INDUSTRY INDUSTRY UPDATEUPDATE

Nancy CoolidgeNancy CoolidgeUniversity of CaliforniaUniversity of California

Office of the PresidentOffice of the President

ACCESS GROUP Conference 2005ACCESS GROUP Conference 2005

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CAVEAT….CAVEAT….• This update is based on the best This update is based on the best

information available.information available.• This presentation for the ACCESS This presentation for the ACCESS

GROUP Conference was finalized on GROUP Conference was finalized on Tuesday, November 15, just as the House Tuesday, November 15, just as the House of Representatives was ready to vote on of Representatives was ready to vote on their reconciliation bill. their reconciliation bill.

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AGENDAAGENDA• Reconciliation and ReauthorizationReconciliation and Reauthorization• Federal Savings and Higher EducationFederal Savings and Higher Education

• Interest Rates and Loan FeesInterest Rates and Loan Fees• ““Squeezing” the LendersSqueezing” the Lenders

• Help Where We Can Find ItHelp Where We Can Find It• PLUS for Graduate StudentsPLUS for Graduate Students• School-as-LenderSchool-as-Lender• Loan ConsolidationLoan Consolidation• Tax CreditTax Credit

As of the date of this writing, As of the date of this writing, Congress had not passed a Fiscal Congress had not passed a Fiscal Year 2006 Appropriations bill, but Year 2006 Appropriations bill, but the conference bill appears to keep the conference bill appears to keep most higher education programs most higher education programs under the Department of Education under the Department of Education FLAT FUNDED.FLAT FUNDED.

Appropriations for FY ‘06Appropriations for FY ‘06

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““RECONCILIATION” & RECONCILIATION” & “REAUTHORIZATION” YET TO “REAUTHORIZATION” YET TO

COMECOME• Congress is planning to reduce federal Congress is planning to reduce federal

support for higher education as part of the support for higher education as part of the planned budget reconciliations bills to planned budget reconciliations bills to “save” money for other priorities. “save” money for other priorities.

• Without reconciliation “savings,” it will be Without reconciliation “savings,” it will be harder to pass a federal tax cut bill as the harder to pass a federal tax cut bill as the Administration is planning and the national Administration is planning and the national deficit will not be reduced.deficit will not be reduced.

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PROPOSED WAYS TO PROPOSED WAYS TO “SAVE”“SAVE”

• Congress is looking to change the various Congress is looking to change the various “mandatory” federal programs so that they “mandatory” federal programs so that they will be less costly. e.g., will be less costly. e.g., • MedicareMedicare• School Lunches School Lunches • Foster Care fundsFoster Care funds• Food Stamp ProgramFood Stamp Program• Student LoansStudent Loans

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HIGHER EDUCATION’S SHARE OF HIGHER EDUCATION’S SHARE OF FEDERAL BUDGETFEDERAL BUDGET

• All federal spending on education at all All federal spending on education at all levels represents less than 3% of the levels represents less than 3% of the annual federal budget expenditures.annual federal budget expenditures.

• Between 1/4Between 1/4thth and 1/3 and 1/3rdrd of all “savings” of all “savings” for federal spending would come out of for federal spending would come out of higher education – mainly out of the higher education – mainly out of the subsidies for Stafford Loanssubsidies for Stafford Loans

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FY 2006 Budget Reconciliation FY 2006 Budget Reconciliation Impact on EducationImpact on Education

Instructions to “save” influences Instructions to “save” influences the reauthorization of HEAthe reauthorization of HEA

Independent of the Independent of the appropriation of new funds for appropriation of new funds for

the coming yearthe coming year

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House House RECONCILIATIONRECONCILIATION Senate – S. 1932Senate – S. 1932$50 billion over 5 $50 billion over 5

yearsyears(awaiting Budget Committee and (awaiting Budget Committee and

floor consideration)floor consideration)

Total, Government-Total, Government-wide wide NetNet Budget Budget

SavingsSavings

$39.1 billion over 5 $39.1 billion over 5 yearsyears

($71 billion in gross savings; ($71 billion in gross savings; offset $32 billion in new offset $32 billion in new

spending)spending)

