Facts About the HOPE Scholarship
and Other New Tax Benefits

 1. What is the HOPE Scholarship?
The HOPE "Scholarship" is not technically a "scholarship." It is a tax credit available to eligible students during their first two years of postsecondary education. The tax credit covers 100 percent of the first $1,000 of tuition and fees and 50 percent of the second $1,000 during the qualified period. The credit is nonrefundable.

 2. Who is eligible?
To be eligible, a student must be enrolled in a degree, certificate, or other program leading to a recognized education credential (i.e. associate degree, automotive technician certificate, etc.). The student must be enrolled at least half time.

 3. When does it take effect?
The HOPE tax credit applies for expenses paid after December 31, 1997, and for education provided in academic periods beginning after that date.

 4. How long is it available?
The tax credit is available for two tax years to those students who have not completed the first two years of postsecondary education.

 5. What items are included in the tax credit?
HOPE applies only to tuition and fees—not to books, dormitory costs, or other living expenses.

 6. Does the tax credit affect my Pell Grant or other financial aid?
The amount of tuition and fees covered by the HOPE tax credit is reduced by other grant and scholarship aid received. This includes scholarship funds excluded from an individual’s gross income, as well as federal grant aid such as Pell Grants. Example: If a student incurs $1,250 in tuition and fees and receives a Pell Grant greater than $1,250, he is not eligible for the HOPE credit. Or, if a student is responsible for $1,250 in tuition and fees and receives a Pell Grant of $700, the student is eligible for a tax credit of $550.

 7. Are there any restrictions?
Yes. Students convicted of a felony related to the possession or distribution of a controlled substance such as heroin or marijuana are not eligible. In addition, individual filers who earn income in excess of $50,000 are ineligible, as are joint tax filers whose income exceeds $100,000. The tax credit is also reduced by certain other types of financial aid received by the student such as the Pell Grant.

 8. How do I apply?
Eligible individuals will claim the credit when they file their federal income tax forms in April.

 9. How does it work for part-time students?
Students attending less than half time are not eligible for the HOPE tax credit. However they are eligible for the lifetime learning credit described below.

10. Do I have to file a separate IRS form or will it be part of the standard 1040?
Details for the new program are still being worked out, but it is likely that students filing for the tax credit will have to complete a separate tax schedule similar to those required for interest and dividend income or child care expenses.

11. Who administers the program?
The college or other educational institution is responsible for reporting the name, address, and tax payer identification number of the student, as well as for providing information relating to any other individual who might claim the student as a dependent for the purpose of filing for the HOPE tax credit. Colleges would also be required to document the net payments of qualified tuition and tuition incurred by students for HOPE.

12. Where can I get more information about the HOPE tax-credit?
Contact the financial aid office of the college you are attending or plan to attend. You may find additional information on the Web site of the American Association of Community Colleges.

13. What are some of the other new educational tax benefits?
• Lifetime Learning Credit

College juniors, seniors, graduate students, adults returning to college, and less than half-time students are eligible for a new lifetime learning tax credit. The credit is worth 20 percent of the first $5,000 of tuition and fees through the year 2002, and 20 percent of the first $10,000 in tuition and fees after that. This credit is available for tuition and fees paid after June 30, 1998. Eligibility is phased out at the same income levels as the HOPE Scholarship. (Single-filers over $50,000 and joint filers over $100,000 are ineligible). The lifetime credit may not be claimed during the same year as the HOPE tax credit.

• Exemption of Employer-Provided Assistance

Section 127 of the IRS Code allows working adults to exclude annually from taxable income up to $5,250 in employer-provided assistance. The new law extends Section 127 for three years, retroactive from May 31, 1997. The benefit does not apply to graduate programs.

• Exemption of Scholarships and Tuition Remission

Section 117 of the IRS Code excludes from taxable income funds received as a qualified scholarship, as well as tuition remission support for both graduate students and relatives of employees of colleges and universities. This benefit is unchanged from existing law.

• Deduction of Student Loan Interest

A student may deduct up to $2,500 per year of interest on education loans for expenses of students enrolled in higher education. The maximum deduction is $1,000 in 1998, increasing in $500 increments each year until reaching $2,500. The deduction is allowed only for the first 60 months of interest payments. Months during which the loan is in deferral or forbearance do not count against the 60-month period. The deduction is effective on interest payments due and paid after December 31, 1997. In the case of existing loans, interest payments qualify for deduction to the extent that the 60-month period has not expired. Eligibility for this deduction is phased out for single filers with incomes between $40,000 and $55,000, and for joint filers with incomes between $60,000 and $75,000.

 

For further information on the HOPE tax credit, consult your tax advisor.