Higher Education Tax Benefits: Brief Overview and Budgetary Effects

Higher Education Tax Benefits: Brief Overview December 21, 2022
and Budgetary Effects
Margot L. Crandall-Hollick
The federal government provides financial assistance to individuals for higher education
Specialist in Public Finance
expenses in two major ways: tax benefits and traditional student aid (loans, grants, and

work-study assistance). Since 1997, education tax benefits have become an increasingly
Brendan McDermott
important component of federal higher education policy. In 2023, 11 higher education-
Analyst in Public Finance
related tax benefits are available. The available tax benefits are a mixture of credits,

deductions, exclusions, and other incentives. The Joint Committee on Taxation (JCT)
estimates higher education-related tax benefits will cost an average of $25 billion per

year over the FY2020-FY2024 budgetary window.
This report provides a brief overview of the higher education tax benefits that are currently available to students
and their families. These tax benefits can be divided into three groups:
1. incentives for current-year expenses,
2. incentives related to the preferential tax treatment of student loan expenses, and
3. incentives for saving for college.
In 2023, incentives for current expenses included the American Opportunity Tax Credit; the Lifetime Learning
Credit; an exclusion for scholarships, fellowship income, and tuition reductions; and an exclusion for employer-
provided education benefits. As a result of P.L. 115-97 (commonly referred to as the “Tax Cuts and Jobs Act”), the
personal exemption (including for student dependents aged 19 to 23) and miscellaneous itemized deductions
(including for unreimbursed work-related education expenses) are temporarily suspended from 2018 through the
end of 2025. The above-the-line tuition and fees deduction, which had expired at the end of 2017, was temporarily
extended for 2018, 2019, and 2020 as part of P.L. 116-94. The Coronavirus Aid, Relief, and Economic Security
(CARES) Act (P.L. 116-136) temporarily expanded the definition of qualifying educational assistance for
employer-provided education benefits to include student loan payments through the end of 2020. The tuition and
fees deduction was permanently repealed in P.L. 116-260, while the income phaseout of the Lifetime Learning
Credit was permanently expanded by the law. These two changes were effective beginning in 2021. The law also
further extended the expanded definition of qualifying educational assistance first enacted in the CARES Act
through the end of 2025.
Tax benefits for student loan expenses include a deduction for interest paid on student loans and an exclusion
from income for the amount of discharged student loans. As a result of changes made in the American Rescue
Plan Act (ARPA; P.L. 117-2), most forgiven student loan debt will be excluded from income and hence not
taxable beginning in 2021. The exclusion is temporary and in effect through the end of 2025.
College saving tax incentives include Qualified Tuition Plans (529 plans); Coverdell education savings accounts
(ESAs); an education savings bond program; withdrawals from individual retirement accounts (IRAs) to pay for
college expenses without penalty; and the allowance of uniform transfers to minors. (Both Coverdells and 529s
can also be used for certain K-12 education expenses, subject to limitations.)

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Contents
Introduction ..................................................................................................................................... 1
Tax Benefits Versus Traditional Student Aid ................................................................................... 1
Brief Historical Perspective of Tax Benefits ................................................................................... 2
Summary and Cost of Current Benefits ........................................................................................... 6

Tables
Table 1. Overview of Education Tax Benefits, 2023 ....................................................................... 8
Table 2. Estimated Budgetary Impact of Tax Benefits for Higher Education Expenses,
FY2020-FY2024 ........................................................................................................................ 14

Contacts
Author Information ........................................................................................................................ 15

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Introduction
Since 1997, education tax benefits have become an increasingly important component of federal
higher education policy. For 2023, 11 higher education-related tax benefits are available. After
2025, absent legislative action, this number will effectively increase to 13. Two provisions that
are temporarily suspended are scheduled to be reinstated—the personal exemption for dependents
(including college-age dependents) and miscellaneous itemized deductions (including for
unreimbursed work-related education expenses)—while the exclusion for discharged or forgiven
student loan debt will only be available in limited circumstances.1
The available tax benefits are a mixture of credits, deductions, exclusions, and other incentives.
The benefits can be placed into one of three general categories: incentives for current year
expenses, preferential tax treatment of student loans, and incentives for saving for college. The
Joint Committee on Taxation (JCT) estimates currently available higher-education tax benefits
will cost an average of $25 billion per year over the FY2020-FY2024 budgetary window.2
This report provides a brief overview of the higher education tax benefits that are currently
available to students and their families. The report contrasts higher education tax benefits with
traditional student aid; presents a brief history of higher education tax policy over the past 60
years, including recent legislative proposals to modify these tax incentives; summarizes key
features of the available tax benefits; and provides JCT estimates of revenue losses resulting from
individual tax provisions. The summary is contained in Table 1 and provides information on
various aspects of each tax benefit including the type of benefit (credit, deduction, etc.), the
annual dollar amount of the benefit, what expenses qualify for the benefit, what level of education
the benefit can be claimed for, income levels at which the benefit phases out, and, if the provision
is temporary, when it expires. Table 2 contains estimates of the annual forgone federal revenue
attributable to each provision.
Tax Benefits Versus Traditional Student Aid
The federal government provides individuals with financial assistance for higher education
expenses in two ways: tax benefits and traditional student aid (loans, grants, and work-study
assistance). To qualify for traditional financial aid, students generally first submit a Free
Application for Federal Student Aid (FAFSA) to the Department of Education.3 Financial aid
officers at the student’s college or university use the asset and income information provided by
the Department of Education to determine the student’s federal financial aid award.4 This
financial aid is then used to pay for higher education expenses at the time they are due.