$13.7 billion$13.7 billionEd & the Workforce CommitteeEd & the Workforce Committee

Education CommitteeEducation Committeeinstructions for savingsinstructions for savings

$13.6 billion $13.6 billion HELP CommitteeHELP Committee

$6.2 billion$6.2 billion CutCut from Pensions from Pensions $6.7 billion$6.7 billion$22.3 billion$22.3 billion CutCut from Student from Student

LoansLoans$20.8 billion$20.8 billion

$5.0 billion$5.0 billion SpentSpent on on Programs/LoansPrograms/Loans

$11.2 billion$11.2 billion

$2.7 billion$2.7 billion SpentSpent on Katrina on Katrina $1.5 billion$1.5 billion$14.6 billion$14.6 billion Net Net EducationEducation Cuts Cuts $8.1 billion$8.1 billion$18.1 billion$18.1 billion Net Net Deficit ReductionDeficit Reduction $13.3 billion$13.3 billion

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Recommended INCREASED Recommended INCREASED UPFRONT LOAN FEESUPFRONT LOAN FEES

Increases in the lender and origination Increases in the lender and origination fees paid by borrowers - from 0%, in fees paid by borrowers - from 0%, in many cases, to 2.5% and from 0% to many cases, to 2.5% and from 0% to 1% respectively 1% respectively

(These are the upfront fees, which for many (These are the upfront fees, which for many borrowers have been 0% in the last few years and borrowers have been 0% in the last few years and which could rise to a total of 3.5% in 2007.) which could rise to a total of 3.5% in 2007.)

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MIXED NEWS ON INTEREST MIXED NEWS ON INTEREST RATESRATES

• The House is proposing variable The House is proposing variable interest rates capped at 8.25%interest rates capped at 8.25%

• The Senate is proposing fixed rates The Senate is proposing fixed rates at 6.8%at 6.8%

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Proposed INTEREST RATESProposed INTEREST RATES

Greater potential increases in the interest Greater potential increases in the interest rates charged to borrowers, by raising the rates charged to borrowers, by raising the cap from 6.8% (current law includes a fixed cap from 6.8% (current law includes a fixed 6.8% rate staring next July 2006) to 8.25% 6.8% rate staring next July 2006) to 8.25% if Congress moves to a variable rather than if Congress moves to a variable rather than a fixed interest rate a fixed interest rate

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REDUCING RETURN-ON-REDUCING RETURN-ON-INVESTMENT FOR LENDERSINVESTMENT FOR LENDERS

Reduced subsidies to lenders and guarantors.Reduced subsidies to lenders and guarantors. All or some of will be passed on to borrowers All or some of will be passed on to borrowers

Reduced buyouts of borrower up-front fees Reduced buyouts of borrower up-front fees Reduced repayment “incentives”Reduced repayment “incentives”

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ENTITLEMENT TO ICRP COULD BE ENTITLEMENT TO ICRP COULD BE ELIMINATED FOR FFELP ELIMINATED FOR FFELP

BORROWERSBORROWERS Congress is planning to reduce borrower Congress is planning to reduce borrower

access to the “income-contingent access to the “income-contingent repayment program” (ICRP) repayment program” (ICRP)

ICRP will no longer be a borrower ICRP will no longer be a borrower entitlement as it is today entitlement as it is today

FFELP borrower access will require FFELP borrower access will require lenders giving borrowers permissionlenders giving borrowers permission

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PARENTS MAY PAY MORE TO PARENTS MAY PAY MORE TO BORROWBORROW

PLUS loans for parents could become PLUS loans for parents could become more costly if fixed rate consolidations are more costly if fixed rate consolidations are eliminated in the PLUS program, also.eliminated in the PLUS program, also.

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Proposed CONSOLIDATION Proposed CONSOLIDATION FEESFEES

A 1% fee added to the principal when A 1% fee added to the principal when borrowers consolidate their loansborrowers consolidate their loans

Potential loss of fixed-rate Potential loss of fixed-rate consolidation loans available todayconsolidation loans available today

Consolidation will be used to obtain Consolidation will be used to obtain longer terms, but the 1% “tax” will longer terms, but the 1% “tax” will increase consolidation costsincrease consolidation costs

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Now, For the GOOD NEWS….Now, For the GOOD NEWS….

