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Tax Breaks for College

In recent years, Congress has passed a series of tax incentives to help families meet higher education costs. Some of the incentives are provided when a child is in school and bills are due, others come through savings plans before children begin college, and still others apply during loan repayment. The various incentives are complicated, with details of one affecting details of another, and are subject to modification or elimination by Congress. Below is a chart summarizing the tax breaks.


Note: Some of these tax benefits may expire on December 31, 2012, subject to Congressional action to extend or renew them.


  Savings Restrictions
Vermont Higher Education Investment Plan

Vermont's "529" program
  • Vermont tax credit of up to $250 per child per year, per taxpayer.
  • Contributions are not tax-deductible, but earnings are tax-free.
  • Withdrawals tax-free if used for qualified higher education expenses.
  • Cannot claim American opportunity credit or lifetime learning credit for same expenses for which a "529" program distribution was used.
American opportunity credit

(formerly the Hope credit)
  • Tax credit of up to $2,500 per student for first four years of college.
  • Begins to phase out if modified adjusted gross income exceeds $80,000 ($160,000 if married, filing jointly). See IRS publication 970 for guidelines.

Lifetime learning credit
  • Tax credit of up to $2,000 per family for an unlimited number of years.
  • Begins to phase out if modified adjusted gross income exceeds $50,000 ($100,000 if married, filing jointly). See IRS publication 970 for guidelines.
Tuition and fees deduction
  • Deduction of up to $4,000/year for tuition and certain related expenses.
  • Targeted to middle-income parents who may not qualify for American opportunity and lifetime learning tax credits. See IRS publication 970 for guidelines.
  • Cannot claim this deduction if you take a American opportunity credit or lifetime learning credit for the same student.

Coverdell Education Savings Accounts (ESA)

(formerly called Education IRAs)

  • Contribute up to $2,000/year/child.
  • Contributions not tax-deductible, but earnings are tax-free.
  • Withdrawals tax-free if used for qualified higher education expenses.

  • Cannot claim American opportunity credit or lifetime learning credit for same expenses for which an ESA distribution was used.
  • Available to individuals with modified adjusted gross income of $110,000 or less ($220,000 or less for joint filers). See IRS publication 970 for guidelines.

Roth IRA

  • Contribute up to $5,000; contributions are not tax-deductible, but earnings are tax-free if held until age 59½.
  • Early withdrawal allowed for college expenses.

Traditional IRA

  • Contribute up to $5,000; contributions are tax-deductible.
  • Withdrawals for college allowed; taxed as ordinary income.

Student loan interest deduction
  • Tax deduction for interest on student or parent education loans.
Education Savings Bond Program
  • Interest on certain savings bonds may be tax-free if bond is used to pay education expenses.
  • Phases out as modified adjusted gross income exceeds $67,100 ($100,650 if married, filing jointly). See IRS publication 970 for guidelines.

For forms and additional information, visit the IRS Web site.



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