1 The Internal Revenue Code (IRC) and various Internal Revenue Service (IRS) guidance use the words forgiveness
and discharge interchangeably, and so they are used interchangeably in this report. But for student loan policy
purposes, the terms discharge and forgiveness are generally different. Forgiveness generally refers to the permanent
elimination of a borrower’s responsibility to repay all or a portion of their outstanding student loan debt, which is
typically available following a borrower’s completion of service or meeting other requirements. Discharge generally
refers to the permanent elimination of a borrower’s responsibility to repay all or a portion of their outstanding student
loan debt, which is typically available based on a borrower’s hardship (e.g., they have become totally and permanently
disabled).
2 See Table 2 for more detailed information about the revenue losses associated with education tax benefits.
3 There are a myriad of smaller programs targeted at special populations for which the FAFSA is not required,
including veterans’ education benefits, State Department programs, Department of Defense (DOD) programs, and
AmeriCorps.
4 This information can also be used to calculate any aid provided by the college or university to the student.
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Higher Education Tax Benefits: Brief Overview and Budgetary Effects

A summary of available traditional financial aid is beyond the scope of this report. For more
information, see CRS Report RL31618, Campus-Based Student Financial Aid Programs Under
the Higher Education Act
, by Joselynn H. Fountain; CRS Report R45931, Federal Student Loans
Made Through the William D. Ford Federal Direct Loan Program: Terms and Conditions for
Borrowers
, by Alexandra Hegji; CRS Report R45418, Federal Pell Grant Program of the Higher
Education Act: Primer
, by Cassandria Dortch, and CRS Report R46720, Student Loan Programs
Authorized by the Public Health Service Act: An Overview
, by Elayne J. Heisler and Alexandra
Hegji.
In contrast, most tax-based higher education assistance becomes available after higher education
expenses have been incurred—sometimes several months afterward. Aside from tax-preferred
college savings accounts, taxpayers must wait until they file their federal income tax returns to
claim any federal higher education tax benefits. Another difference between the two forms of
educational assistance is that traditional financial aid is often directed toward students with
financial need, while tax benefits are generally available to eligible taxpayers regardless of need.
Brief Historical Perspective of Tax Benefits
Tax benefits for higher education were first introduced nearly 60 years ago. While most of these
benefits were originally structured as deductions and exclusions, which reduce taxable income,
they now include tax credits, which directly reduce tax liability.
Between 1954 and 1996, eight tax benefits for education were enacted:
1. an exclusion for scholarships, fellowships, and tuition reductions;
2. a parental exemption for students ages 19 to 23 who were enrolled in college;
3. a miscellaneous itemized deduction for ordinary and necessary business
expenses, which has been interpreted by the Treasury Department to include
unreimbursed work-related education expenses;
4. an exclusion for employer-provided education assistance;
5. an exclusion for the interest earned on educational savings bonds;
6. an exclusion of qualifying cancelled student loans from taxable income;
7. an unlimited gift tax exclusion for amounts paid by a donor directly to an
educational institution for tuition payments on behalf of the donee; and
8. an exclusion of the earnings from qualified tuition programs (QTPs), also known
as Section 529 Plans.
The deduction for student loan interest, which had existed since 1954, was eliminated with the
passage of the Tax Reform Act of 1986 (TRA86, P.L. 99-514). TRA86 disallowed all forms of
personal interest deductions other than for mortgage interest.
The Taxpayer Relief Act of 1997 (P.L. 105-34) enacted five new education tax benefits:
1. the Hope Tax Credit;
2. the Lifetime Learning Credit;
3. a reinstatement of the deduction for student loan interest, which was made an
above-the-line deduction;5

5 Above-the-line deductions, unlike itemized deductions, are available to all tax filers. Taxpayers who claim the
standard deduction cannot benefit from itemized deductions.
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Higher Education Tax Benefits: Brief Overview and Budgetary Effects

