Some students may now qualify for tuition relief

Psychology students and their families filing their 1998 taxes this season can look for tuition relief through new tax credits, available for the first time this year.

The tax credits translate into reductions from the total a tax-payer owes in income tax of up to $1,500 a year, and possibly more in deductions on loan interest. They are part of President Clinton's plan to make college more affordable for the average American in the face of spiraling college tuition costs. The price of higher education has outpaced growth in family incomes by more than 50 percent in recent years.

Clinton's plan for easing the tuition burden on students and families, modified and passed by Congress as the Taxpayer Relief Act of 1997, also allows students and parents to claim income-tax deductions for interest paid on student loans. Through the new law and a boost to several education grants, Clinton proclaimed, "We have finally opened the doors of college to all Americans," in his January State of the Union address.

Sharing his enthusiasm, APA's education advocates welcome the tax credits as a needed financial boost for students.

"It's not enough money to send anyone to Harvard, but it is a shot in the arm," says Nina Levitt, EdD, APA's director for education policy, noting that passing this legislation is the most Congress has done recently to support students financially. "For some psychology students, this will be helpful."

Who benefits

Specifically, the new tax credits target middle-income Americans, whose incomes haven't kept up with tuition hikes, explains Kristin Conklin, director of The National Center for Public Policy and Higher Education in Washington, D.C.

Working families and students will benefit to varying degrees, she says, based on the amount of tuition paid after all other tax-free scholarships and grants. Un-der the law, tax payers, either independent students or parents with dependent students, can claim relief on their income-tax return through either the Hope Scholarship credit for undergraduates in their first two years; the Lifetime Learning credit for undergraduates in their second two years, graduate students and part-time students; or a deduction for interest paid on student loans for students at all levels.

For example, a married couple earning a combined income of $60,000 and paying $13,000 in college tuition for their two children could tap the Hope credit and cut $3,000 from what they owe in income tax.

The package includes other tuition relief as well. For example, it allows families to deposit up to $500 a year into an Education Individual Retirement Account, the earned interest on which is tax-exempt. In total, the package amounts to $40 billion in higher education funding, equal to all other federal financial-aid programs combined.

How it works

For each of the new law's three major tax breaks, Hope Scholar-ship, Lifetime Learning and interest deduction, the government specifies who qualifies and for how much. Here's the breakdown:

* Hope Scholarship. This credit allows eligible first- and second-year students and their parents to claim a reduction of up to $1,500 a year from the total taxes they owe--100 percent of the first $1,000 spent on tuition and fees, and 50 percent of the next $1,000 spent. Students and their families don't qualify for the benefit if their earnings fall below or exceed a window of income designated by the federal government. For example, dependent students don't qualify if their families' taxable income is less than $17,500 a year or more than $50,000 (see chart).

* Lifetime Learning. This credit qualifies eligible graduate, part-time, and third- and fourth-year students for a tax break equal to 20 percent of the first $5,000 they spend on college. Again, those whose incomes are too high or too low aren't eligible. For example, single independent students don't qualify if their taxable income is less than $6,800 a year or more than $50,000 (see chart).

* Interest deduction. This benefit enables students and their families to claim a deduction for interest on student loans in the first 60 months of repayment. Students can claim up to $1,000 for 1998, $1,500 for 1999, $2,000 for 2000, $2,500 for 2001 and so forth. Students filing singly are eligible for the full benefit if they earn less than $40,000 a year, and for part of the benefit if they earn between $40,000 and $50,000. For joint filers the thresholds are higher (see chart).

How beneficial is it?

On the whole, the benefits should help relieve the tuition burden on psychology students, says Mitch Prinstein, PhD, immediate past-chair of the American Psychological Association of Graduate Students and a postdoctoral
fellow at Brown University School of Medicine.

Those likely to benefit most are dependent undergraduates whose parents qualify or tuition-paying graduate students and adult learners with a taxable income in excess of $6,000, through jobs, research assistantships or teaching stipends. Those for whom tuition is waived in full are not eligible.

Unfortunately, though, graduate students without any taxable income --perhaps the neediest group--aren't eligible for the tax credits, says Prinstein. Also, he notes, recent graduates earning slightly more than $40,000--many of whom carry hefty loan debt--will lose out on the maximum amount of interest forgiveness on their student loans. Still, Prinstein feels gratified by the government's move to assist students with college costs.

"It's nice to see some federal laws recognizing the needs of graduate students for once," says Prinstein. "Any legislation that does that is a step in the right direction."

To find out more about the credits, visit the Department of Education web site at www.ed.gov/inits/hope/index.html or the Internal Revenue Service web site at www.irs.ustreast.gov.

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