The 1997 Tax Act: Family Tax Relief (Education Provisions)

Chapter 1 (continued)
Family Tax Relief
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Guide to
Promises Kept

Tax Cuts for Individuals

Principal Tax Increases

Other Key Provisions

Table of Contents

Education Provisions

Congress and the President approved roughly $40 billion in direct tax incentives and savings incentives for higher education. Included in the Act's education package are such features as:

$1,500 HOPE scholarship tax credit.
A lifetime learning tax credit.
Tax-free treatment for prepaid tuition plans.
Penalty-free withdrawals from individual retirement accounts (IRAs) for education expenses.
Education IRAs (discussed in chapter 3).
An extension through 2000 of the exclusion for employer-provided educational assistance.
Interest deductions from student loans.

HOPE scholarship tax credit and lifetime learning credit for higher education tuition expenses: The Act provides a non-refundable "HOPE" scholarship tax credit for college tuition, reduced by scholarship or fellowship grants already excluded from income, and certain miscellaneous fees incurred by the taxpayer, the taxpayer's spouse, or a qualified dependent of the taxpayer. For each student, the HOPE credit covers the first $1,000 and 50% of the next $1,000 in education expenses incurred in the first and second years of college. It will not be available if the student is convicted of a felony drug offense during the year in which the credit applies.

The student must be enrolled on at least a half-time basis and be attending an accredited college, university, or vocational school leading to a bachelor's degree, an associate's degree, or another recognized postsecondary credential.

A lifetime learning credit will be available for any taxpayer in any taxable year (provided the taxpayer, the taxpayer's spouse, or a dependent of the taxpayer is not eligible for the HOPE credit). This credit equals 20% of the first $5,000 in education expenses (a $1,000 maximum) and increases to 20% of the first $10,000 in expenses, or $2,000, after 2002.

The credit will be available in the year the expenses are paid and the corresponding education must begin during that year or the first three months of the next year. The credit will be phased out for taxpayers with modified AGI between $40,000 and $50,000 ($80,000 to $100,000 for joint filers).

Effective date: The HOPE credit is effective for expenses paid and education commencing after 1997, and the lifetime learning credit will be available for expenses paid after June 30, 1998.

Deduction for student loan interest: The Act provides an above-the-line deduction for interest paid on qualified education loans. The deduction will be allowed for interest paid during the first 60 months in which interest payments are required and will not be allowed if the taxpayer can be claimed as a dependent on another taxpayer's return. The limit on the deduction is $1,000 in 1998, $1,500 in 1999, $2,000 in 2000, and $2,500 in 2001 and thereafter.

The deduction will be phased out for taxpayers with modified AGIs between $40,000 and $55,000 ($60,000 to $75,000 for joint filers).

The deduction will apply to interest on loans incurred to pay expenses for undergraduate and graduate-level tuition, room and board, and related expenses (reduced by scholarships or fellowship grants). The student must be enrolled on at least a half-time basis and be attending an accredited college, university or vocational school, or an institution conducting internship or residency programs leading to a degree or certificate from an institution of higher education, hospital, or a health care facility conducting postgraduate training.

Effective date: This provision of the Act is effective for payments of interest due after Dec. 31, 1997. If such a loan already exists, interest payments would qualify provided the 60-month period has not expired.

Extension of exclusion for employer-provided educational assistance: The Act retroactively reinstates the exclusion for employer-provided educational assistance and extends the exclusion through May 31, 2000. As under prior law, the exclusion will not apply to graduate level courses.

Effective date: The extension of this provision is effective for tax years beginning after Dec. 31, 1996.

Treatment of cancellation of certain student loans: The forgiveness of indebtedness with respect to certain student loans is not considered gross income to an individual when the individual makes a commitment to work for a certain period of time in certain professions. The Act expands the population of lenders to include tax-exempt charitable organizations and private foundations, if the loans were provided for programs designed to encourage students to pursue careers in areas with unmet needs.

Effective date: The provision applies after the date of enactment.

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Tax News & Views is produced by the Financial Counseling Specialists and the Legislative & Regulatory Services Group at Deloitte & Touche LLP.