Here is everything you need to know about what the White House is proposing:
Strip away 529 college savings plan benefits
In order to expand education tax credits, President Obama would roll back tax breaks on one of the most popular college savings plans. If the president has his way, families would no longer be able to withdraw earnings from 529 plans without paying taxes on them.
The advantage to 529 plans, named for a section of the tax code, is that families can invest through these accounts without the earnings being taxed as long as the funds are used to pay for college expenses. President Obama would treat the earnings on new contributions to 529 plans as ordinary income subject to taxes, stripping away a key benefit of the savings plans.
Families could still defer paying taxes on the plans as the earnings grow, but that ends once they start drawing down the account, according to the White House. Earnings will be treated as student income, which would be taxed at a lower rate, but that could hurt a student's chances of receiving financial aid.
The 529 savings plans are sometimes considered to be tax shelters for the wealthy; the less than 3 percent of families that have them have a median income of $142,400 a year. But eliminating the central tax benefit of the plan could lead more families to take on more debt to pay for college.
Consolidate six education tax breaks into two
There are quite a number of tax deductions afforded to people paying for college or repaying student loans. There's the Lifetime Learning Credit, Student Loan Interest Deduction and the Tuition and Fees Deduction.
If that wasn't enough, the Obama administration added the American Opportunity Tax Credit (AOTC) in 2009 to provide families up to $2,500 a year for the cost of tuition, books and supplies. The tax credit is more generous than its predecessor the Hope Credit, which only covered the first two years of school instead of four, but it's set to expire in 2017.
Confused yet? Obama wants Congress to fold most of the existing deductions into the AOTC credit and make it a permanent feature of the tax code. The president also wants to increase the tax break (more on that below). But this consolidation part is mostly a branding thing. By simplifying the system, the administration wants to boost participation.
Abolish the student loan interest deduction
Around this time of year, millions of Americans get a letter or an email detailing the amount of interest paid on their student loans for the year. That amount is then used to calculate their student loan interest deduction, which amounts to a measly $100 on average.
Under Obama's plan, current borrowers would keep getting that paltry deduction, but it would no longer be available to new borrowers. Instead, the money that would've gone towards the deduction will be folded into one overarching tax credit, the AOTC.
Expand tax credit eligibility and refund
As it stands, students must be enrolled in college at least half the time to qualify for the AOTC credit. But Obama would open the benefit to people attending less than half of the time, offering them up to $1,250 and extending the credit for five years instead of four for all students.
The president is also adopting bipartisan proposals to increase the refundable portion of the opportunity credit from a maximum of $1,000, or 40 percent of the total benefit, to $1,500. In other words, a family that doesn't owe any taxes would receive a larger refund for paying tuition and fees for a child in college. This could be especially useful for lower income families with kids in college.
Still, student advocates question whether the government could help more families by redirecting money used for tax credits to Pell Grants, the free money given to needy students to pay for college. They say it would be more effective for students to get more grant money to pay for tuition in the fall, rather than wait for tax credit aid that is paid in the spring.
"The administration should build on its tax package by investing additional resources in the Pell grant, which is covering less of college costs than ever before," said Jennifer Wang, policy director at Young Invincibles.
Make it easier to apply for tax credits
Education tax credits cost the government roughly $34 billion, making it one of the largest forms of student aid, according to a the Consortium for Higher Education Tax Reform, a partnership of liberal think tanks and advocates.
Yet most of the benefits go to families making at least $100,000, according to the Tax Policy Center. Researchers at the Government Accountability Office found that 14 percent of eligible families failed to claim any of the tax benefits, while 27 percent of families who claimed one tax benefit would have been better off claiming another.
To improve the participation rate, Obama would require colleges and universities to provide students with the tuition and fee information needed to claim the credit, rather than having families gather that information on their own.
But wealthy families receive so much tax aid is because you have to have enough federal tax liability to get the full credit, said Ben Miller, a senior policy analyst at the New America Foundation. He points out that families that send their children to expensive schools also reap more of the benefits from the credits because the amount they pay in tuition and fees.
Tax exemptions for struggling borrowers and needy families
Millions of student loan borrowers can limit their loan payments to no more than 10 percent of their income and qualify for forgiveness after 20 years of payments. But those who take advantage of the debt forgiveness after 20 years could face a hefty tax bill. Obama's plan would make sure those borrowers would not be taxed on loan balances that are forgiven.
The president's plan would also prevent families from having to pay any taxes on the federal Pell Grant money awarded to their children. The current law only exempts educational expenses and treats other costs like housing as taxable income. That treatment could make families ineligible for the opportunity credit.