College Could Get Cheaper -- or Not

College tuition could soon become a little bit cheaper – at least if President Obama gets his way.

During his State of the Union address last week, President Obama announced several proposals that would make paying for college tuition within reach for more students and their families. These include a tax credit of $10,000 for students who attend a four-year undergraduate college or university and a small increase in the Pell grant. Also, the president proposed changing an existing federal-student-loan repayment plan – the income-based repayment plan -- or IBR -- by lowering the minimum amount borrowers are required to pay each month and shortening the repayment period.

The proposals address the widening gap between college costs and the salaries that pay for them. “College costs are rising anywhere from 5% to 10% depending on the university and part of the country, and incomes aren’t keeping up with that,” says Josh McWhorter, president of Black Oak Asset Management, a financial planning and advisory firm that specializes in college planning. “If you apply these numbers to tuition and incomes 20 years down the road, you’ll see a great disconnect.”

Detailed information about these proposals hasn’t be laid out yet. And a big unknown is whether or not the tax credit will phase out based on income thresholds. However, the Pell grant will continue to apply primarily to lower-income families; currently, 96% of Pell grants are issued to families with less than $50,000 in annual adjusted gross income, according to FinAid.org. “For low-income families, increase in help is a good thing, but middle-income Americans are basically being left out,” says McWhorter.

Here are three changes college students and their families could see as early as in the 2010-11 academic year and the impact they’ll have on their out-of-pocket tuition expenses.

Tax credit

When a bank underwrites a student loan, it often receives a subsidy as a result. In his State of the Union address, President Obama proposed to take that subsidy money and give families a $10,000 tax credit for four years of college.

“On the surface it does sound good,” says McWhorter. An extra $10,000 could wipe away a semester or a year’s worth of college tuition (depending on the institution).

But, there are many questions that need to be answered, including whether the tax credit will be refundable or not. If it’s nonrefundable, families that don’t owe anything on their income taxes won’t benefit from such a tax credit – it would only be applied to the amount that families owe on their income taxes. Also, there’s a question of when this tax credit would be distributed and whether families will have to wait until their child graduates college to get the tax credit. It’s also very possible that not all families will qualify for the tax credit especially if it gets pegged to income thresholds.

McWhorter points out that this tax credit doesn’t help students who pursue a two-year college degree or trade schools.