Remember this day when the Pell Grant shortfall comes up

Today, President Obama announced a compromise that reduces the payroll tax while also extending the Bush tax cuts for two years, among other things. That deal also extends the American Opportunity Tax Credit (AOTC), which essentially reimburses students and families for higher education costs. Without action, that credit would have expired at the end of this year.

So here’s some quick math on the tax credit (figures come from here):

52 the percent of AOTC benefits in dollars that went to families with an adjusted gross income above $50,000. One-third of AOTC benefits in dollars that went to families with an adjusted gross income above $75,000.

3.9 percent of Pell Grant recipients from families making over $50,000 annually [XLS]. Just over 1 percent come from families with incomes over $60,000.

$8.7 billion estimated net cost of the AOTC in the 2009 fiscal year by the U.S. Treasury. Of that amount, $3.6 billion was disbursed in the form of refundable benefits in fiscal year 2009 to low-income families that would otherwise have not received a benefit from the credit due to insufficient tax liability.

$5.7 billion estimated amount of dollars needed to make up for expiring stimulus funds and to keep  the maximum award from decreasing.

In short, the tax compromise keeps in place a benefit that costs about $17.4 billion over two years, more than half of which will go to students who probably aren’t even Pell Grant eligible. At the same time, the Pell Grant program, which is the best targeted federal benefit to the lowest income students, would need about $11.4 billion over the next two years. Even if you got rid of everything except the refundable benefit, you’d still have 89.5 percent of the dollars needed to not cut Pell.

One can debate whether Pell Grants or tax credits are the better way to distribute funds to students. And ideally, this wouldn’t matter and these two programs with admirable aims  wouldn’t be pitted against each other. But they were both funded in the stimulus and that money is now gone, forcing tough choices to be made. Unfortunately, it looks like absent some unexpected Congressional action, Pell very well could end up on the short end of this tough choice.

Tagged as: American Opportunity Tax Credit, Pell Grants, Tax Credits