4. an exclusion for earnings accruing to education individual retirement accounts
(later renamed Coverdell education savings accounts); and
5. a cancellation of the penalty for early withdrawals from individual retirement
accounts (IRAs).
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16)
temporarily modified several education tax benefits, including the exclusion of scholarships,
grants, and tuition reductions associated with certain scholarships;6 the student loan interest
deduction;7 and Coverdells.8 These modifications were scheduled to expire at the end of 2010.
In addition, the law extended the exclusion for employer-provided educational assistance through
the end of 2010.9 EGTRRA also enacted a new temporary above-the-line deduction for higher
education expenses (often referred to as the “tuition and fees” deduction). The tuition and fees
deduction was scheduled to expire at the end of 2005. (Several laws subsequently extended the
deduction through the end of 2020.10)
The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5) modified a variety of
parameters of the Hope Credit, increasing the amount of the credit and expanding eligibility for
the credit. Collectively, these modifications resulted in the Hope Credit being referred to as the
American Opportunity Tax Credit (AOTC). The AOTC as enacted under ARRA was scheduled to
be in effect only for 2009 and 2010.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L.
111-312) extended the AOTC for two years (2011 and 2012). In addition, modifications to
education tax benefits originally made by EGTRRA were also extended through the end of 2012
by this law, including modifications to the exclusion of scholarships, grants, and tuition
reductions concerning specific scholarships; the student loan interest deduction; and Coverdells.

6 Students must generally pay taxes on any part of a scholarship, fellowship, or tuition reduction that can be attributed
to teaching, research, or other services that have been performed, are being performed, or will be performed. EGTRRA
included a temporary exception to this general rule for funding received from the National Health Service Corps
Scholarships and F. Edward Hebert Armed Forces Health Professions Scholarship and Financial Assistance Program.
7 Prior to EGTRRA, the deduction could only be claimed by eligible taxpayers for the first 60 months of interest
payments. In addition, the deduction phased out when income was $40,000-$50,000 ($60,000-$70,000 for married joint
filers), adjusted for inflation. As a result of EGTRRA, up to $2,500 of student loan interest could be deducted from
gross income for the entire duration of repayment. The amount that could be deducted phased out for taxpayers with
income between $50,000 and $65,000 ($100,000 and $130,000 for married joint filers), adjusted for inflation.
8 Prior to EGTRRA, the maximum contribution was $500 per beneficiary per year; qualified expenses were limited to
higher education expenses; the phaseout range for married taxpayers was $150,000-$160,000; contributions could only
be made until the beneficiary was 18; the balance of the account had to be distributed when the beneficiary turned 30,
for both special needs and non-special needs beneficiaries; a taxpayer could not claim an education credit if they also
took a tax-free distribution from their Coverdell; and contributions to a Coverdell were subject to a 6% excise tax if
contributions for the same beneficiary were made to a 529 plan. As a result of EGTRRA, the maximum contribution
amount for a beneficiary was $2,000 per year; qualified expenses included both elementary and secondary school
expenses and higher education expenses; the phaseout range for married taxpayers was $190,000-$220,000 (which is
double the phaseout range for unmarried taxpayers); age limitations were waived for special needs beneficiaries;
beneficiaries who took tax-free distributions from Coverdells could also claim education tax credits (although expenses
paid for with Coverdell funds cannot be used to claim the credits); and contributions could be made to both a 529 plan
and a Coverdell for the same beneficiary without penalty.
9 EGTRRA also repealed a limitation to this exclusion that prevented its applicability to graduate education. This
expansion of the exclusion to cover graduate school expenses was also extended through the end of 2010.
10 P.L. 109-432 extended the tuition and fees deduction for 2006 and 2007, while P.L. 110-343 extended the deduction
for 2008 and 2009.
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Higher Education Tax Benefits: Brief Overview and Budgetary Effects

The law also extended the exclusion for employer-provided educational assistance for 2011 and
2012 and the tuition and fees deduction for 2010 and 2011.
The American Taxpayer Relief Act of 2012 (P.L. 112-240; ATRA) made the exclusion for
employer-provided educational assistance permanent. The law also made several EGTRRA
modifications to education tax benefits permanent. Finally, ATRA extended the AOTC for five
more years, through the end of 2017, and extended the tuition and fees deduction for 2012 and
2013.
The Tax Increase Prevention Act of 2014 (P.L. 113-295) extended the tuition and fees deduction
through the end of 2014.
The Protecting Americans from Tax Hikes (PATH) Act (Division Q of P.L. 114-113) extended the
tuition and fees deduction for 2015 and 2016. In addition, the PATH Act made the AOTC
permanent, effectively eliminating the Hope Credit. The PATH Act also expanded the exclusion
of scholarship income to apply to amounts received under comprehensive student work-learning-
service programs (as defined in Section 448(e) of the Higher Education Act of 1965, P.L. 89-329).
The law commonly referred to as the Tax Cuts and Jobs Act (TCJA; P.L. 115-97) modified four
education tax benefits: 529 plans, the tax treatment of discharged student loan indebtedness,
personal exemptions for college age-dependents, and the miscellaneous itemized deduction for
unreimbursed work-related education expenses.11 With respect to 529 plans, it permanently
allowed up to $10,000 to be withdrawn tax-free per beneficiary per year and be used for tuition
expenses at public, private, and parochial schools. With respect to the exclusion of certain
discharged student loan debt, the law temporarily expanded the categories of nontaxable
discharged student loan debt to include certain student loan debt that is discharged on account of
the death or total and permanent disability of the student. This change was originally in effect
from 2018 through the end of 2025. However, as a result of changes included in the American
Rescue Plan Act (ARPA; P.L. 117-2), virtually all student loan debt forgiven in 2021 through
2025 will not be taxable. The law also temporarily suspended personal exemptions and the
miscellaneous itemized deductions. Hence, from 2018 to 2025, taxpayers cannot claim a personal
exemption for their college-age dependents or the miscellaneous itemized deduction for
unreimbursed work-related education expenses.12 All else being equal, this change will increase
the taxpayer’s taxable income. However, the ultimate impact on the tax bill will depend on each
taxpayer’s particular circumstances.