The Senate has a proposal to make PLUS The Senate has a proposal to make PLUS loans available to Graduate Students, in loans available to Graduate Students, in addition to a small bump in the annual addition to a small bump in the annual maximum from the Stafford unsubsidized maximum from the Stafford unsubsidized loan program. If this manages to survive loan program. If this manages to survive the conference process, it would eliminate the conference process, it would eliminate some of the current dependence on some of the current dependence on higher-cost private and alternative loan higher-cost private and alternative loan borrowing borrowing

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Help Where We Can Find Help Where We Can Find It…It…

• Our job is to help our students find ways to Our job is to help our students find ways to finance their educations. finance their educations.

• Each student as well as each of us must Each student as well as each of us must act according to our individual act according to our individual consciences within the strictures of the law consciences within the strictures of the law and the social norms of our institutions and the social norms of our institutions and communities.and communities.

• This material is presented for your This material is presented for your consideration…consideration…

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SCHOOL-AS-LENDER (I)SCHOOL-AS-LENDER (I)• UC has looked into this possibility and is UC has looked into this possibility and is

still considering its options, pending the still considering its options, pending the outcome of the current bills before outcome of the current bills before Congress to limit lender profits.Congress to limit lender profits.

• Schools can make money on this Schools can make money on this enterprise under the current systementerprise under the current system

• There are serious ethical issues that can There are serious ethical issues that can be mitigated by institutional choices. be mitigated by institutional choices.

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SCHOOL-AS-LENDER (II)SCHOOL-AS-LENDER (II)• What uses are made of the “profits”?What uses are made of the “profits”?• Do borrowers have real, practical choice in Do borrowers have real, practical choice in

selecting lenders?selecting lenders?• What role does the school have in What role does the school have in

promoting the school’s brand of loans?promoting the school’s brand of loans?• What role does the school have in making What role does the school have in making

borrowers aware of lender options and borrowers aware of lender options and their respective real value?their respective real value?

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SCHOOL-AS-LENDER (III)SCHOOL-AS-LENDER (III)• Consider the role of administrative Consider the role of administrative

simplicity and resources in the choicesimplicity and resources in the choice• Consider the role of “non-financial perks” Consider the role of “non-financial perks”

to school to school • Consider the role of alternative loan Consider the role of alternative loan

availability and pricing availability and pricing • Consider the transparency of the Consider the transparency of the

transactions to students and alumni as transactions to students and alumni as well as state and other public interestswell as state and other public interests

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CONSOLIDATION IN SPRING ‘06CONSOLIDATION IN SPRING ‘06

• This may be the last time that consolidation This may be the last time that consolidation offers borrowers such a good deal.offers borrowers such a good deal.

• Borrowers in school as well as recent grads Borrowers in school as well as recent grads should consider consolidation as interest should consider consolidation as interest rates are rising – locking down the current rates are rising – locking down the current 4.7% may look GOOD this time next year!4.7% may look GOOD this time next year!

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NEW CONSOLIDATION LOAN?NEW CONSOLIDATION LOAN?• Borrowers are free to consolidate this year’s Borrowers are free to consolidate this year’s

loans as a separate consolidation loan if they loans as a separate consolidation loan if they don’t wish to combine the new disbursements don’t wish to combine the new disbursements with their current consolidation loan. with their current consolidation loan.

• A weighted average makes the costs of A weighted average makes the costs of combining or not very similar overall, combining or not very similar overall, depending on the effects of the ROUNDING depending on the effects of the ROUNDING (up to the nearest 1/8(up to the nearest 1/8thth of a percent.) of a percent.) Typically, there is no significant savings Typically, there is no significant savings associated with choosing to combine associated with choosing to combine consolidation loans. consolidation loans.

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LONGER CONSOLIDATION LONGER CONSOLIDATION TERMSTERMS

• If the term (# of years in repayment) is If the term (# of years in repayment) is longer, the cost will increase, whether longer, the cost will increase, whether loans are combined or not.loans are combined or not.

