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Uncle Sam Is Friendlier to Half of College Students, Tax Study Shows

Thinking about taxes makes some folks cringe, but being a student can pay off during tax time, due to federal tax credits and deductions for college. A new government study shows that nearly half of all undergraduates in 2007-08 received an education tax benefit. The credits and deductions lowered their average annual college expenses by about $700. As college costs keep rising, any type of student aid helps.

The study, by the U.S. Department of Education's National Center for Education Statistics, looked at the government's three benefits: the Hope tax credit (now The American Opportunity Credit, up to $2,500); the Lifetime Learning credit (up to $2,500); and the tuition and fees deduction (up to $4,000). It found that 47 percent of students saved money from one of those three benefits. The report says: "These three tax benefits have become a significant source of student aid in recent years." Compare that to the federal Pell Grant, which only 27 percent of undergraduates receive.

The benefits represented about 6 percent of all undergraduate aid dollars, with a total value of $6.85 billion, according to College Board data. The tax savings helped reduce the cost of college an average of $14,300 a year by 5 percent in 2007-2008. An income breakdown shows that more high- and middle-income students received the tax benefits than did low-income students. It found that 29 percent of lower-income students received the education tax benefits.

To qualify for the tax credits and deduction, tax filers had to meet income limits and incur net tuition and fee expenses for the student, after subtracting grant aid and veterans benefits. The study noted that 44 percent of all low-income dependent students were ineligible because of this requirement.

By income level, here's a look at the average tax savings:

Low-income students: $600
Low-middle income students: $900
High-middle income students: $1,000
High-income students: $700

Here's some good news: The American Opportunity Tax Credit has been extended through December 2012. That means if you or your family meets income limits and other qualifications under this and other tax credits, you can take advantage of these free savings for your education.

--Lori Johnston