Tax law changes to help college savings
Update: Until the Governor calls a special session of the Legislature, the tax changes passed will not become law.
If you have kids — or are thinking about it — you received some good news from policymakers in St. Paul in the last week. New tax benefits that provide incentives for saving for college through 529 plans were included in the bill that passed by the House and Senate. Gov. Mark Dayton will be reviewing the bill and sounds likely to sign it.
“Some of the headlines about the end of the session are focusing on what didn’t happen,” said Paul Cerkvenik, president, Minnesota Private College Council. “But there were some very critical higher education benefits added to Minnesota’s tax laws — benefits that will help families save for college and that will help students with high student debt burdens.”
Summing up tax changes
Minnesota tax law has left families at a disadvantage compared to those in most other states when it comes to saving for college because Minnesota has been one of a handful of states that do not provide tax incentives for college savings accounts known as “529 plans.” The 529 plans that have grown popular as a vehicle for saving for college will now have two new tax benefits.
- All Minnesota families will be eligible for a tax deduction tied to what they set aside in college savings, meaning that up to $3,000 of savings for joint filers will be exempt from state taxes.
- Many families will also be eligible for a $500 tax credit, which reduces a filers’ tax payment responsibility by that amount. The tax credit will be focused on lower- and middle-income families, with eligibility limited based on income levels.
These two changes are significant, providing more than $15 million in tax relief for those who save for college. The hope is that more Minnesota families will take advantage of this change to make better use of 529 savings plan options. These provisions were championed by Sen. Greg Clausen and Rep. Anna Wills, who were the chief authors of the legislation calling for this change. Tax committee leaders who supported this and incorporated it into the final tax bill included Sen. Rod Skoe, Sen. Ann Rest and Rep. Greg Davids. In recent years the Minnesota Private College Council has been speaking up at the Capitol on behalf of tax changes to encourage increased college savings.
Another important change was made to Minnesota tax law to address college costs through the creation of a tax credit for payment of principal and interest on student loans. This provision of the tax bill helps those who must borrow to pay for college. The focus is on those with high levels of debt and lower incomes, so eligibility will require student debt payments that exceed 10 percent of the taxpayer’s adjusted gross income. For these former students who are paying this debt, the tax bill will provide a tax credit of up to $1,000 a year. And for teachers and others in public service jobs, they will qualify for the full benefit with slightly smaller debt burden requirements. Students with graduate education loan debt will be eligible as well.
And in one more college debt-related change, the tax bill removes a penalty that has hit those who have been in income-based student loan repayment plans. These are federal programs to help students with high student debt who have lower incomes. When people participate in these programs, the final amount of debt that has been written off is considered taxable income, triggering a surprisingly large tax bill for many of these borrowers. The bill ensures that this amount will no longer be considered taxable income on the taxpayers state income tax return.
Where else college students came out ahead
When it comes to other positive news for college students, or future ones, three changes rise to the top.
- A small but important investment was made this session in the State Grant program, which provides need-based aid to one out of four college students in Minnesota. Targeting lower- and middle-income students, the majority of these grants help students at the U of M and MnSCU; students at private nonprofit colleges receive them as well.
When a supplemental spending bill was passed last week by both the House and Senate, it included $5 million for higher education, of which $2 million went to improving State Grant awards. These grants could increase by up to $460 next year at the U of M and private nonprofit colleges, given that investment and other changes.
The inclusion of new State Grant funding to help college students wouldn’t have been possible without the support of Sen. Terri Bonoff and Rep. Bud Nornes, who chair the two chambers’ higher education committees. Gov. Dayton will be reviewing the bill when it reaches him for his signature; early indications are that he is likely to be supportive.
- Graduate students with children will have new access to state support for their child care costs if the supplemental spending bill becomes law. The existing state program that has been meeting the needs of lower-income students earning bachelor’s and associate degrees will now be expanded to graduate students.
And new support for advising high school students about college and career options emerged in the K-12 bill that passed both the House and Senate. Legislators set aside $12 million for school districts to hire more social workers, student support staff and school counselors. This proposal was advanced by Sen. Susan Kent and Rep. Alice Hausman; supporters included the Minnesota Association for College Admission Counseling. The provision would help address the fact that Minnesota has had the dubious distinction of spending less of its education money on student support than any other state.