The fiscal cliff was averted on January first by a last minute deal struck in Congress. Along with a renewal of tax cuts for the middle class, came several benefits to college students, although some major issues remain unresolved.
The fiscal cliff combined a multitude of expirations such as those of the Bush era tax cuts, emergency long term unemployment benefits, and a large amount of educational spending, with severe domestic and military cuts, all of which were to take place at the end of December 2012. Back in August 2011, these cuts were set to automatically trigger on the first day of 2013 in order to force a divided Congress into agreeing on a way to cut $12 trillion from the budget by then; however, Congress did not foresee that these cuts would coincide with a dramatic increase in tax rates, and create a fiscal cliff that was predicted to throw the U.S. back into recession.
Although in the early hours of the New Year, Congress was able to pass the American Taxpayer Relief Act of 2012 which extended the Bush tax cuts to those who earn less than $400,000 a year. The biggest decisions about cuts to major government programs were postponed until March 1, and the question of how this fiscal deal will serve to mend the economy by reducing the deficit remains largely unanswered.
While college students may still have to fear cuts to federal aid and Pell Grants further down the road, where drastic cuts to spending are inevitable, the recent fiscal deal did include several incentives for students and their families.
The American Opportunity Tax Credit, which allows students and their families to claim $2,500 in for college expenses, was extended and will continue to serve over nine million families for the next five years.
Also extended, but just until the end of 2013, was the Tuition and Fees Deduction which, based on income, allows those paying for college to deduct up to $4,000 in tuition expenses. The Student Loan Interest Deduction, which allows for a maximum $2,500 in student loan interest deduction, was made permanent.
These, amongst other extensions of educational tax credits and programs, mean student loan holders can breathe easier for now. However, the upcoming across-the-board cuts rescheduled to occur in March, could greatly reduce the amount of federal aid available to the neediest of students who depend on the Pell Grant and FAFSA, both of which are headed toward a potential eight percent cut.
So while the fiscal cliff has been avoided for the time being it remains to be seen whether or not Congress can achieve another deal by the time their extended deadline rolls around.