• Combining new loans with an existing Combining new loans with an existing consolidation loan may make the consolidation loan may make the borrower eligible for a longer repayment borrower eligible for a longer repayment term (30 years instead of 25).term (30 years instead of 25).

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REAL LOAN REPAYMENT (I)REAL LOAN REPAYMENT (I)

Loan AmountLoan Amount(based on 4.7% (based on 4.7%

interest rate)interest rate)

Years to Years to Pay OffPay Off

MonthlyMonthlyPaymentPayment

$50,000$50,0001010 $523$523

2525 $284$284

$100,000$100,0001010 $1,046$1,046

2525 $567$567$100,000 $100,000

consolidationconsolidation 3030 $522$522

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REAL LOAN REPAYMENT (II)REAL LOAN REPAYMENT (II)

Loan AmountLoan Amount(based on 6.8% (based on 6.8%

interest rate)interest rate)

Years to Years to Pay OffPay Off

MonthlyMonthlyPaymentPayment

$50,000$50,0001010 $575$575

2525 $347$347

$100,000$100,0001010 $1,151$1,151

2525 $694$694$100,000 $100,000

consolidationconsolidation 3030 $657$657

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REAL LOAN REPAYMENT (III)REAL LOAN REPAYMENT (III)

Loan AmountLoan Amount(based on 8% (based on 8% interest rate)interest rate)

Years to Years to Pay OffPay Off

MonthlyMonthlyPaymentPayment

$50,000$50,0001010 $607$607

2525 $386$386

$100,000$100,0001010 $1,213$1,213

2525 $772$772$100,000 $100,000

consolidationconsolidation 3030 $734 $734

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HOW MUCH MORE PER MONTH?HOW MUCH MORE PER MONTH?$$$$$$$$ yearsyears 4.7%4.7% 6.8%6.8% 8%8%$50K$50K 1010 $523$523 $575 $575

+52+52$607 $607 +$84+$84

$50K$50K 2525 $284$284 $347 $347 ++$63$63

$386 $386 ++$102$102

$100K$100K 1010 $1,046$1,046 $1,151 $1,151 +$105+$105

$1,213$1,213 + +$167$167

$100K$100K 2525 $567$567 $694 $694 ++$127$127

$722$722 + +$155$155

$100K $100K consol.consol.

3030 $522$522 $657 $657 ++$135$135

$734 $734 ++$212$212

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INCOME CONTINGENT REPAYMENT INCOME CONTINGENT REPAYMENT (I)(I)

• Borrowers who may not earn steady Borrowers who may not earn steady incomes right out of schoolincomes right out of school

• Borrowers whose debt to income Borrowers whose debt to income ratio is too high – this may be ratio is too high – this may be chronic or temporarychronic or temporary

• Un- or under-employed but no Un- or under-employed but no remaining deferment or forbearance remaining deferment or forbearance eligibilityeligibility

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ICRP (II)ICRP (II)

Currently, access to ICRP is an Currently, access to ICRP is an borrower entitlement, but Congress borrower entitlement, but Congress is considering limiting access to is considering limiting access to FFELP borrowers whose lenders FFELP borrowers whose lenders give them permission to seek the give them permission to seek the lower repayments under ICRP (may lower repayments under ICRP (may include negative amortization, unlike include negative amortization, unlike “income sensitive” repayment plans)“income sensitive” repayment plans)

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ICRP (III)ICRP (III)

Borrowers in ICRP must agree once Borrowers in ICRP must agree once upfront to allow the Department of upfront to allow the Department of Education to check their income tax Education to check their income tax filings with the IRS each year.filings with the IRS each year.

Required repayment installment Required repayment installment amounts will vary according to amounts will vary according to changes in the borrower’s income changes in the borrower’s income over timeover time

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ICRP (IV)ICRP (IV)

• Borrowers who elect an ICRP plan may switch to Borrowers who elect an ICRP plan may switch to another plan at any time. Switching to another plan another plan at any time. Switching to another plan makes sense when the borrower’s income increases makes sense when the borrower’s income increases substantially, otherwise the monthly payments under substantially, otherwise the monthly payments under ICRP will be larger than the payments under an ICRP will be larger than the payments under an extended payment plan.extended payment plan. Under ICRP, higher-income Under ICRP, higher-income borrowers will pay off their loans earlier than would borrowers will pay off their loans earlier than would be the case under an extended plan. While this will be the case under an extended plan. While this will save money on interest payments, some borrowers save money on interest payments, some borrowers will need to target their increased earnings to higher will need to target their increased earnings to higher interest debts first. interest debts first.

