This morning I received a call from a reporter at UTVS asking if I could comment on the ways in which the Economic Recovery and Reinvestment Act (a.k.a. the “stimulus” bill) will affect students. Here is what I was able to determine, which I discussed in the interview.

1. Pell grant maximums increase by $500 per year.

2. Stafford loan maximums increase by $2,000 per year.

3. The Hope Education Credit, which gives you tax credits for money spent on tuition and education-related expenses, is much more accessible to a broad range of students than it used to be. In the past, it was only accessible to the truly middle-class — poor people could not claim it because they did not pay taxes, and individuals making more than $48,000 could not claim the full amount, while those making over $58,000 (or families making more than $116,000) could not claim anything at all. The credit has changed in a few important ways.

a. The maximum amount of the Hope tax credit has increased from $1,800 to $2,500 per year. (Note: you have to spend $4,000 on education to get the maximum $2,500 in tax credits; it covers the first $1,200 you spend dollar for dollar, and beyond that you get $.50 back for every dollar spent, up to the maximum tax credit of $2,500.)

b. The income level at which the phase-out of the credit begins increased from $58,000 to $80,000, and on married couples from $94,000 to $160,000. At $90,000 for individuals or $180,000 for married couples, Hope cannot be claimed at all.

c. In the past, the tax credit was not refundable. This meant that if you had Hope tax credits of $1,000 but only owed $200 in income taxes because your income was relatively low, the credit would wipe out that $200 you owed but you could not actually get $800 cash back. If you were poor enough to have no income tax liability at all, Hope was worthless to you. Now 40% of the credit is refundable — so if you have tax liability anywhere from $0 to $1,500, and you meet the full $2,500 credit limit, you can get $1,000 cash back.  (Can you say Spring Break trip, anyone? Just make sure you go somewhere in the U.S. to keep the stimulus in our economy. There’s already enough stimulus at Spring Break in Cancun.)

Overall, I was happy with the portion of the interview that UTVS showed on their news program tonight. But after the reporter’s clip was finished, the broadcaster said that Professor Switzer had additional advice for students — that they should consider filing as an individual taxpayer if their parents make less than $58,000 per year. That was pretty much the opposite of what I actually said in the interview.  The $58,000 figure was incorrect on my part (since now the relevant income level for individuals is actually $80,000). But the broadcaster should have said that you should consider filing individually if your parents make more than this income level, not less. Let me clarify:

If a student’s parents make more than $160,000, they will not be able to claim the full tax credit (and if they make more than $180,000 they will get nothing from Hope), while the student would receive the full credit if their income is less than $80,000, which it likely is. Since the benefit to rich families from being able to claim a child as a deduction is $3,500, and the marginal tax rate at an income of $160,000 is 33%, that’s a cash benefit of $1,155 if parents can claim the child. That’s better than the $1,000 cash back students filing individually would get if they have no tax liability at all – but not as good as the potential $2,500 savings if a student does actually have some tax liability and can use the full credit to reduce their taxes owed. If a student’s parents do not make more than $160,000, the parents can get the entire $2,500 credit even if they claim the child as a dependent, and the amount of benefit from the child deduction probably means they should just go ahead and claim the student. So to clarify, students should consider filing individually if a) their parents make over $160,000 and b) students actually have some positive income, enough to owe more than a few hundred dollars in income taxes. Even then, there are other things to consider — but when Charlie Rangel, the Congressman in charge of the tax code, can’t figure out his own taxes, don’t feel too bad if you can’t figure it out either.

If you are one of the vast majority of students (who do not have income tax liability and whose parents do not make more than $160,000), if your parents are claiming you now, let them keep on claiming you and Hope they give you some of this extra $700.