Consumer Reports: New Tax Break for Students

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With college costs rising at almost twice the rate of inflation, it can be tough to make those tuition bills in any economy. But this economy has prompted some federal help to cut college costs with the American Opportunity Tax Credit.

The new tax cut, which was included in the stimulus package that passed earlier this year, actually beefs up an old tax break for higher education expenses, the Hope Scholarship Credit, says Eric Smith, spokesperson for the Internal Revenue Service. The new version increases the tax credit to $2,500 from $1,800 and can now be claimed for four years instead of two. Costs of books and course materials have been added to qualifying expenses. Income levels have also been raised so that more people can qualify—couples earning up to $160,000 and individuals earning up to $80,000 are eligible for the full credit. Those earning more—couples up to $180,000 and individuals up to $90,000—would get a partial credit.

The stimulus package also has increased the Pell Grant by $500 to $5,350 for 2009 and $5,550 for 2010.

For more college saving advice for these tough times, check out Consumer Reports Money Rebuild Your Finances special publication, available on newsstands or visit our online bookstore.