Fiscal Cliff Deal Spares Higher Education . . . For Now

January 22, 2013

The US Capitol Building


In a last minute vote on New Year’s Day, both houses of Congress passed an agreement averting measures that would have raised the tax bill for college students and potentially deprived universities of critical research funding. The vote to avoid the tax hikes and spending cuts, known as the “fiscal cliff,” will give lawmakers until March 1 to cut $6 billion from the federal budget.

“Under this law, more than 98 percent of Americans and 97 percent of small businesses will not see their income taxes go up. Millions of families will continue to receive tax credits to help raise their kids and send them to college,” President Obama said after the House vote.

Avoids Across-the-Board Spending Cuts

The final agreement to avoid certain tax increases and spending cuts prevents several measures that would have hit college students and universities particularly hard. Provisions of the bill include:

  • The American Opportunity Tax Credit – Helps defray undergraduate college education expenses by allowing a tax credit of up to $2,500 a year, has been extended for five years, through the end of 2017.
  • The Tuition and Fees Deduction – Allows taxpayers to claim up to $4,000 in tuition expenses, has also been extended. The deduction, which was set to expire at the end of 2011, will continue through the end of 2013.
  • Coverdell Education Savings Accounts – Some changes to the Coverdell Education Savings Accounts have been made permanent. This means that the contribution limit has been increased to $2,000 from $500 and that the account may be used for elementary and secondary school expenses. Higher income phase-outs have also been made permanent.
  • The Student Loan Interest Deduction – The deal permanently repeals a five-year limit for deducting up to $2,500 via the Student Loan Interest Deduction. This means that students and families can claim on their tax forms student loan interest beyond 60 months.

Education Funding Still in Limbo

The bill avoids tax hikes for couples earning under $450,000 and individuals earning under $400,000, as the Bush-era tax cuts expire. It also averts sequestration, the across-the-board spending cuts scheduled to take place because Congress did not reach a long-term agreement on deficit reduction in 2012. Many programs important to higher education, including federal work-study, the Supplemental Educational Opportunity Grant, and funding for scientific research, would have been cut 8.2 percent under sequestration.

Though the fiscal cliff has been avoided, many questions remain unanswered. Congress will need to reach an agreement by March 1 to cut $6 billion from the budget. Whether those budget cuts will affect programs important to higher education is still unclear. The future of federal funding for higher education will depend on whether sequestration comes into effect in March or if another deal is made.

But the president warned against any further spending reductions after the fiscal cliff bill passed, saying, “We can’t keep cutting things like basic research and new technology and still expect to succeed in a 21st century economy. So we’re going to have to continue to move forward in deficit reduction, but we have to do it in a balanced way, making sure that we are growing even as we get a handle on our spending.”