11 In addition to these direct changes, other changes in the law could indirectly impact the value of education tax
benefits for certain taxpayers as well as their budgetary score. For example, the tax law temporarily lowered marginal
tax rates. Since the value of a tax benefit like a deduction or exclusion—in terms of tax savings—is proportional to a
taxpayer’s marginal tax rate, the reduction of these rates will also reduce the tax savings from these benefits. It will also
reduce the aggregate revenue loss from these provisions. In addition, insofar as the law lowers a taxpayer’s income tax
liability, the taxpayer may also receive a smaller Lifetime Learning Credit (LLC) because—as a nonrefundable credit—
the final value cannot exceed income tax liability.
12 The miscellaneous itemized deduction for unreimbursed work-related education expenses was, when it was in effect,
available to employees for expenses that met the criteria for deductibility under Internal Revenue Code (IRC) §162 and
Treasury Regulation §1.162-5, but only to the extent that the expenses, along with other miscellaneous deductions,
exceeded 2% of the taxpayer’s adjusted gross income (AGI), as required under IRC §67. While miscellaneous itemized
deductions are suspended from 2018 through the end of 2025, self-employed individuals may still be able to deduct
certain work-related education expenses. For more information, see Internal Revenue Service, Publication 970 Tax
Benefits for Education 2018
, Chapter 12, January 17, 2019, https://www.irs.gov/forms-pubs/about-publication-
970https://www.irs.gov/forms-pubs/about-publication-970.
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The Bipartisan Budget Act of 2018 (BBA; P.L. 115-123) extended the tuition and fees deduction
retroactively for 2017.
The Further Consolidated Appropriations Act, 2020 (P.L. 116-94) extended the tuition and fees
deduction through the end of 2020. In addition, the law made two permanent changes to 529 that
go into effect in 2019.13 First, the law allows up to $10,000 to be withdrawn tax-free from a 529
account to repay the beneficiary’s (and any of the beneficiary’s siblings’) qualifying student
loans.14 This $10,000 limit is an aggregate lifetime limit per borrower.15 Second, the law expands
the definition of qualifying expenses for 529 plans to include fees, books, supplies, and
equipment required for an apprenticeship program.16 Hence, beneficiaries can withdraw funds
tax-free from their 529 plans and use them for qualified apprenticeship expenses.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) modified the
exclusion for employer-provided educational assistance, temporarily expanding the definition of
qualifying educational assistance to include student loan payments through the end of 2020.17
The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Division EE of the Consolidated
Appropriations Act, 2021; P.L. 116-260) eliminated the tuition and fees deduction and
permanently modified the Lifetime Leaning Credit. Specifically, the law increased the statutory
income level and the range over which the credit phased out from $40,000-$50,000 ($80,000-
$100,000 for married joint filers) to $80,000-$90,000 ($160,000-$180,000 for married joint
filers). Of note, the prior-law income range (i.e., $40,000-$50,000; $80,000-$100,000 for married
joint filers) was annually adjusted for inflation. Hence, in 2020, the income range over which the
credit phased out was $59,000-$69,000 ($118,000-$138,000 for married joint filers). The new
income range is not annually adjusted for inflation. With this change, the phaseout ranges for the
Lifetime Learning Credit and the AOTC are the same. These changes are effective beginning in
2021. The law also further extended the expanded definition of qualifying educational assistance
that was first enacted in the CARES Act, through the end of 2025.
The American Rescue Plan Act (ARPA, P.L. 117-2) included a provision temporarily modifying
the tax treatment of forgiven student loan debt. Specifically, the law excludes from gross income
qualifying student loans that are forgiven, for almost any reason, between December 31, 2020,
and January 1, 2026. Hence, these amounts of forgiven student loan debt will not be subject to