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ICRP (V)ICRP (V)

• When borrowers pay less each When borrowers pay less each month than the interest that month than the interest that accrues on their loans, the accrues on their loans, the unpaid interest is capped unpaid interest is capped when/if it reaches 150% of the when/if it reaches 150% of the original loan amountoriginal loan amount

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ICRP (VI)ICRP (VI)

Borrowers who make required Borrowers who make required payments in ICRP for 25 years payments in ICRP for 25 years are entitled to forgiveness of the are entitled to forgiveness of the balance remaining at that time, balance remaining at that time, although it is technically a although it is technically a taxable “gift” to the borrower.taxable “gift” to the borrower.

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ICRP (VII)ICRP (VII)ICRP was designed to be an ICRP was designed to be an

alternative to default and alternative to default and delinquency – to improve the delinquency – to improve the political standing of Federal Loan political standing of Federal Loan Programs, which were being Programs, which were being criticized due to rising default rates, criticized due to rising default rates, and also to provide humane and also to provide humane treatment for those who “took a treatment for those who “took a chance” on higher education, but for chance” on higher education, but for whom the monetary rewards did not whom the monetary rewards did not follow.follow.

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Income Contingent Repayment Income Contingent Repayment PlanPlan

Interest rate 4.7%, single, and U.S. mainland resident. Shaded area indicates lower monthly repayment plan is Interest rate 4.7%, single, and U.S. mainland resident. Shaded area indicates lower monthly repayment plan is available.available.

AGILoans Outstanding

$15,000 $30,000 $45,000 $60,000 $75,000 $100,000 $150,000

$9,750 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00

$10,000 $7.17 $7.17 $7.17 $7.17 $7.17 $7.17 $7.17

$12,000 $40.50 $40.50 $40.50 $40.50 $40.50 $40.50 $40.50

$15,000 $81.73 $90.50 $90.50 $90.50 $90.50 $90.50 $90.50

$20,000 $91.52 $173.83 $173.83 $173.83 $173.83 $173.83 $173.83

$25,000 $103.54 $207.08 $257.17 $257.17 $257.17 $257.17 $257.17

$30,000 $114.07 $228.15 $340.50 $340.50 $340.50 $340.50 $340.50

$40,000 $131.81 $262.36 $393.54 $507.17 $507.17 $507.17 $507.17

$50,000 $136.49 $272.97 $409.46 $545.95 $673.83 $673.83 $673.83

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OUTSIDE THE BOXOUTSIDE THE BOX• Subsidies for students that are not from Subsidies for students that are not from

the usual sources of financial aid – the the usual sources of financial aid – the U.S. Tax CodeU.S. Tax Code

• Citizens differ in their views of using the Citizens differ in their views of using the tax code to assist the country’s lowest tax code to assist the country’s lowest income workers as avenues for helping income workers as avenues for helping students who work.students who work.

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TAX TIPS FOR STUDENTSTAX TIPS FOR STUDENTS

IRS Publication 970 Tax Benefits for Education http://www.irs.gov/pub/irs-pdf/p970.pdf

IRS Publication 596 Earned Income Credit http://www.irs.gov/pub/irs-pdf/p596.pdf

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EARNED INCOME TAX CREDITS EARNED INCOME TAX CREDITS (EITC)(EITC)

• A A refundablerefundable federal income tax credit federal income tax credit for low-income working individuals for low-income working individuals and families.and families.

• Filer must be >24 and <65 years oldFiler must be >24 and <65 years old• Investment Income must be <$2,650Investment Income must be <$2,650• Must have EARNED INCOME within Must have EARNED INCOME within

specified ranges.specified ranges.

