New tax benefits for students have limits

Several sections of the act provide either tax credits or itemized deductions for expenses related to higher education.

The HOPE Scholarship is designed to "send a clear message to students that at least two years of college is the new educational standard," according to information provided by the U.S. Department of Education.

To make that goal a reality, the scholarship allows a tax credit of up to $1,500 per year for the first two years of college, effective Jan. 1, 1998.

The $1,500 credit breaks down to a tax credit for 100 percent of the first $1,000 of tuition and a 50 percent credit for the second $1,000 of tuition.

One drawback to the scholarship is that if students are paying their own way through college, they may never see the benefit, said Phyliss Bannister, director of student financial aid at the UA.

She said that because the scholarship is a tax credit, the person claiming it needs to earn enough to claim a $1,500 deduction, which most students do not.

George Figueroa, a tax specialist with Ernst & Young LLP, estimated a single student would have to earn at least $6,700 per year to receive the credit.

However, many parents helping to finance college costs will benefit from the new law.

Figueroa added that how substantial the new benefits are depends on each family.

"If someone is making $14,000 a year, a $1,500 credit is substantial," he said.

The next tax credit option is the Lifetime Learning Credit. A student is eligible for either the HOPE or the Lifetime Learning Credit, but not both.

The Lifetime Learning Credit is equal to 20 percent of qualified tuition and fees and may be used for an unlimited number of years.

The maximum credit is $5,000 for expenses paid between June 30, 1998 and Jan. 1, 2003. The amount of the credit then jumps to a maximum of $10,000.

While the HOPE and Lifetime Learning credits may exclude many students based on financial circumstances, another section of the act, the Deduction for Interest on Educational Loans, will benefit almost every student borrowing money to attend school.

At the UA that is approximately 11,000 students per year, roughly one-third of the student population, Bannister said.

The interest deduction is "a very direct benefit," she said.

The Tax Reform Act of 1986 ended the practice of deducting interest on student loans - this year's act returns the benefit.

Bannister said the deduction works the same way as a mortgage interest deduction. At the end of each year the lender will send a statement showing how much interest was paid.

That interest can then be taken as a deduction on income taxes.

However, this benefit has its limits as well.

It is only applied to the first five years of the repayment term, and it has a maximum deduction of $1,000 the first year (1998), $1,500 in 1999, $2,000 in 2000 and $2,500 in 2001.

Although Figueroa did not know why there is a cap on the interest, he guessed it might be a way to discourage excessive borrowing.

All loans due for payment after Dec. 31 are eligible for the deduction beginning with the 1998 tax season.

The act has many other sections relating to educational benefits, and fuller descriptions of the limitations, generally tied to income.

To read about the Act in more depth, log onto the Department of Education World Wide Web site at http://www.ed.gov. Follow the links to the Secretary's Initiatives, point eight.

For a lighter version of the act with some analysis, go to Ernst & Young's tax site: http://www.taxcast.com. A tax calculator is also on this site to show exactly how the new law affects individual tax returns.