13 These changes were originally introduced as part of the SECURE Act. For more information, see CRS In Focus
IF11174, The SECURE Act and the Retirement Enhancement and Savings Act Tax Proposals (H.R. 1994 and S. 972),
by Jane G. Gravelle.
14 Qualifying student loans as defined for the student loan interest deduction under IRC Section 221(d). Student loan
interest that is paid for with a tax-free withdrawal from a 529 account is not eligible for the student loan interest
deduction. Joint Committee on Taxation, Description of the Chairman’s Amendment in the Nature of a Substitute to
H.R. 1994, the “Setting Every Community up for Retirement Enhancement (SECURE) Act of 2019,”
April 1, 2019,
JCX-13-19, p. 85.
15 As noted by the Joint Committee on Taxation (JCT), for purposes of this $10,000 per individual lifetime limit,
withdrawals for a sibling of the beneficiary “are applied to the sibling’s lifetime limit and not the designated
beneficiary’s lifetime limit.” Joint Committee on Taxation, Description of the Chairman’s Amendment in the Nature of
a Substitute to H.R. 1994, the “Setting Every Community up for Retirement Enhancement (SECURE) Act of 2019,”

April 1, 2019, JCX-13-19, pp. 84-85.
16 The apprenticeship program must be registered and certified with the Secretary of Labor under Section 1 of the
National Apprenticeship Act (29 U.S.C. 50).
17 Under this provision, qualified student loan payments are subject to the overall cap of $5,250 per employee per year.
Payments made by the employer can go to the employee directly or to the lender. Payments can cover both the
principal and interest of the qualified student loan. For more information, see CRS Report R46279, The Coronavirus
Aid, Relief, and Economic Security (CARES) Act—Tax Relief for Individuals and Businesses
, coordinated by Molly F.
Sherlock.
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taxation. This change effectively replaces the more limited exclusion enacted as part of P.L. 115-
97. Qualifying student loans include all federal student loans, and certain private education and
institutional loans.
Summary and Cost of Current Benefits
Table 1
summarizes the higher education tax benefits currently available to individuals. The
benefits can be divided into three groups: incentives for current year higher education expenses,
incentives that provide preferential tax treatment of student loan expenses, and incentives for
saving for college. Generally, a taxpayer cannot claim more than one tax benefit for the same
dollar of education expense.
The benefits available are structured as a tax credit, deduction, exemption, or exclusion. While
these terms are sometimes used interchangeably, they are different. It is important to understand
the distinctions among the types of incentives:
Tax credits reduce the amount an individual owes in taxes directly, on a dollar-
for-dollar basis. Credits are available to all qualified taxpayers, whether they
itemize deductions or not. Credits can be nonrefundable or refundable.
Nonrefundable credits cannot exceed taxes owed, and therefore can only reduce
an individual’s tax liability to zero. Refundable credits can exceed taxes owed,
meaning a taxpayer with no tax liability may receive all or part of the credit
amount as a refund check. Education tax credits include the Lifetime Learning
Credit, which is nonrefundable, and the American Opportunity Tax Credit, which
is refundable, although the maximum amount that can be received as a refund is
limited to 40% of the total credit ($1,000).

Tax deductions reduce the amount of a taxpayer’s income that is subject to
taxation by the amount of the deduction. As a result, deductions reduce a
taxpayer’s tax liability, but only in proportion to the taxpayer’s highest marginal
tax bracket.18 Hence, deductions are generally less valuable than a given dollar
amount in tax credits. Generally, the amount that may be deducted is equal to a
portion of some expense incurred. Deductions can either be “above-the-line” or
“itemized.” Above-the-line deductions are typically more advantageous than
itemized deductions and may be claimed by most taxpayers. Itemized deductions
may only be claimed by those taxpayers who itemize all their deductions on their
tax returns. The alternative to itemizing is claiming the standard deduction.
Education tax deductions include the deduction for tuition and fees (repealed
beginning in 2021), and the student loan interest deduction (both above-the-line
deductions). Under P.L. 115-97, miscellaneous itemized deductions (including
for unreimbursed work-related education expenses) are suspended from 2018
through 2025.

Tax exemptions reduce the amount of a taxpayer’s income that is subject to
taxation, by a fixed dollar amount per exemption claimed. Generally, every
taxpayer is allowed to claim one exemption for themselves, one exemption for a
spouse, and one for each dependent. Exemptions function similarly to deductions
in that they reduce the income that is subject to taxation, but they are based on a

18 For example, a $4,000 deduction for someone whose highest marginal tax bracket is the 10% bracket will result in a
$400 reduction in that taxpayer’s tax bill. If the taxpayer’s highest marginal tax bracket is the 35% bracket, their tax bill
will fall by $1,400.
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fixed amount per person instead of actual expenses. An exemption’s value to a
taxpayer is also similar to the value of a deduction in terms of being proportional
to a taxpayer’s highest marginal tax bracket. Parents of students between the ages
of 19 and 23 are eligible for a personal tax exemption for their children. Under
P.L. 115-97, the personal exemption, including for students ages to 19 to 23, is
suspended from 2018 through 2025.

