From Capitol To Campus

The new $1.7 billion tax cut adopted by Congress will have a major impact on higher education finance, but most of the bill's benefits go to more affluent families.

Over the next 10 years, the tax bill will make it difficult, for example, to increase the maximum amount of Pell Grants, or fund initiatives like GEAR UP and TRIO, which help steer low-income, minority, and potential first-generation college attendees toward college prep classes.

An analysis by the Citizens for Tax Justice shows that the top 1 percent of income-earners will receive a tax break of about $53,123, while the bottom 60 percent of all taxpayers will receive an average of $347.

The tax bill increases the annual limit on contributions to education savings accounts from $500 to $2,000 and allows anyone—including employers and corporations—to contribute to an education savings account on behalf of the beneficiary.

The bill, for the first time, expands the definition of qualified education expenses to include K-12 education expenses, thereby allowing tax-free withdrawals for private and religious school tuition.

Other elements of the bill include increases in the income phase-out limit for student loan interest deductions and elimination of the 60-month limit on such deductions.

In addition, the bill creates an above-the-line tax deduction of $3,000, rising to $4,000 in 2004 for qualified higher education expenses. But this new deduction is only in effect for four years: 2002-2005.

Finally, the tax bill expands tax benefits under state pre-paid tuition and college savings plans to make withdrawals tax-free and to allow private colleges to establish such savings plans.