tax benefits in order to aid more college students with tuition and so that aid would be more significant.

University of Wisconsin Director of Student Financial Aid Susan Fischer said she was with extending the tax credit as long as it does not take away other financial aid money.

“With tax credit, we don’t know who gets it. It’s nice for families to get tax relief, but it’s not the same as saying, ‘Here’s a $2,000 grant upfront to help you pay your tuition,’” Fischer said.

Noel Radomski, director of the Wisconsin Center for the Advancement of Postsecondary Education, said in the current economic climate tax credits are not the best way to help students.

Radomski said tax benefit programs aid only upper-middle and upper income families, and with the recession more families’ incomes are dropping.

He added more students are now eligible for federal financial aid, and less for tax credits.

“I think it’s misguided,” Radomski said. “When the economy comes back then this is the strategy that would work. It’s a strategy set for another environment, not for today’s environment.”

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And now, The White House Blog: (Read this through your personal political lens.)

What the American Opportunity Tax Credit Means for College Students

Any middle class parent or student who’s worried about paying college tuition will tell you that $2,500 makes a big difference when it comes time to pay the bills.  But right now, there's a real chance students will lose access to an important tax credit provides this level of assistance - unless we act quickly.

That’s why President Obama is calling on Congress to make the American Opportunity Tax Credit – a $2500 per year tax credit for working families and students attending college – permanent.  To help bring attention to the issue, he's meeting with college students in the Oval Office today.  You can help by spreading the word about this important issue as well.

This isn't just an issue for current students - it matters to all of us.  Having more college educated workers in the American workforce is crucial to growing our economy. In order to compete in the 21st century global economy, we need to give all Americans the opportunity to pursue a college degree – and that’s exactly what this tax credit does:

  • The American Opportunity Tax Credit gives working families and students a $2,500 per year tax credit for students attending college.
  • If Congress makes this tax credit permanent it would be worth up to $10,000 for four years of college.
  • 12 million more students from working families will have a chance to earn a college degree thanks to a 90% increase in tax credits for education during the first year of the Obama Administration.

Unfortunately, some Congressional Republicans are  proposing a 20% cut on education which would mean reducing financial aid for eight million college students and leaving community colleges without the resources they need to prepare students for the jobs of the future.  At the same time, they’re proposing to borrow $700 billion to provide millionaires and billionaires with an average tax cut of $100,000.

At times like these, cutting back on investments that are directly related to our economic growth just doesn’t make sense.  We can’t afford to shortchange American students, and that’s why the President will continue to fight to make the American Opportunity Tax Credits permanent and to strengthen our education system for all students.

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Finally, here are some comments from posters on the College Confidential discussion forum:

Well, this is the government, or to be more specific, the IRS. Nothing is clear. It does seem that whomever wrote the legislation/rules at least considered the possibility that some student would be able to get a degree in less than 3 years. Still I would guess that if you called IRS for clarification 3 times you would get three different answers.

If "proficiency examinations" means credit given for AP scores, then that would apply to my son. He will use AP credits to meet 20% of his graduation requirements. He graduates next spring so if the credits are extended maybe he would qualify.

One reason that makes me think there may be a "gotcha" is that on stuff like FAFSA, as soon as a student graduates he/she becomes independent.

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Per the IRS: Student must be pursuing an undergraduate degree or other recognized education credential. This information can be found here:

Publication 970 (2009), Tax Benefits for Education

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Thanks. What I'm left with is that it's ambiguous as hell. Typical government. Here are the terms I have found regarding eligibility:

"post-secondary": that would mean anything after high school

"in a program leading to a degree, certificate, or other recognized educational credential": a law degree would fit this description.

"undergraduate degree or other recognized education credential": a law degree is not an undergrad degree, but it is a recognized educational credential, is it not?

I get the sense that the AOTC is intended for undergraduates, but there is considerable room to interpret otherwise. It would be so simple to just say that once a student has obtained an undergraduate degree, he/she is no longer eligible. I guess it never occurred to anyone within the IRS that students are capable of graduating in three years or less.

Oh well, this won't change any plans. We'll just have to wait and see.

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OK. I looked up the actual legislation that was passed by congress and signed into law. The AOTC legislation amends the Hope Credit legislation. There are no references in the AOTC legislation to undergraduate education. What it says is. "Credit allowed for first 4 years of post-secondary education" However, this is not really definitive, since language in the Hope Credit

legislation may be more specific regarding eligibility.

My guess is that AOTC would be subject to whatever eligibility requirements exist in the Hope Credit legislation. If Hope Credit as/was limited to undergrad education, then AOTC probably is too. Clear as mud, eh?

Edit: I think much of the confusion here comes from the fact that the Hope Credit was for two years. No student was/is likely to complete and undergrad degree in less than two years. Four years is a different story. My son has a HS classmate that got his degree at a 4-yr college in only 2 years. After looking at the Hope Credit legislation I don't see anything dictates undergraduate only or any limitation on eligibility after an undergraduate degree is obtained. Maybe there's "hope" after all.

Internal Revenue Code Section 25A. Hope and Lifetime Learning Credit

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Seen enough? If so, I'm curious t know what you think of The American Opportunity Tax Credit. Post your comment below.

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