Tax exclusions are amounts of income that are not included as income for tax
purposes because the tax code explicitly excludes—or exempts—them from
taxation. Education tax exclusions include the exclusion of certain scholarships,
grants, and tuition reductions, the exclusion of employer-provided educational
assistance, the exclusion of qualifying cancelled student loan debt, and the
exclusion of direct transfers to educational institutions.

As Table 1 shows, there are a number of limitations to the available tax benefits. Some benefits
are subject to an annual limit, or “cap.” For example, the maximum annual American Opportunity
Tax Credit that may be claimed is $2,500. A number of the tax benefits may be limited by the
type of “qualifying” expenses they are used to offset. For some tax benefits, only tuition and
required fees qualify. Generally, fees that must be paid to the educational institution as a
condition of enrollment or attendance are considered “required fees.” Other tax benefits can be
used to offset course-related books, supplies, and materials. And still other benefits may be used
to cover travel and other expenses.
A number of higher education tax benefits also have income limitations. When an income
limitation does exist, it is in the form of an income phaseout range. Taxpayers with incomes
below the start of the phaseout range are eligible to claim the maximum tax benefit amount. The
amount of the credit that can be claimed is then reduced for individuals with incomes within the
phaseout range, and is zero for those with incomes above the phaseout range. In addition, the
expiration date for the provision, if temporary, is provided.
Table 2 presents the JCT cost estimates for each available tax benefit. The JCT advises that these
estimates cannot be simply summed to estimate the aggregate revenue loss from multiple tax
provisions. This effect is because of interactions. When the revenue loss associated with a specific
tax provision is estimated, the estimate is made assuming that there are no changes in other
provisions or in taxpayer behavior. When individual tax expenditures are summed, the interaction
effects may lead to different revenue loss estimates. Consequently, aggregate tax expenditure
estimates, derived from summing the estimated revenue effects of individual tax expenditure
provisions, are unlikely to reflect the actual change in federal receipts associated with removing
various tax provisions.
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Table 1. Overview of Education Tax Benefits, 2023
Income
Phaseout

Annual
Qualifying
Qualifying
Range

Limit
Expenses
Education Level
*married joint
Expiration
TAX BENEFITS FOR TUITION AND RELATED EXPENSES
American Opportunity Tax Credit
$2,500 credit per
(1) Tuition and required
First 4 years of
$80,000-$90,000
None
IRC §25A
student
enrol ment fees
postsecondary education
$160,000-
Tax credit partially refundable. 40% of credit
(2) Course-related books,
(Generally undergraduate)
$180,000*
may be refundable (up to $1,000)
supplies, and equipment
Lifetime Learning Credit
$2,000 credit per
(1) Tuition and required
Undergraduate and
$80,000-$90,000
None
IRC §25A
tax return
enrol ment fees
graduate
$160,000-
Tax credit nonrefundable
Courses to acquire or
$180,000*
improve job skil s
TEMPORARILY SUSPENDED 2018-2025. Pre-2018:
Miscellaneous Itemized Deduction for
None
(1) Tuition and required enrollment
Education must be required
None
Under current
Unreimbursed Work-Related Education
fees
by employer or law to keep
law (P.L. 115-
Expenses
(2) Transportation and travel
present job, salary, status or
97), this
IRC §67 & 162; Reg §1.162-5
(3) Other necessary expenses
maintain or improve job skills
provision will be
Deduction (itemized) of qualified expenses from AGI
in effect in
2026.

CRS-8


Income
Phaseout

Annual
Qualifying
Qualifying
Range

Limit
Expenses
Education Level
*married joint
Expiration
Exclusion of Scholarships, Grants, and
None
(1) Tuition and required
Undergraduate and
None
None
Tuition Reductions
enrol ment fees
graduate
IRC §117
(2) Course-related books,
Exclusion from taxable income if scholarship,
supplies, and equipment
grant is used to pay qualifying education
expenses and does not represent payment for
services (i.e., “work-based”). Work-based
scholarships are generally taxable.
There are three work-based scholarships that
are not taxable. Specifically, the National Health
Service Corps Scholarships, the F. Edward
Hebert Armed Forces Health Professions
Scholarship and Financial Assistance Program,
and amounts received under a comprehensive
student work-learning-service program (as
defined in Section 448(e) of the Higher
Education Act of 1965, P.L. 89-329) operated by
a work col ege are excludible from taxation.
Exclusion of Employer Provided
$5,250 exclusion
(1) Tuition and required
Undergraduate and
None
Expansion to
Educational Assistance
enrol ment fees
graduate
include
IRC §127
(2) Course-related books,
student loan
Exclusion from taxable income
supplies, and equipment
payments
(3) Student loan payments
expires at the
(principal and interest) paid by an
end of 2025
employer after March 27, 2020,
and before January 1, 2026
TEMPORARILY SUSPENDED 2018-2025. Pre-2018:
Parental Personal Exemption for Dependent
$4,050 per
NA
Student must be under 24 by
None
Under current
Students 19-23 Years Old
dependent in 2017
the end of the tax year and
law (P.L. 115-
IRC §151 & 152
amounts adjusted
enrolled full time at a
97), this
Exemption of fixed amount per dependent
annual y for inflation
qualifying institution.
provision will be
in effect in
2026.

