President Obama proposed today to permanently extend the American Opportunity Tax Credit, a partially refundable $2,500 tax credit that families with incomes up to $180,000 can claim to help offset the costs of higher education. But as I wrote in the “Student Aid Perspectives” column that ran this morning on the National Association of Student Financial Aid Administrator’s website, providing financial aid through the tax code is an ineffective and wasteful way to help students and families pay for college.
Here are three reasons why:
- As many student-aid experts have pointed out, tuition tax breaks are not well-targeted, with a substantial share of the benefits going to affluent families who can afford to send their children to college without the aid. According to the College Board, 26 percent of the savings derived from the higher education tax credits in 2009 went to taxpayers with incomes over $100,000. In comparison, the Department of Education reports that more than 90 percent of dependent students who receive Pell Grants come from families making less than $50,000.
- The tax breaks arrive months after students and their families pay their tuition bills. This disconnect in timing is not only impractical but serves to obscure the purpose of the benefits as well. Suzanne Mettler, a professor of government at Cornell University, conducted a survey of tuition tax credit recipients and found that nearly 60 percent didn’t realize that they had received help from the government to pay for college. These types of “social tax expenditures,” Mettler wrote in the Washington Monthly last summer, “are largely hidden from the public: through them, the government benefits people, providing them with opportunities and relieving their financial burdens, often without them even knowing it.” (Italics in original.)
- The tax breaks are complicated and confusing. Because of the complexity of navigating the tax code, many families do not appear to know whether they are qualified for these benefits. The Government Accountability Office reported in 2008 that it had found that “hundreds of thousands of taxpayers fail to claim tax preferences to which they are entitled or do not claim the tax preference that would be most advantageous to them.” Meanwhile, the U.S. Treasury Inspector General for Tax Administration revealed in October that more than two million taxpayers may have mistakenly claimed the AOTC in 2009.
Trying to help make college more affordable for students and families is an extremely important goal. However, at a time when federal policymakers can barely find the money to keep the Pell Grant program afloat, providing billions of dollars in tax benefits to upper-middle-income families who can afford to send their children to college without the government’s help is a luxury that the government can ill-afford.
For the sake of preserving access and equity in higher education, the Obama administration and Congress should eliminate, or at least significantly scale back, the AOTC and the other tuition tax benefit programs and use the savings to ensure that the Pell Grant program is on a sustainable path.
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5/11/2012 | U.S. News & World Report highlights ideas from "Moving On Up: How Tuition Tax Breaks Increasingly Favor the Upper-Middle Class." 
5/11/2012 | In Diverse, Steve Burd comments on the Obama administration's plans to address student debt. 
5/11/2012 | Kevin Carey talks to Salon about the government's role in rising student debt.
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Crimson Wife, I agree that both colleges would be the poorer without the diversity. If there was a one to one relationship that only high cost colleges offered a good education and low cost instituions offered a bad education that I would be more concerned….but there is not. One can find a Berkeley quality education at a lower price if prepared to do your due diligence. Back to choice, it is not an all or none proposition. That should be separate from the discussion around access for poor students who can get admitted, but can’t afford to go. Apples and oranges.
“a little better proactive comparison shopping can get around the sticker price issue”
Do we really want bright students who come from moderate-income families to choose their local Cal State over UC Berkeley because of price? College is not a commodity, and I don’t want to see the state’s flagship university become the exclusive provenance of the so-called”1%”.
I understand your concerns Marco. It IS very difficult for FAO’s to run a good program given complexity, tight budgets, technology, etc. I guess I don’t see my ease as the main reason to change a program….although I am glad ACG/Smart went away…
I guess I don’t see how it is easier. Right now we have a sort of “free money apartheid”. Poor folks fill out the FAFSA to get a Pell grant (and I would argue that not all are poor due to loopholes in the need formula), and middle class folks wait to get there AOTC when they file their taxes.
