The 2017 Tax Cuts and Jobs Act (TCJA) was a signature achievement of President Donald Trump’s first term, and congressional Republicans and the president are eager to extend this tax reform package. Several provisions of the TCJA will expire at the end of 2025 if Congress does not act. But first Congress must determine how it will pay for the over $4 trillion that is projected to be added to the federal budget deficit over the next ten years should the TCJA be extended.
At this stage, many proposals are being analyzed by policy centers and considered by members of Congress. The House Budget Committee recently distributed a 50-page document outlining dozens of possible options to reduce the deficit to the House Republican Caucus. While it is still too early to know for sure which of these options will end up under serious consideration or included in any potential legislation, there are a number of proposals that directly impact education financing.
Elimination of the Student Loan Interest Tax Deduction
The $2,500 above-the-line tax deduction for interest paid on student loans came into the crosshairs of lawmakers during the initial negotiations of the TCJA but ultimately was saved. However, the elimination of this deduction is once again under consideration. For student loan borrowers with incomes lower than the deduction’s phaseout thresholds, this may have a noticeable effect on tax bills. Eliminating the deduction is projected to save $30 billion over the next ten years.
Elimination of the American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC)
The AOTC and LLC are popular tax credits for education expenses by taxpayers, subject to income limitations. The AOTC offers a credit for 100% of the first $2,000 spent on qualifying education expenses plus 25% of the next $2,000 in expenses, totalling a refundable credit of up to $2,500. The LLC works similarly, offering a credit of 20% of education expenses up to $10,000. Taxpayers may not claim both credits on the same educational expenses. Eliminating both of these credits is projected to save $85 billion over the next ten years, but will certainly disappoint taxpayers who are eligible for one of these credits.
Repeal of SAVE Student Loan Repayment Plan
This proposal is to offer Federal Student Loan borrowers two repayment options for loans originated after June 2024, down from the current four, with the elimination of the hotly-contested SAVE repayment plan, which was created in 2023 by the Biden Department of Education and blocked by a federal judge in 2024. The fate of the plan continues through the legal process, but would be sealed if this proposal is implemented in legislation. If SAVE is eliminated, borrowers will likely need to switch to one of the remaining income-driven repayment plans. For many borrowers, this would result in increased monthly payments compared to SAVE. This proposal has the largest budget savings of those impacting education financing, projected to be over $127 billion over the next ten years.
Sunset Parent and Graduate Federal PLUS Loan Program
This proposal, if enacted, would mark a dramatic shakeup of the student loan landscape by eliminating this popular federal loan program entirely by 2028, and closing it to new borrowers as soon as the 2025-26 school year. Families with students nearing college that were planning to borrow Parent PLUS loans, or prospective graduate students that were planning to borrow Grad PLUS loans, should carefully watch for news on this proposal. Elimination of this program would be a major tailwind for private student loan lenders and will likely reduce overall access to student loan funding, since PLUS loans were not subject to credit checks and private lenders have stricter credit requirements.
Additional related proposals include amending the borrowing caps on unsubsidized federal loans, and reforming the Pell Grant program. Limited details are available on these proposals in the document circulated.
In addition to the above budget-cutting measures, there has also been a new bill introduced that seeks to expand the benefits of 529 plans.
Expanded Definition of 529 Plan Qualified Expenses
Sen. Ted Cruz (R-TX) drove the expansion of the 529 plan qualified expenses to include up to $10,000 annually in private K-12 tuition as part of the TCJA in 2017. Senator Cruz and Representative Kevin Hern recently introduced the Student Empowerment Act that would further expand qualified expenses related to private K-12 institutions, as well as other expenses incurred by K-12 families, like fees for tutoring, standardized tests, dual enrollment, and therapies for students with disabilities. This legislation would also expand the definition of qualified expenses to cover similar costs related to homeschooling.
While all of the above are just proposals, any one could have a significant impact on the college financing landscape if enacted. There are expected to be substantive changes in the tax code in 2025, and it appears that education tax benefits and financing options are under serious consideration for reform. Each proposal related to higher education would increase overall college financing costs, though Senator Cruz’s legislation demonstrates that 529 plans endure as an education savings vehicle with bipartisan support. Families will want to closely monitor developments related to tax legislation and consider how it might impact their education financing plan.