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• EITC amounts may reduce taxes owed or EITC amounts may reduce taxes owed or be paid as a REFUND IN EXCESS OF be paid as a REFUND IN EXCESS OF TAXES WITHHELDTAXES WITHHELD

• Eligible filers may received “refunds” for Eligible filers may received “refunds” for more than they paid in taxes after filingmore than they paid in taxes after filing

• Eligible workers can avoid having all or Eligible workers can avoid having all or portions of normal “withholding” taken out portions of normal “withholding” taken out of paychecks ahead of anticipated credit.of paychecks ahead of anticipated credit.

EARNED INCOME TAX CREDITS EARNED INCOME TAX CREDITS (EITC)(EITC)

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EITC INCOME RANGESEITC INCOME RANGES

Earned Earned Income Tax Income Tax CreditCredit

SINGLE, SINGLE, age 25+age 25+

Head of Head of Household Household – one child– one child

Married – Married – no children, no children, age 25+age 25+

Earned Earned Income Income ceilings for ceilings for eligibility--eligibility--

(not AGI)(not AGI)

Up to Up to $11,490$11,490

Up to Up to $30,338$30,338

Up to Up to 12,49012,490

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EARNED INCOME TAX CREDIT EARNED INCOME TAX CREDIT (EITC)(EITC)

HEAD OF HOUSEHOLD WITH 1 CHILDHEAD OF HOUSEHOLD WITH 1 CHILD• Income of $30K would be eligible for Income of $30K would be eligible for $50$50 • Income of $20K would be eligible for Income of $20K would be eligible for $1,648$1,648

• Income of $10K would be eligible for Income of $10K would be eligible for $2,604$2,604

• Income of $7,500 would be eligible for Income of $7,500 would be eligible for $2,559$2,559

• Income of $5K would be eligible for Income of $5K would be eligible for $1,709$1,709

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EARNED INCOME TAX CREDIT EARNED INCOME TAX CREDIT (EITC)(EITC)

SINGLE PERSONSINGLE PERSON• A refundable federal income tax credit for A refundable federal income tax credit for

low-income working individuals and low-income working individuals and families.families.

• Must be >24 and <65 years oldMust be >24 and <65 years old• Investment Income must be <$2,650Investment Income must be <$2,650• Must have earned income less than Must have earned income less than

$11,490 to qualify for EITC. $11,490 to qualify for EITC.

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EARNED INCOME TAX CREDIT EARNED INCOME TAX CREDIT (EITC)(EITC)

SINGLE PERSONSINGLE PERSON

• Income of $2,500 would be eligible for Income of $2,500 would be eligible for $193$193

• Income of $5,000 would be eligible for Income of $5,000 would be eligible for $384$384

• Income of $7,500 would be eligible for Income of $7,500 would be eligible for $303$303

• Income of $10,000 would be eligible for Income of $10,000 would be eligible for $112$112

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EARNED INCOME TAX CREDIT EARNED INCOME TAX CREDIT FOR MARRIED COUPLES – NO FOR MARRIED COUPLES – NO

CHILDRENCHILDREN• A refundable federal income tax credit for low-A refundable federal income tax credit for low-

income working couplesincome working couples

• One partner must be >24, but <65 yrs.One partner must be >24, but <65 yrs.

• Must have earned income less than $12,490 to Must have earned income less than $12,490 to qualify for EITC.qualify for EITC.

• Investment income may not be >$2,650Investment income may not be >$2,650

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EARNED INCOME TAX CREDIT FOR EARNED INCOME TAX CREDIT FOR MARRIED COUPLES – NO MARRIED COUPLES – NO

CHILDRENCHILDREN• Earned Income of $5K would be eligible for Earned Income of $5K would be eligible for $384$384

• Earned Income of $7,500 would be eligible for Earned Income of $7,500 would be eligible for $380$380

• Earned Income of $10K would be eligible for Earned Income of $10K would be eligible for $189$189

• Earned Income of $12,000 would be eligible for Earned Income of $12,000 would be eligible for $36$36

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LIFE-TIME LEARNING CREDITSLIFE-TIME LEARNING CREDITS• REDUCES TAXES DOLLAR FOR REDUCES TAXES DOLLAR FOR

DOLLAR – Maximum of $2000 DOLLAR – Maximum of $2000 • Maximum of 20% of “tuition and qualified Maximum of 20% of “tuition and qualified

educational expenses” up to max of educational expenses” up to max of $2,000 for TY 2005 per filer$2,000 for TY 2005 per filer

