A Guide to the Fiscal Cliff

December 21, 2012

Congress still has not reached a deal to avert the combination of tax increases and spending cuts -- collectively known as the "fiscal cliff" -- that go into effect Jan. 2. Either a compromise on long-term deficit reduction and tax reform, or the spending cuts that will go into effect if a deal is not reached, will have big implications for federal financial aid and scientific research, as well as other programs important to higher education.

The spending cuts, known as sequestration, are required by the Budget Control Act, the compromise that increased the federal borrowing limit in August 2011. If Congress does not reach a deal, most domestic discretionary programs will be cut by 8.2 percent, including funds for federal research and for some financial aid programs, such as federal work-study. (The Pell Grant is exempt from the cuts in 2013.)

Also on Jan. 2, several tax breaks related to higher education will expire, chief among them the American Opportunity Tax Credit, which currently provides a tax credit of up to $2,500 for college tuition for up to four years. If not renewed, the tuition credit will be limited to two years and will drop to $2,000. The limit for contributing to Coverdell education savings accounts wil drop from $2,000 to $500 per year, and student loan interest will not be deductible for higher earners.

But colleges have found something to fear in proposed compromises as well -- especially those that suggest limiting charitable deductions, part of President Obama's plan to increase tax revenue.

Even if Congress does not reach a deal in time, few expect immediate effects at colleges, as an agreement in 2013 is likely to be retroactive.

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