Friday, March 2, 2012

Education Tax Credits

Newspapers, Magazines, and blogs have been filled with articles and stories about the crippling reality of student loan debt on graduates. The national conversation about how to quell the exponentially increasing costs of a college education is one that has be continually in the spotlight, some have argued that student loan debt is the next financial bubble. As recently as this morning MPR was dedicating another hour on how to get an affordable college education. And for just as long as the debate has been going on, and even longer, government actors have been trying to devise some sort of relief for students. One of the more popular options has been education tax credits.

Education tax credits, such as the Hope Credit or Lifetime Learning Credit (see all options here), act as an offset to direct educational expenses that students incur. Credits are most often refundable, which means that some of the money could end up directly in the student’s pocket. Of course in this system the hope is that the extra money returned will be used to pay for other educational expenses. The question then remains if these tax credits do enough to change the reality of the large debt-load of college students?

The national average loan debt per student is currently around $25,000. If a student were to receive the The American Opportunity Credit for all four years of their undergraduate career, at its maximum level of $2,500 per year,  they would receive $10,000 in tax credits. This is a good amount against the national average debt loan, but the average does not tell the whole story. In Minnesota the average student loan debt is $29,000, the 4th highest in the nation. Which means the amount of the American Opportunity Credit becomes less substantial. And when you take into consideration the fact that some schools have an average student debt load about $40,000, the power of the tax credit dwindles further.

Education tax credits may not be as powerful a tool to combat student loan debt-load as they were originally thought to be, but they are still a tool that should be utilized.  As tuitions increase and the need for a college degree becomes even more essential, the conversation around student loan debt will continue. And as the conversation continues on, so should the use and expansion of education tax credits.


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