• AGI max of $52K for single filer and $105K AGI max of $52K for single filer and $105K for married filer – ratably reduced at top of for married filer – ratably reduced at top of range ($42K and $95K respectively)range ($42K and $95K respectively)

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TAX CREDITSTAX CREDITS• A single filer must have an A single filer must have an AGIAGI of at least of at least

$20,700$20,700 to get the maximum credit. LTL to get the maximum credit. LTL credits cannot be greater than the tax credits cannot be greater than the tax liability – liability – not refundablenot refundable..

• A head of household filer with one A head of household filer with one dependent - dependent - AGIAGI of at least of at least $24,250$24,250

• Married filer with no minor dependents – Married filer with no minor dependents – AGIAGI of of $28,100$28,100

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LIFETIME LEARNING TAX LIFETIME LEARNING TAX CREDITSCREDITS

Lifetime Lifetime Learning Learning Tax Credit Tax Credit

SINGLESINGLE Head of Head of Household Household – one child– one child

Married – Married – no children, no children,

Eligible Eligible Income Income

ranges – ranges – ratably ratably

reduced at reduced at top of top of rangerange

$9,955 to$9,955 to$52,000 –$52,000 – MAX credit MAX credit available atavailable at>>$20,700$20,700

$15,355 to$15,355 to$52,000$52,000

MAX credit MAX credit available at available at > > $24,250$24,250

$17,905 to $17,905 to $105,000$105,000

MAX credit MAX credit available at available at > > $28,100$28,100

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TAX CREDITS ARE WORTH TAX CREDITS ARE WORTH MOREMORE

For those eligible for a tax credit, this is For those eligible for a tax credit, this is always the best option in comparison to a always the best option in comparison to a tax deductiontax deduction

Tax deductions are less valuable, but they Tax deductions are less valuable, but they are available to higher-income filers than are available to higher-income filers than is the case with tax creditsis the case with tax credits

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TAX DEDUCTIONS FOR TAX DEDUCTIONS FOR STUDENTSSTUDENTS

• Deduction for up to $4,000 per filer for Deduction for up to $4,000 per filer for qualified tuition and fees qualified tuition and fees

• Reduces AGI “above the line” so filers do Reduces AGI “above the line” so filers do not have to “itemize” on Schedule “A”not have to “itemize” on Schedule “A”

• EASY TO DO: CALCULATE THE NET EASY TO DO: CALCULATE THE NET TUITION amounts from 1098-TTUITION amounts from 1098-T

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TUITION AND FEE DEDUCTIONTUITION AND FEE DEDUCTIONReducesReducesAGI either AGI either $4K or $2K$4K or $2K

SINGLESINGLEHEAD of HEAD of HOUSE-HOUSE-HOLD – HOLD – one childone child

MARRIED - MARRIED - no children no children

AGI for AGI for $4,000 $4,000 deductiondeduction

$11,955 to $11,955 to $65,000$65,000

$17,355 to $17,355 to $65,000$65,000

$19,905 to $19,905 to $130,000$130,000

AGI for AGI for $2,000$2,000deductiondeduction

$65,001 to $65,001 to $80,000$80,000

$65,001 to $65,001 to $80,000$80,000

$130,001$130,001to to $160,000$160,000

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DOLLAR VALUE OF DEDUCTIONDOLLAR VALUE OF DEDUCTION

Single andSingle and Head of Head of Household – Household – one childone child

< $65K< $65Ksavessaves$400 - $400 - $1000$1000

>$65 - $80K>$65 - $80K saves saves$500 - $560$500 - $560

Married – no Married – no childrenchildren

<$130K<$130K savessaves$400 - $400 - $1000$1000

>$130K - >$130K - <$160,001<$160,001 saves saves$500 - $560$500 - $560

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DEDUCTION FOR STUDENT LOAN DEDUCTION FOR STUDENT LOAN INTEREST INTEREST PAIDPAID

• Up to $2500 in interest payments may Up to $2500 in interest payments may be deducted by borrowerbe deducted by borrower

