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Tax-Credit Changes Could Broaden Access to College

Families can use all the help they can get when it comes to paying for college. Tax credits for higher education are a popular way to curb the cost. A new report calls for the federal tax credits for college expenses to be fully refundable and deposited into college savings accounts for Americans from low- and middle-income families when students are in the 8th grade.

The report, "Enhancing Tax Credits to Encourage Savings for Higher Education," was released by the New America Foundation on Tuesday. Author Mark Huelsman suggests tax-credit changes designed to encourage savings and make college more accessible for students in need.

Last year, the federal stimulus package gave families a welcome break with the creation of the American Opportunity Tax Credit. This temporarily replaced and expanded the Hope Credit from the 1990s. Now families can claim a $2,500 credit, instead of $1,800—and claim it for four years instead of two. The credit also applies to course-related expenses, such as books and supplies rather than just tuition and fees.

The AOTC also made the credit partially refundable—allowing low- and moderate-income families to receive a credit of up to $1,000. This means that families could get an upfront payment, regardless of whether they had a tax liability.

To expand access to more low-income students, Huelsman proposes the credit be fully refundable and allow families to use that money to invest in 529 college-savings plans when the child enters 8th grade. This way, families could seed accounts with tax credits and have four years to build up their balances before their child enters college.

"The idea is that there are certain flaws in these tax credits and often you don't get them until long after tuition bills are due," says Huelsman. Providing support earlier could help change the aspirations for low-income families.

Huelsman also suggests the Saver's Credit that encourages low-and moderate-income workers to save for retirement be changed so the federal tax credit is refundable and includes saving for college.

How likely are these proposals to become reality? Huelsman says it's a bit more pessimistic today after the election, since the GOP doesn't always view tax credits as a good deal. However, changes to the Saver's Credit have broad bipartisan support. Advancing the AOTC is more of a long-term proposal, but one that Huelsman also thinks has promise.

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