Policymakers ended the recent legislative session in a tussle over a number of tax and budget issues, as is often the case. While partisan drama garners lots of media attention, what can be missed are all the agreements that were reached and policy changes that occurred. When it comes to higher education, legislation passed in the 2017 session will help college students, recent grads and those saving for college.
New incentives for college savings
Families trying to save for college will benefit from state tax law changes that were passed by the Legislature and signed into law by Gov. Mark Dayton. Two changes were made that involve 529 plans, which are vehicles for saving for college:
- Contributions made to these college saving plans of up to $3,000 can now be deducted when filing Minnesota income taxes. This in effect lowers a family’s taxable income.
- And families with incomes below $160,000 who save money for college through a 529 plan will receive a tax credit, which reduces a family’s Minnesota tax liability by up to $500.
“This is about encouraging people to make the right decisions about saving money for college,” said Jeff Olson, director of financial aid at Bethel University.
Creating incentives for families to save money for college can ideally start to influence how families think about budgeting. Olson gave the example of how if he is counting calories, he’ll be more careful about eating that second or third cookie, or even taking the first one. Similarly, once families establish a 529 plan they are likely to be more intentional about how they save and spend.
“For the state to do something that will encourage the good practice of saving for college right off the bat, the hope would be it helps families be in a healthier situation when their kids go to college.” Olson said. “You don’t have to save everything, but you can aim to save enough so you don’t have to borrow or don’t have to borrow as much.”
The new incentives apply to saving in any 529 plan, not just the one sponsored by the state of Minnesota, as well as the Private College 529 Plan. The new tax law goes into effect July 1, meaning these incentives can impact taxes paid next April if families put funds into a 529 plan yet during the 2017 calendar year. Minnesota is playing catch-up with these changes; most states with income taxes already offer these kinds of incentives for college savings. The new incentives are expected to cost the state about $20 million over the next biennium.
More funding for college grants
Policymakers put $36 million of new funding into the State Grant program, which helps one out of four Minnesota college students. This 10 percent increase in the program’s base funding was a meaningful jump, given all the competing demands on limited state funds. And it will result in more eligible students and larger awards starting this fall. (Need-based State Grant awards help students at public and private institutions, whether they are earning associate or bachelor’s degrees.)
“We don’t have to look very far to see that college is expensive,” Olson said. “By increasing the investment in the State Grant program, it helps low- and middle-income students have additional resources to pay for college. And the hope is that the students can then minimize educational debt.”
The new funding targets a part of the formula that is used to calculate awards, reducing the share of expenses that families and students are expected to cover. For students at Minnesota’s private nonprofit colleges, the new investment will mean that the average award will increase by $180 next fall.
At Bethel alone more than 50 additional students will become eligible for State Grant awards because of the new investment. “They’ll receive from $100 to $3,500 per student, so that will be a big help,” Olson said. And more than 700 Bethel students who already receive the awards will see increases that average $489 per year. He talked about translating figures like these into how many hours it would take a student to work to earn those amounts to understand how meaningful these grants are for students.
Olson added that modest increases over time can help keep a college education within grasp — failing to act at all would only worsen the affordability challenge.
New help for student debt
The tax law also includes a new tax credit for college graduates with qualified education loans. Available for use when Minnesotans file their 2017 taxes, this new credit targets borrowers with a high debt-to-income ratio.
About 65,000 Minnesotans will benefit from the student loan tax credit; the average credit is expected to be about $414. Minnesota is the first state to create these kinds of student loan credits to respond to concerns about the burden of student loans; this provision is expected to cost more than $54 million over the next biennium.