• Incomes up to $65K for single and Incomes up to $65K for single and $130K joint return$130K joint return

• Lender should send borrower a 1098-E Lender should send borrower a 1098-E statement each year detailing intereststatement each year detailing interest

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DOLLAR VALUE OF INTEREST DOLLAR VALUE OF INTEREST DEDUCTIONDEDUCTION

Single andSingle and Head of Head of Household – Household – one childone child

< $50K< $50Ksavessaves$0 - $625$0 - $625

>$50,001 - $65K>$50,001 - $65K savessaves$625 - $0$625 - $0

Married – no Married – no childrenchildren

<$100K<$100K savessaves$0 - $613$0 - $613

>$100,001 - >$100,001 - <$130K<$130K saves saves$613 - $0$613 - $0

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POSSIBLE BUSINESS DEDUCTION POSSIBLE BUSINESS DEDUCTION FOR FOR CERTAIN MBA STUDENTSCERTAIN MBA STUDENTS

(Treasury Regulation 1.162-5) - tuition (Treasury Regulation 1.162-5) - tuition and other education expenses are and other education expenses are DEDUCTIBLE ONLY IF DEDUCTIBLE ONLY IF

1)1) Maintaining or improving skills Maintaining or improving skills required in the trade or businessrequired in the trade or business

2)2) Required as a condition of continued Required as a condition of continued employment or salary levelemployment or salary level

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BUSINESS DEDUCTION FOR BUSINESS DEDUCTION FOR MBAsMBAs

Q:Q: Why would this business deduction be Why would this business deduction be more desirable than the Education more desirable than the Education Tuition and Fee Deduction discussed Tuition and Fee Deduction discussed earlier in the presentation?earlier in the presentation?

A: A: This deduction is not limited to $4,000 This deduction is not limited to $4,000 per year, is not limited to those single per year, is not limited to those single filers with AGIs less than $80K or filers with AGIs less than $80K or married filers with AGIs less married filers with AGIs less than$160K.than$160K.

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NOT DEDUCTIBLE IF…NOT DEDUCTIBLE IF…• Incurred to meet the minimum educational Incurred to meet the minimum educational

requirements for job, including a license or requirements for job, including a license or certification (e.g., most candidates for MD, certification (e.g., most candidates for MD, DDS, teaching credential, etc.)DDS, teaching credential, etc.)

• Education is part of a program to prepare Education is part of a program to prepare for a new business or type of employmentfor a new business or type of employment

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TAX COURT RE: TAX COURT RE: MBA IN ALLEMEIER MBA IN ALLEMEIER V. COMMISSIONERV. COMMISSIONER, , T.C. MEMO 2005-207T.C. MEMO 2005-207

Tuition and other educational expenses Tuition and other educational expenses connected to the acquisition of an MBA are connected to the acquisition of an MBA are deductible if the student then engages in “the deductible if the student then engages in “the same general activities” as before the MBA. same general activities” as before the MBA.

““WHILE THE MBA MAY HAVE SPED UP HIS WHILE THE MBA MAY HAVE SPED UP HIS

ADVANCEMENT WITH THE COMPANY, THE ADVANCEMENT WITH THE COMPANY, THE BASIC NATURE OF HIS DUTIES DID NOT BASIC NATURE OF HIS DUTIES DID NOT SIGNIFICALNTLY CHANGE.”SIGNIFICALNTLY CHANGE.”

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THIS PRESENTATION AVAILABLE THIS PRESENTATION AVAILABLE AT…AT…

http://www.ucop.edu/sas/sfs/other_material/http://www.ucop.edu/sas/sfs/other_material/other_material.htm other_material.htm

The content of this presentation is not endorsed or The content of this presentation is not endorsed or vetted by the U.S. Department of Education, the vetted by the U.S. Department of Education, the Internal Revenue Service, or even the Regents Internal Revenue Service, or even the Regents of the University of California. This is an of the University of California. This is an informal colleague-to-colleague message, not informal colleague-to-colleague message, not legal advice. All errors are my own. Contact legal advice. All errors are my own. Contact

Nancy Coolidge - <nancy.coolidge@ucop.edu>Nancy Coolidge - <nancy.coolidge@ucop.edu>