Bipartisan tax deal includes extension of $2,500 tuition tax credit

President Barack Obama’s recent tax deal with Republicans includes tax breaks that have supported higher education not just on the institutional level, but for tuition-paying families as well.

Despite opposition from Democrats who want to repeal the tax cuts for the highest income levels and Republicans who are concerned about the impact some components of the $858 billion, two-year package will have on the country’s fiscal health, the Senate passed the bill by a heavily bipartisan vote of 81-19 on Wednesday. The House of Representatives is expected to vote on the package today. While Democrats in the House are expected to put up stronger opposition than the bill met in the Senate, it is still expected to pass and be signed into law by Obama.

Among the tax provisions that would be extended is the American opportunity credit, a tax credit of up to $2,500, renewable for up to four years, to single filers who make less than $80,000 or $160,000 for married couples filing a joint return. The provision was included in the 2009 American Recovery and Reinvestment Act — better known as the stimulus package — as an expansion of a 1997 law that provided a maximum of $1,500 over two years to joint filers with incomes below $80,000. If the House fails to pass the tax bill, all credits will revert back to Hope credits after this year.

If the American opportunity tax credit is not extended, some middle-class families would essentially see college expenses rise by $2,500, though they would pay the extra money to the government, rather than to educational institutions.

Even if the tax bill is not passed, students will not see significant changes in their financial aid packages, largely because of the University’s already generous financial aid policy, Director of Undergraduate Financial Aid Robin Moscato said in an e-mail.

Financial aid awards would not be very affected by the fate of the legislation, since “the tax credits have a very minimal impact on parental contribution calculations and the amount of aid received,” Moscato explained.

Families who normally have trouble paying for four years of college can still appeal to Princeton’s guarantee to meet 100 percent of demonstrated need.

“Given the incredible level of ... scholarship financing, I doubt that the benefit has any impact on Princeton students,” Stanley Katz, a Wilson School professor with a background in higher education policy, said in an e-mail.

Moscato acknowledged, however, that if the bill does not pass, some families would have to pay higher taxes. This could be particularly consequential for middle-income families with joint incomes between $80,000 and $160,000. These families qualify for the expanded benefits but not for the baseline benefit laid out in the 1997 law.

“They’re particularly beneficial to the middle class, who frequently face a squeeze when it comes to financing college education,” said Barry Toiv, vice president for public affairs at the Association of American Universities, a Washington higher education lobby of which Princeton is a member.

“We think it’s important that the benefits continue, and we’re pleased that there’s a lot of progress towards making that happen,” he added.

The University also stands to benefit if the bill passes, since it contains a provision that would continue to offer financial incentives to individual retirement account holders who make charitable donations to nonprofit organizations, including colleges and universities.

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“The incentives do play an important role” in the decision to donate to universities, Toiv said. “At a time when the economy is weak, we wouldn’t want to see that discouraged further.”

Although Princeton did not specifically advocate for any of these provisions, the AAU strongly lobbied Congress to extend the expiring benefits.

Obama’s deal with the Republicans reneges on a campaign promise to let the George W. Bush-era tax cuts expire at the end of 2010. Obama argued that passing the bill is the only way to extend the many progressive tax benefits that are being “held hostage” by Republicans who refuse to pass a tax break that lets taxes rise on the wealthy.