(This is a two-part series, designed to help kids understand what the President was talking about when he spoke about investing in education. There is nothing more pertinent to a teen or college student. PART 1 will address tax credits for college. PART 2 will address paying off student loans.)

Two weeks ago, President Obama gave his first State of the Union address. It is an historical occasion, and naturally what I loved best were all the teen money lessons crammed in there. My students are still moaning about having to analyze and write about what it all means.

Today’s lesson, about tax credit for college costs, is pertinent to our teens’ lives, so they’ll remember it, but it also can be generalized to understand taxation altogether. And it’s the most important–or at least the most exciting–aspect of taxation: the tax break.

First, have your kids watch the Obama State of the Union Address. Just Google it, and it will appear.

Second, hone in on the part of the speech about investing in the skills and education of our people. There were eight points Obama addressed. Obama called for Congress to:

• Renew the Elementary and Secondary Education Act
• Revitalize community colleges
• End taxpayer subsidies to banks for student loans
• Award a $10,000 tax credit to families for four years of college
• Increase Pell Grants (need-based Federal grants for low-income college students)
• Reduce compulsory student loan payments to only 10% of income
• Legislate that all student loan debt be forgiven after 20 years, after 10 years if they choose a career in public service
• Cost cut at colleges and universities

Third, ask them if they understand what the two tax items mean: Ending taxpayer subsidies, while increasing the tax credit to $10,000 for four years of college. Make note of their answers, whether they answer correctly or not. Understanding how they perceive these terms will help you explain other related issues later. Then give them workable definitions.

Subsidizing: Explain first that the word subsidizing means to help pay for something. As the recession hit, student loans became harder to get. People, otherwise known as taxpayers, had to help foot the bill to keep student loans available by paying extra taxes. The irony of that won’t escape your kids. What is the point of having the people who need the loans to begin with contribute to the pot of available loan money?

Well, not a lot of point, especially since there’s no way to guarantee that wealthy people, who could afford helping to subsidize the student loans, would be the ones contributing. So the call to end subsidies for student loans means that the tax burden, in theory, will be lessened for the average taxpayer.

On the other end of the tax problem: The average taxpayer needs a tax break, not simply being absolved of paying more. Explain that a tax break is when you get out of having to pay certain taxes. This either happens by lowering your taxable income by a certain amount, or by taking the tax you would be paying and subtracting a designated amount. Lowering taxable income tends to be for wealthier people. Actually getting a refund tends to be for people who have no more deductions to take and who already get a refund.

In Obama’s proposal, he is asking to lower the amount of taxable income a family pays by $2,500 per year for every student who finishes four years of college. So if a family has a taxable income of $120,000, it would be reduced to a taxable income of $117,500 each year for four years. The total after four years is $10,000.

Incidentally, families stop being eligible if they’re too wealthy. The tax benefits start to fade when the family income is $160,000.

But the tax credit also helps families with much, much lower incomes who need the cash back. If a family spends at least $4,000 per year on college, then they can actually get a refund of 40% of that $2,500–$1,000 back in cash. So the taxable income is lowered, but the refund is also real.

Have your teen or college student look up these Acts. They should be informed at a detailed level. The American Recovery and Reinvestment Act of 2009 included a scaled-back version of the American Opportunity Tax Credit as a modification to the Hope Scholarship tax credit. The legislation increased the maximum credit to $2,500 (100% of the first $2,000 in tuition, fees and course materials and 25% of the next $2,000) per year, expanded it to four years from two, and made the tax credit partially refundable.

In addition, the income phaseouts were expanded and the tax credit is no longer subject to the Alternative Minimum Tax (AMT). To date, these improvements are temporary, for the 2009 and 2010 tax years only. However, in his speech, President Obama has proposed making the improvements permanent in his FY2010 budget.

It’s important because of course it saves money. But it also shows kids how when we budget for life expenses, we have to look at the big picture to see what’s affordable. In some cases, this type of tax credit could mean the difference between being able to afford college and not being able to.

Also, there is a growing number of college students–many of mine included–that take five years instead of four to graduate. This is a thorny issue, because sometimes it’s very difficult to schedule needed classes on campuses where budget cuts are translating to fewer class offerings. (I will do a post on navigating the college and university advisor and registration system, to help ensure that your kids get the classes they need to graduate in four years.)

By pointing out to your kids that there is no tax credit for a fifth year of college, they will understand on a whole new level that it’s critical they register early and remain organized.

In his speech, President Obama said: “No one should go broke because they chose to go to college.” And he’s right. The tax changes are designed to live up to that message. So are the changes in student loans, which we’ll talk about in a future blog post. Stay tuned.