CRS-9


Income
Phaseout

Annual
Qualifying
Qualifying
Range

Limit
Expenses
Education Level
*married joint
Expiration
TAX BENEFITS FOR STUDENT LOANS
Student Loan Interest Deduction
$2,500
(1) Tuition and required
Undergraduate and
$75,000-$90,000
None
IRC §221
enrol ment fees
graduate
$155,000-
Deduction (“above-the-line”) of interest paid
(2) Course-related books,
$185,000*
supplies, and equipment
(3) Room and board
amounts adjusted
annual y for inflation
(4) Other necessary expenses
(including transportation)
Exclusion of Qualifying Cancelled Student
None
(1) Tuition and required
Undergraduate and
None
Generally,
Loans Debt
enrol ment fees
graduate
none.
(Temporary expansion of nontaxable discharged
(2) Course-related books,
Temporary
student loan debt to include most forgiven
supplies, and equipment
expansion of
student loan debt.)
(3) Room and board
nontaxable
IRC §108(f)
(4) Other necessary expenses
discharged
Exclusion from taxable income
(including transportation)
student loan
debt to
include most
forgiven
student loan
debt in effect
from 2021 to
2025.
CRS-10


Income
Phaseout

Annual
Qualifying
Qualifying
Range

Limit
Expenses
Education Level
*married joint
Expiration
TAX BENEFITS FOR EDUCATION SAVINGS PLANS
Qualified Tuition Programs (529 Plans)
No federal
K-12:
K-12
None
None
IRC §529
contribution limit
Tuition expenses at public,
Undergraduate and
Earnings not taxed
(individual states
private, and parochial schools,
graduate
may set limits.)
subject to limit of $10,000 per
K-12:
beneficiary per year.
$10,000 per
Higher Education:
beneficiary per
(1) Tuition and required
year withdrawal
enrol ment fees
limit for qualifying
(2) Books, supplies, and
K-12 expenses.
equipment
Higher Education
(3) Expenses for special needs
&
services
Apprenticeships:
(4) Room and board if at least
No withdrawal
half-time student
limit if used for
Apprenticeships:
higher education
Fees, books, supplies, and
or apprenticeship
equipment required for an
expenses.
apprenticeship program.
Student Loans:
Student Loans:
$10,000 per
Student loan repayments—
borrower lifetime
principal and/or interest, subject
limit. Borrowers
to a per borrower lifetime limit
include the
of $10,000.
beneficiary and
their siblings.
CRS-11

link to page 16
Income
Phaseout

Annual
Qualifying
Qualifying
Range

Limit
Expenses
Education Level
*married joint
Expiration
Coverdell Education Savings Account
$2,000
K-12:
K-12
$95,000-$110,000 None
IRC §530
contribution per
(1) Tuition and fees
Undergraduate and
$190,000-
Earnings not taxed
beneficiary
(2) Books, supplies, and
graduate
$220,000*a
equipment
(3) Academic tutoring
(4) Special needs services
(5) Room and board
(6) Uniforms
(7) Transportation
(8) Required supplementary
items and services
(9) The purchase of a computer
if it is used by the beneficiary or
their family.
Higher Education:
(1) Tuition and required
enrol ment Fees
(2) Books, supplies, and
equipment
(3) Expenses for special needs
services
(4) Payments to QTP
(5) Room and board if at least
half-time student
Exclusion of Interest on Education Savings
Amount of
(1) Tuition and required
Undergraduate and
$91,850-$106,850 None
Bonds
qualified
enrol ment fees
graduate
$137,800-
IRC §135
education
(2) Payments to Coverdell ESAs
$167,800*
Interest not taxed
expenses
(3) Payments to QTPs
amounts adjusted
annual y for inflation
Early Withdrawals from IRAs
Amount of
(1) Tuition and required
Undergraduate and
None
None
IRC §72(t)
qualified
enrol ment fees
graduate
No 10% additional tax on early withdrawal
education
(2) Books, supplies, and
expenses
equipment
(3) Expenses for special needs
services
(4) Room and board if at least
half-time student
CRS-12


Income
Phaseout

Annual
Qualifying
Qualifying
Range

Limit
Expenses
Education Level
*married joint
Expiration
Uniform Transfers to Minors
Unlimited
(1) Amounts paid directly to
Undergraduate and
None
None
IRC §2503(e)
educational institution for tuition
graduate
Exclusion from income of direct transfer to
educational institution
Sources: Internal Revenue Service, Publication 970: Tax Benefits for Education: For Use in Preparing 2021 Returns and Internal Revenue Service, Revenue Procedure 22-38.
Note: NA = not applicable.
a. The income phaseouts for Coverdells apply to any individual who contributes to the Coverdell (including the beneficiary).

