Two pieces of legislation that impact college were approved towards the end of 2019. Each has some components that may be of interest.
The Fostering Undergraduate Talent by Unlocking Resources for Education (FUTURE) Act has two components:
- Restoring and permanently extending funding for historically black colleges and universities (HBCUs) and other minority-serving institutions (MSIs).
- Simplifying the FAFSA and eliminating paperwork for income-driven student loan repayment plans.
The $255 million in annual funding to HBCUs and MSIs will continue funding that began in 1965 and was set to expire in 2021. The funds are targeted to STEM initiatives, student services, educational equipment acquisition and facility renovation and construction.
The FAFSA simplification eliminates up to 22 questions from the FAFSA and allows direct tax information sharing between the IRS and the Department of Education. Currently, the IRS DRT allows applicants to retrieve their own tax information from the IRS and then import it into the FAFSA. (It may appear to be a direct link, but the underlying data movement is not.) The new process will both streamline the existing process to allow direct import from the IRS, and open the direct import process to tax filing statuses such as head of household or married filing separate that have been ineligible for the IRS DRT in the past. In addition, the direct information sharing will automate income recertification for federal student loan borrowers in income-driven repayment plans.
One result of this change should be a reduction in the number of applicants selected for verification. Each year, millions of FAFSA applications are selected by the Department of Education for verification, meaning that schools are required to validate the submitted information for accuracy. Because anything that is imported by the IRS DRT is automatically not subject to verification, head of household and MFS filing statuses are the most likely to be verified. The process is complex, and many families don’t do it. One study showed that 25% of FAFSAs selected for verification were not completed, and that the burden of verification falls more heavily on lower-income students.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act went into effect on Jan. 1 of this year. Most of its provisions relate to retirement savings; however, one provision in the SECURE Act expands the use of 529 plans to allow account holders to pay the following with their 529 account:
- Expenses for apprenticeship programs including required fees, books, supplies and equipment
- Up to $10,000 in student loan repayment per beneficiary or sibling of beneficiary
The SECURE Act also repealed the Tax Cuts and Jobs Act’s (TCJA) change to the Kiddie Tax rate, reverting it from trust tax rates to the parent’s marginal tax rate. The Kiddie Tax is a tax on a child’s (up to age 24) unearned income. This is pertinent with respect to college funding because scholarships that cover items beyond tuition and fees—such as room and board—are treated as unearned income by the IRS and taxed at Kiddie Tax rates. Students from low-income families found themselves being taxed at trust tax rates—where income above $2,600 is taxed at 24% and above $9,300 at 35%– rather than at the likely much lower parent’s marginal tax rate.
Some of these changes—especially when combined with tax code changes in the TCJA—present interesting planning opportunities in some circumstances. I’ll explore some of those in detail in future posts.