Washington — U.S. Senator Evan Bayh, joined by Senator Charles Schumer, today introduced a bill to quadruple the value of the current college tuition tax benefit and will push to pass it as part of the economic recovery package currently being assembled in Congress. The bill is a new approach and a major change to the current college tuition tax benefit. The new credit will save middle class families up to $4,000 on their taxes per student each year.

“Access to an affordable college education is a key component in preparing students for the job market of the future,” said Bayh. “Especially during challenging economic times, this important bill will not only simplify and expand access to higher education for students, but help alleviate the stresses on family budgets today.”

Schumer said today there is a good chance that this credit could pass with the economic stimulus package, as it has received broad support from the Senate Finance Committee and the incoming Obama administration. If so, middle class families across the country could utilize the new tax credit as soon as this tax year for returns filed next year. The senators said the savings is needed now more than ever as the economic downturn takes its toll on middle-class families and tuition costs skyrocket.

“A college education is a necessity for America's children and it is being priced as a luxury item. This bill is a new approach that would provide middle class families with one dollar off their taxes for every dollar spent on college tuition,” said Schumer. “This bill could save middle-class families thousands of dollars. In tough economic times like these, this bill will offer families real relief.”

In the last decade, college tuition has skyrocketed across the country in light of rising costs. With the recent tightening in the student loan credit market, more students of all income levels are being forced into borrowing from both federal and private lenders to finance college and they are borrowing in higher amounts than ever before. Others are forced to make tough decisions about whether or not higher education is feasible. According to the federal Advisory Committee on Student Financial Assistance, cost factors prevent 48 percent of college-qualified high school graduates from attending a four-year institution and 22 percent from attending any college at all.

To provide real relief for middle class families saddled with skyrocketing tuition costs, the senators today announced that they are fighting to significantly increase the tax benefits provided by the current higher education tax incentives. The senators said the plan would quadruple the middle class tax benefit in many cases and save U.S. families thousands of dollars every year. They said that if it passed, the tax credit would take effect as soon as this tax year.

The bill introduced today would combine the HOPE and Lifetime Learning credits and the above-the-line tuition tax deduction into one credit of up to $4,000 per student. For middle class families currently taking the HOPE credit, making less than $60,000, the new credit would more than double the existing tax benefit. If these families currently use the college tuition deduction, the maximum tax benefit could be quadrupled or more, depending on a family’s circumstances and tuition costs. The tax credit would go into effect for tax year 2009 and help the millions of individuals that apply for higher education tax credits each year. The bill is written in such a way so that even students with modest tuition—such as those attending a community college—still receive a sizeable credit. The lifetime benefit per student is set at $16,000, and it can be used for college or graduate school. The new credit will also include expenses for tuition, fees, and textbooks and can be used for up to three students per household. Up to 50 percent of the cost of textbooks, up to $400, can be claimed as part of the $4,000 credit each year.

The college tuition tax credit bill works much better than existing tax incentives and would save families thousands more dollars every year. For example, a family making $60,000 this year would save $600 this year if they use the current tuition deduction, or $1800 if they use the HOPE credit. Under the new proposal, that family would see their entire federal tax liability disappear and they would save $3,265 for each student, every year. A family making $70,000 a year, with $8,000 in out of pocket tuition costs, would save the full $4,000 under Bayh’s new bill. Under the current incentives, they would likely save just $600 because they would not qualify for the HOPE credit at all.

SUMMARY OF SCHUMER-BAYH PROPOSAL TO CONSOLIDATE AND EXPAND HIGHER EDUCATION TAX INCENTIVES

• The proposal in the “Higher Education Opportunity Act of 2009” is very similar to S. 851 in the 110th Congress, and the proposal included within the Middle Class Opportunity Act (S. 614).

• The Schumer-Bayh proposal would combine the HOPE and Lifetime Learning credits and the above-the-line tuition tax deduction into one simple, streamlined, easy-to-understand credit of up to $4,000 per student, which combines the best features of the existing benefits and significantly expands the benefit for most families. The new credit would be in effect for tax year 2009.

• The new credit is calculated on a declining sliding scale: 100 percent of the first $2,000 in out-of-pocket expenses; 50 percent of the next $2,000; and 25 percent of the next $4,000, for a maximum credit of $4,000. The credit begins to phase out at income levels of $70,000 (single) and $140,000 (joint), and reaches zero when family income exceeds $80,000/$160,000.

• The purpose for the sliding scale is to ensure that community college students do not lose tax benefits, as they might if the new credit were a fixed percentage (e.g., 25 percent of the first $10,000). For example, under this proposal, a community college student paying $2,500 in tuition would receive a credit of $2,250, as opposed to $625 if the fixed percentage was 25 percent. This is a greater benefit than under the three current tax incentives.

• Unlike the tax benefits in current law, the new credit would allow a certain percentage of textbook expenses to be claimed. A student may include up to 50 percent of amounts paid for books, up to a maximum of $400 (as long as the total credit claimed remains under $4,000).

• The new consolidated credit can be used for both graduate and undergraduate education (up to two years of graduate education per taxpayer), and it can be used for up to three students in the household each year. The lifetime credit per student cannot exceed $16,000, starting with the 2009 tax year.

• Students must be enrolled at least half-time to be eligible, but the half-time enrollment requirement may be waived for students working a minimum of 25 hours per week while enrolled.

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