Tax Breaks for College Students (& Their Parents!)

Would your employees turn down an extra $2,000 bonus with no strings attached?  No?

Sadly, in 2009, over 1.5 million workers did turn down such free money by neglecting to take advantage of the education tax breaks that they were entitled to.  As reported in The Chronicle of Higher Education, the lost savings in unclaimed education tax breaks in 2009 totaled $726 million, representing an average loss of $466 per family.  Over the course of a 4-year education, this average yearly loss equates to an employee turning down a nearly $2,000 bonus!

Why would working families turn down this free money?

Unfortunately, many taxpayers simply misunderstand, or are unaware of, the tax benefits that are available to them.  Here's where employers can help bridge the knowledge gap, creating a uniquely supportive workplace and engendering employee loyalty by providing College Coach finance counseling as part of a comprehensive benefits package.

College Coach strives to make sure the employees of our corporate clients take full advantage of each of the education tax breaks they may be entitled to.  Our college finance educators bring to your employees an understanding of the four main tax credits and deductions that parents of college students, or working students themselves, may be eligible for:

American Opportunity Credit (AOC)

If an employee is paying for the undergraduate tuition, enrollment fees, and course materials for a dependent child that is at least a half-time student within the first 4 years of their postsecondary education, the most valuable tax credit to that employee is likely the American Opportunity Credit.  The AOC provides a credit equaling 100% of the first $2,000 in tuition and related fees paid for a student and 25% of the next $2,000, for a maximum credit of $2,500 per year for parents paying at least $4,000.  Though workers can claim only one education tax credit/deduction per child, if they are paying the college expenses of more than one child, they can claim the AOC for multiple students.  Eligibility for the AOC phases out between $80,000 and $90,000 of income for single taxpayers and between $160,000 and $180,000 of income for married taxpayers filing jointly.

Lifetime Learning Credit (LLC)

Working graduate students, part-time students, and parents of students on the 5-year undergraduate plan (i.e. have already used up 4 years' worth of AOC) may be eligible for the Lifetime Learning Credit instead.  The LLC provides a credit equaling 20% of the first $10,000 of eligible expenses paid for a student, for a maximum credit of $2,000.  Eligibility for the LLC phases out between $52,000 and $62,000 of income for single taxpayers and between $104,000 and $124,000 for married taxpayers filing jointly.

Tuition and Fees Deduction

If an employee's income is too high to qualify for the Lifetime Learning Credit, yet his enrollment status or that of his dependent child (less than half-time, graduate student, etc.) disqualifies him from the American Opportunity Credit, he may benefit from the Tuition and Fees Deduction.  This tax break allows a worker to deduct up to $4,000 in tuition and fees paid from his taxable income, his net benefit dependent upon your tax bracket.  Single taxpayers with incomes less than $65,000 and married taxpayers with incomes less than $130,000 are eligible for the maximum deduction.  Single taxpayers with incomes between $65,000 and $80,000 and married taxpayers with incomes between $130,000 and $160,000 are eligible for a lesser deduction.  No deduction is available at higher incomes.

Student Loan Interest Deduction

In addition to the above tax breaks for direct college expenses, if an employee is currently paying down a loan borrowed for her own or her child's educational expenses, she may be eligible to deduct the interest paid this year from her taxable income, up to a maximum deduction of $2,500.  Eligibility for this deduction phases out at AGIs between $60,000 and $75,000 for single taxpayers and AGIs between $125,000 and $155,000 for married taxpayers filing jointly.

Personalized assistance can show working families that paying for college is within their reach

As you can see, a number of education tax credits and deductions are readily available to middle-income employees who are either students themselves or who are paying the college expenses of their dependent children.

Though many workers neglect to claim the tax breaks they are eligible for, due to lack of awareness or misunderstanding of these benefits, as an employer, you can provide your workforce with the personalized assistance that they need to take full advantage of whichever education tax break(s) will garner them the greatest financial benefit, based on each employee's individual family and financial circumstances.

One College Coach workplace event or personalized counseling session can provide your employees with the insider college finance information that they need to put thousands of tax dollars back in their pockets - the benefit equivalent to thousands of dollars' worth of employee bonuses without the hit to your company's bottom line.

So what are you waiting for?  April 15th will be here before you know it!

Written by: Shannon Vasconcelos

About the Author

Shannon works with Bright Horizons Education & College Advising corporate clients to deliver college financing workshops and provide personalized counseling to employees. She has over 10 years of experience in student financial assistance, at Boston University and Tufts University, and has also served as an active member of MASFAA’s Early Awareness and Outreach Committee, as a trainer for DOE’s National Training for Counselors and Mentors, and as a volunteer for FAFSA Day Massachusetts.