CRS-13

link to page 17 link to page 17 link to page 17 link to page 17 Higher Education Tax Benefits: Brief Overview and Budgetary Effects

Table 2. Estimated Budgetary Impact of Tax Benefits for
Higher Education Expenses, FY2020-FY2024
(billions of dollars)
Tax Benefit
2020 2021 2022 2023 2024 Total
Higher Education Tax Credits (AOTC and LLC)a
14.5
15.5
16.4
16.4
16.3
79.1
Exclusion of Scholarship and Fellowship Income
3.8
3.9
4.0
4.1
4.2
20.1
Deduction for Student Loan Interest
1.4
1.9
2.3
2.3
2.4
10.2
Exclusion of Employer-Provided Education Benefitsb
1.6
2.1
1.8
2.0
2.0
9.5
Exclusion of Earnings of Qualified Tuition Programs (529
1.3
1.1
1.3
1.7
2.1
7.3
Plans)
Exclusion of Employer-Provided Tuition Reductions
0.3
0.3
0.3
0.3
0.3
1.7
Exclusion of Certain Discharged Student Loansc
0.2
0.2
0.2
0.2
0.2
0.9
Exclusion of Earnings of Coverdel Education Savings
0.1
0.1
0.1
0.1
0.1
0.3
Accounts
Deduction for Tuition and Feesd
0.3
0.1



0.3
Exclusion of Interest on Education Savings Bonds
-i-
-i-
-i-
-i-
-i-
-i-
Parental Personal Exemption for Students ages 19 to






23Error! Reference source not found. Error! Re
Total
23.5
25.1
26.4
27.1
27.6
129.4
ference source not found.
6
Source: Joint Committee on Taxation: JCX-11R-20, JCX-23-20, JCX-24-20, and JCX-14-21.

Notes: A positive estimate corresponds to a federal revenue cost. Items may not sum due to rounding. “-i-”
indicates revenue losses for FY2020-FY2024 are less than $50 mil ion; “—” indicates no budgetary impact.
a. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Division EE of the Consolidated
Appropriations Act, 2021; P.L. 116-260) eliminated the tuition and fees deduction and permanently modified
the Lifetime Learning Credit. These changes are estimated to reduce revenues by $173 mil ion in FY2021,
$860 mil ion in FY2022, $835 mil ion in FY2023, and $782 mil ion in FY2024. These revenue loss estimates
are included above.
b. The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) modified the exclusion for
employer-provided educational assistance, temporarily expanding the definition of qualifying educational
assistance to include student loan payments through the end of 2020. These changes are estimated to
reduce revenues by $215 mil ion in FY2020 and $245 mil ion in FY2021. These revenue loss estimates are
included above. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Division EE of the
Consolidated Appropriations Act, 2021; P.L. 116-260) further extended the expanded definition of qualifying
educational assistance that was first enacted in the CARES Act, through the end of 2025. These changes are
estimated to reduce revenues by $429 mil ion in FY2021, $640 mil ion in FY2022, $676 mil ion in FY2023,
$712 mil ion in FY2024, $748 mil ion in FY2025, and $227 mil ion in FY2026. The revenue loss estimates for
FY2021-FY2024 are included above.
c. The American Rescue Plan Act (ARPA, P.L. 117-2) included a provision temporarily modifying the tax
treatment of discharged student loan debt. Specifically, the law excludes from gross income qualifying
student loans that are discharged, for almost any reason, between December 31, 2020, and January 1, 2026.
Hence, these amounts of forgiven student loan debt wil not be subject to taxation. This provision
effectively replaces the more limited exclusion enacted as part of P.L. 115-97. This change was estimated to
reduce revenues by $1 mil ion in FY2020, $8 mil ion in FY2021, $8 mil ion in FY2022, $9 mil ion in FY2023,
and $9 mil ion in FY2024. Due to rounding, these amounts do not change the revenue loss estimates
provided above.
d. The deduction for tuition and fees expired at the end of 2017. It was extended through the end of 2020 as
part of P.L. 116-94, signed into law on December 20, 2019. It was permanently repealed beginning in 2021
as part of P.L. 116-260.
e. P.L. 115-97 temporarily suspended the personal exemption from 2018 through the end of 2025.
Congressional Research Service

14

Higher Education Tax Benefits: Brief Overview and Budgetary Effects


Author Information

Margot L. Crandall-Hollick
Brendan McDermott
Specialist in Public Finance
Analyst in Public Finance




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Congressional Research Service
R41967 · VERSION 53 · UPDATED
15