Simpler and easier to me would have been to fold the money from the tax credits back into Pell grants and expand the income ranges that would be elegible to receive it, which would capture more middle class folks. Thus tax filing gets easier, and there is only one place for free money from the feds. Having to explain both FAFSA concepts/machanics as well as tax arcana to parents is not a five minute proposition. I would rather stick to explaining FAFSA alone. Simpler.
I agree with Bob here. Back when tax credits were first implemented, the budget wasn’t as big of a problem. So sure – tax credits were a great form of financial aid to help the middle class who wouldn’t be eligible for grants or other types of need-based aid. But I dispute the sweeping generalization that most families who qualify for Pell don’t have taxable income anyway. That may be true for a subset of the Pell population, but definitely not for all. I received Pell Grants for all four years of college and my parents made plenty of taxable income – just not very much.
I agree that it’s a hard dilemma, and in a budgetary crisis, hard decisions will have to be made. If the federal government had all the money possible, then it should definitely keep tax credits to help alleviate the middle class squeeze. But as Bob said, federal aid has always been about access – and if things have to cut, then it has to preserve what will help the people with fewer sources of assistance.
Totally agree with Raymond. The tax credits were initially intended to provide a bit of releaf for middle-class income students / parents who most likelly will not qualify for any Grant money. Particularly for students who may enroll in a Master’s Degree program for which they would have to take out loans to pay for tuition.
Most poor families that qualify for Pell Grant do not have any taxable income anyways and only recently the American Opportunity credit was instituted to give a portion of the Educational credit (only up to $1000) to families with such a low income that qualify for it.
As a Financial Aid administrator it is hell of a lot easier to tell a middle class student who do not qualify for grants because they make just enough to get by but too much to get grants that if they pay for their tuition they will at least get a protion of that money in the back end as an educational credit instead of the IRS keeping it as income tax. So to the author please get your facts right and only then I would entrust you as having an objective opinion in the subject.
It is not just the AOTC. As a tax preparer, it is a nightmare to compare the four different education tax credits to see which one works best for the tax payer. Further, even the IRS has noted …and started to audit all of the incorrectly filed AOTC credits due to the complexity of the rules. It is not chump change, not when everyone is trying to find the last dime…even the feds.
Also, what about the folks who self prepare their tax returns and don’t know they qualify for the credit? I can’t tell you how many amended tax returns there would be….
As an Financial Aid Administrator, your points are valid. Further, not to diminish the points made by FuzzyFace and Crimson Wife, but a little better proactive comparison shopping can get around the sticker price issue.
Also, I don’t buy the middle class “free money” argument. The overriding priority of federal financial aid is “Access”. “Choice” of where to go to school has not entered the federal financial aid argument for quite a number of years now. The middle class would still go to school without the AOTC, just somewhere cheaper. The point of saving money in the federal budget is too make sure the well qualified poor kids who might not otherwise go to college…get a shot at it!
Let us also note that for the poorer students attending a low cost community college and receiving maximum Pell funds are not eligible for the AOTC. THEN the Federal tax law requires this student to report the difference between the costs and the Title IV assistance as income. At the state level, some States are inaccurately using this “Tax Break” as a reason for cutting State aid to students. Thank you for your article.
I am sure you are just rtrying to help families with the cost of education, but you are forgetting one very important fact. Tha american opportunity credit was specifically designed to help the middle class families who do not qualify for free aid. The poorer groups don’t really need it because they get all kinds of financial aid and most do not have taxable income in the first place. The middle class families(myself included) don’t receive any grants or scholarships, so to them this is at least partial relief. Taking it away would be another slap in the face of hard working middle class people who are doing everything they can to educate their children.
Even public colleges are a financial stretch for families making in the low-to-mid $100k’s. UC Berkeley just announced a 9.6% hike in fees for 2012-2013, bringing the cost to state residents to a whopping $23k.
I do think we need to increase financial aid to students from low-income families. However, that should be in addition to, not in lieu of, continued assistance to moderate income families.
How is a family earning, say, $110,000 supposed to afford $50,000 in tuition? For purposes of financial aid, you need to be making probably at least $250,000 to be in a position where you can really “afford” most private colleges, these days.
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