Fiscal cliff uncertainty leads experts to foresee federal student aid cuts

By Daniel Wheaton on January 7th, 2013

Twenty-three hours after its self-imposed deadline, Congress passed legislation to avoid the so-called fiscal cliff of spending cuts and tax increases set to go into effect on New Year’s Day – but students and their families will still face tax increases and uncertainty regarding federal student aid.

On Jan. 1, Congress passed the American Taxpayer Relief Act of 2012, which extended the Bush tax cuts for 98 percent of Americans and put off planned spending cuts for two months. The late passage had no consequence for taxpayers because the market had no time to react because it was closed.

Near the final hours of Dec. 31, the Senate brokered a bipartisan deal averting the cliff. Instead of letting taxes rise for everyone, the Senate agreed to let Bush tax cuts expire for individuals making more than $400,000 a year. The Senate passed the bill with a rare 89-8 majority. The deal did not extend the payroll tax cut of 2010. This means there will be a 2 percent increase in federal taxes taken out of every paycheck. Late on Jan. 1, the House of Representatives voted on the bill, and it passed with a vote of 257-167, sending it to President Barack Obama, who signed it into law that evening.

The second element of the cliff – spending cuts known as “the sequester” – has been delayed for two months. These cuts were designed to reduce the rising deficit and include everything from defense spending to Medicare.

Mark Kantrowitz, publisher of financial aid websites Fastweb and FinAid, said the sequester includes cuts to federal student aid programs. If Congress does not act, aid will be cut by 8.2 percent in two months, he said.

Kantrowitz said a number of education-related tax credits were made permanent in the act: the American Opportunity Tax Credit, worth up to $2,500 per student, and the Lifetime Learning Credit, worth up to $2,000 and the Tuition and Fees Deduction. Improvements to The Coverdell Education Savings Account were also made permanent, Kantrowitz said. These are savings accounts that incentivize saving for future education costs.

“This essentially maintains the status quo,” Kantrowitz said.

The five-year Student Loan Interest Deduction was also made permanent. This means up to $2,500 can be deducted from taxes filed if you are repaying a student loan.

Kantrowitz said uncertainties about future cuts will impact the amount of aid that universities will give to students.

Additionally, the federal work study program may be trimmed by $76 million, according to the National Association of State Student Grant and Aid Programs.

“The question is how will they distribute what is left,” Kantrowitz said.

For work study, there might be less money to go around, he said.

Also, interest rates for Stafford and Parent PLUS loans could increase. In the summer of 2012, Congress blocked the doubling of interest rates. If no action is taken, interest rates will double from 3.4 percent to 6.8 percent in the next academic year. Kantrowitz said Pell Grants have remained out of the discussion, but the maximum award may be cut by $300 or $400 as part of the sequester.

The sequester also cuts some research funds for universities, including the University of Nebraska-Lincoln.

John Anderson, a professor of economics at UNL, said he was glad the major harms of the fiscal cliff were averted. But he said the future is unclear.

“It’s hard to know specifically what will get less funding,” Anderson said. “There may just be less funding in the future.”

Kantrowitz said the cuts to aid would force universities to look for other forms of income. Public institutions such as UNL will have to increase enrollment of out-of-state and international students, he said.

Anderson said the deal still doesn’t solve America’s budget problems. In order to have a balanced budget, Congress must reconsider tax law and cut entitlement and discretionary spending, he said.

The current deal, he said, only avoided the worst impacts of the fiscal cliff. It also will create more political battles as the 113th Congress works out the details.

Treasury Secretary Timothy Geithner notified Congress that the debt ceiling had been reached on Dec. 31. Anderson said he hopes discussion over the debt ceiling will force Congress to find a long-term solution to debt and deficit issues.

“Write to your congressman about the importance of financial aid,” Kantrowitz said. “The more they know, the more likely they’ll make the right decision.”

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