In his State of the Union address in January, President Obama called on Congress to make the American Opportunity Tax Credit (AOTC) permanent, saying that his proposal would save “millions of middle-class families thousands of dollars” off of the cost of sending their kids to college. What he didn’t say was that the primary beneficiaries of his tuition tax credit program are actually much farther up the income scale.
Today, at Education Sector, we are releasing a new report that shows how the tens of billions of dollars that the government provides in student aid through the tax code each year are increasingly going to upper middle income families who are more able to afford sending their children to college without the help.
This wasn’t always so. When President Bill Clinton and the Republican-led Congress first introduced the Hope and Lifetime Learning Tax Credit programs in the late 1990s, they aimed squarely at helping make college more affordable for moderate-income and middle-income families who just missed the cut off for federal need-based financial aid.
Analyzing Internal Revenue Service data collected by the College Board, I found that for the first several years after they were created, the Hope and Lifetime programs lived up to their promise as a middle-class benefit. From the tax years 1999 through 2001, more than two-thirds of the benefits (69 percent) went to students and families making between $25,000 and $75,000 a year. Only 17 percent went to filers earning $75,000 or more. Because of income limits Congress placed on these programs, families making $100,000 or more were not eligible for these benefits.
In the years since, however, policymakers have added new tax breaks to the mix that have steered benefits to families with higher incomes.
First in 2001, Congress created the “Higher Education Tax Deduction” as part of President George W. Bush’s tax cut legislation. Under the program, students and their families became eligible to subtract from their taxable income up to $4,000 in tuition and fees. Congress made the deduction, which expired at the end of 2011, available to individuals earning up to $80,000 a year and families making as much as $160,000 annually.
Student aid experts who opposed this new tax break warned that it would primarily help the highest income families eligible for the benefit. That’s because a tax deduction is subtracted from the amount of a taxpayer’s income that is subject to tax. As a result, individuals in higher tax brackets receive greater savings than those in lower brackets who pay the same tuition.
My analysis shows that the aid experts’ concerns were warranted. More than half of the $11 billion in savings that families received from the tuition tax deduction in tax years 2002 through 2009 went to those making $100,000 or more, and nearly three quarters went to those earning $75,000 and above.
The addition of the deduction to the other tuition tax breaks shifted the overall benefits from these programs up the income scale. From 2002 through 2008, students and families making between $25,000 and $75,000 saw their share of the benefits drop from 69 to 53 percent. Meanwhile, filers who make $75,000 or more saw their share rise from 17 to 38 percent (with 13 percent going to families making $100,000 or more).
Next in 2009, Congress created the AOTC, a $2,500 tax credit that families with incomes up to $180,000 can claim, as part of the federal budget stimulus legislation. With the addition of the AOTC, which has temporarily replaced the less-generous Hope credit, the share of benefits going to filers making between $25,000 and $75,000 plummeted to just 38 percent in the program’s first year.
In part, this drop can be attributed to gains made by lower-income filers. The AOTC is a partially refundable credit – allowing students and families without tax liability to claim up to $1,000 as a refund. As a result, those making less than $25,000 saw their share of the benefits more than double to 17 percent.
But by far, the biggest winners have been higher income families. In 2009, families with incomes of $75,000 or more received 44 percent of the benefits (with a whopping 26 percent going to those making between $100,000 and $180,000).
At a time when Congress is struggling to fund the Pell Grant program and financially needy students who pursue a higher education are facing mountains and mountains of debt, steering billions of dollars in tuition tax benefits each year to upper middle income families who would send their children to college without the help is a luxury that the government cannot afford. So why are we doing it? That will be the subject of my next post.