Education may be its own reward, but numerous
tax breaks are available for earners, their spouses and their
children to pay for college or other higher education. One warning:
The government can seize tax refunds from people who default on
federal student loans.
The Treasury Department can take money out of a taxpayer's
refund if a federal student loan is in default, which generally
means a failure to make payments for nine months or more. Last
year, some $1.3 billion in defaulted loans was collected from tax
There are ways to prevent this, said Kevin Tharp, director of
delinquency and default at USA Group, the nation's biggest student
loan administrator. Borrowers already in default should contact the
lender and make some payment arrangement before the Internal
Revenue Service starts taking action toward their refund. Also,
payments can be reduced or delayed temporarily if the borrower is
having financial trouble.
Comparing the Numbers
Selected figures from this year's tax filing season through
March 17 compared to the same period last year
- 58.7 million, up 2.5 percent.
- Total, 26.6 million, up 16.5 percent.
- Computer, 22.5 million, up 22.9 percent.
- Self-prepared, 3 million, up 95.2 percent.
- Tax professionals, 19.4 million, up 16.2 percent.
- 47.2 million, up 8.4 percent.
- Total: $80.6 billion, up 14.8 percent.
- Average: $1,705, up 5.9 percent.
- Direct deposit: $46.3 million, up 24.5 percent.
"The vast majority of defaults can be avoided," Tharp said.
"We prefer to work with former students to avoid default in the
People hoping to claim education tax breaks by this year's April
17 filing deadline should obtain Form 8863, which was not included
in standard tax packages mailed to homes by the IRS. The form is
available over the Internet from the IRS or at one of the agency's
The Hope Scholarship allows a taxpayer to claim a $1,500 credit
for each student in the family who carries at least half of a full
course load at a higher education institution. The credit only
applies during the first two years of higher learning, however.
The Lifetime Learning Credit, on the other hand, is not
restricted to those first two years and can be used for the costs
of undergraduate or graduate courses, or for job skills classes.
There are no requirements for a minimum number of courses, but the
credit is limited to 20 percent of tuition and fees up to a maximum
of $1,000 a year.
Taxpayers cannot claim both credits in the same year. They also
cannot claim either credit if their adjusted gross income exceeds
$100,000 for those who are married and filing jointly, or $50,000
for singles and heads of households.
One way parents can get around those income limits is to avoid
claiming a child who is a student as a dependent, according to tax
advisers. The child can then claim the credit, and for
higher-income parents the loss of the dependency exemption might
not make much difference.
Families with children under 18 might want to open an education
IRA, which allows a contribution of up to $500 a year for each
child. The money then will not be subject to taxes if it is used
for higher education expenses before the beneficiary reaches age
There are some things to keep in mind: