A r c h i v e d I n f o r m a t i o n
FY 1999 Annual Plan - Volume 1. Objective Performance Plans and Data Quality - February 27, 1998
Use of tax expenditures
In addition to the many programs that ED administers, tax expenditures targeted for educational benefits also significantly support the objectives of the ED Strategic Plan in 1999. While they are under the jurisdiction of the Department of the Treasury, the postsecondary education tax credits and deductions authorized by the Balanced Budget and Taxpayer Relief Acts of 1997 and the proposed School Modernization Bonds support several Department of Education objectives.
Elementary and secondary schools
This proposed interest-free bond program would support Objective 1.3: Schools are strong, safe, disciplined, and drug-free.
- School Modernization Bonds (for school construction).
States, territories, and school districts--especially those serving large numbers of low-income children--will be eligible for $9.7 billion in 1999 in zero-interest bonds to support the construction and renovation of public school facilities.
All of the following tax credits, deductions, and forgiveness provisions were recently authorized by the Balanced Budget Act of 1997 or the Taxpayer Relief Act of 1997. All support Objective 3.2: Postsecondary students receive the financial aid and support services they need to enroll in and complete their educational program. The Lifelong Leaning tax credit and employer-provided higher education assistance tax deduction also support Objective 3.4: Adults can strengthen their skills and improve their earning power over their lifetime through lifelong learning.
Expanded opportunities to save for college
- New Education IRAs and use of regular IRAs for education expenses. Parents and grandparents can now create education IRAs and make penalty-free withdrawals from other IRAs.
- Beginning January 1, 1998, taxpayers may withdraw funds from an IRA, without penalty, for their own higher education expenses or those of their spouse, child, or even grandchild.
- In addition, for each child under age 18, families may deposit $500 per year into an Education IRA in the child's name. Earnings in the Education IRA will accumulate tax-free and no taxes will be due upon withdrawal if the money is used to pay for post-secondary tuition and required fees (less grants, scholarships, and other tax-free educational assistance), books, equipment, and eligible room and board expenses. Once the child reaches age 30, his or her Education IRA must be closed or transferred to a younger member of the family.
- Support for State-sponsored pre-paid tuition plans. In order to provide greater flexibility for families saving in qualified State tuition plans, when a family uses a qualified State-sponsored tuition plan to save for college, no tax is due in connection with the plan until the time of withdrawal. Further, families may use these plans to save not only for tuition but also for certain room and board expenses for students who attend on at least a half-time basis. These benefits are available on January 1, 1998.
Help for postsecondary students
- HOPE Scholarship. The "HOPE Scholarship" tax credit helps make the first two years of college or vocational school universally available. These non-refundable tax credits will reimburse families for up to $1,500 for each of the first two years of postsecondary education. An estimated 5.5 million students will receive $4.2 billion in HOPE tax credits in 1999.
Students will receive a 100% tax credit for the first $1,000 of tuition and required fees and a 50% credit on the second $1,000. This credit is available for tuition and required fees less grants, scholarships, and other tax-free educational assistance and will be available for payments made after December 31, 1997, for college enrollment after that date. A high school senior going into his or her freshman year of college in September 1998, for example, could be eligible for as much as a $1,500 HOPE tax credit.
The credit can be claimed in two years for students who are in their first two years of college or vocational school and who are enrolled on at least a half-time basis in a degree or certificate program for any portion of the year. The taxpayer can claim a credit for his own tuition expense or for the expenses of his or her spouse or dependent children.
- Lifetime Learning tax credit. Lifetime Learning credits make will postsecondary education more affordable for students beyond their first two years of study, as well as for those taking class part-time to upgrade their job skills. This tax credit is targeted to adults who want to go back to school, change careers, or take a course or two to upgrade their skills and to college juniors, seniors, graduate and professional degree students. It offers a 20-percent non-refundable tax credit for the first $5,000 of tuition and fees each year through 2002 and a 20-percent non-refundable tax credit for the first $10,000 thereafter. An estimated 7.2 million students will receive $2.5 billion in Lifelong Learning tax credits in 1999.
- Tax deduction for employer-provided higher education benefits. For adults going to school while they work, the new tax law extends Section 127 of the tax code for three years. Section 127 allows workers to exclude up to $5,250 of employer-provided education benefits from their income. The assistance must be for undergraduate courses beginning prior to June 1, 2000. This provision will enable many Americans to pursue their goals of lifelong learning.
Tax relief for borrowers repaying loans
- Easier student loan repayment. For many college graduates, one of their first financial obligations is to repay their student loans, which average about $13,500 per student. The new student loan interest deduction will reduce the burden of the repayment obligation by allowing students or their families to take a tax deduction for interest paid in the first 60 months of repayment on student loans. The deduction is available even if an individual does not itemize other deductions. The maximum deduction is $1,000 in 1998, $1,500 in 1999, $2,000 in 2000, and $2,500 in 2001 and beyond.
- Community service loan forgiveness. This provision excludes from income the student loan amounts forgiven by non-profit, tax-exempt charitable or educational institutions for borrowers who take community-service jobs that address unmet community needs. For example, a recent graduate who takes a low-paying job in a rural school will not owe any additional income tax if in recognition of this service his or her college or another charity forgives a loan it made to the student to help pay college costs. This provision applies to loans forgiven after August 5, 1997.
[Funding and staffing by objective]