The last couple of years, I received a nice refund check from the federal government. I was a full-time grad student for most of last year, working two jobs, and using student loans to cover my expenses. Last year, I was able to take the full $2,500 Student Loan Interest Deduction. I got an even bigger refund in 2010 because I qualified for the Lifetime Learning Credit. But the more I learn about how misdirected these tax credits are, the more uneasy I feel when I take them. And the more I delve into higher education policy, the more certain I become about my conviction—we need to stop subsidizing higher education through our tax code.
The main problem with higher education tax benefits is that they are not effectively targeted to the students who need the benefit the most. According to the College Board, 26 percent of the savings derived from the higher education tax credits in 2009 went to families making more than $100,000. And just yesterday my colleague Steve Burd released a report on the American Opportunity Tax Credit (AOTC) that found filers making more than $75,000 were two-and-a-half times more likely to receive benefits than those earning less than $25,000.
But by far the biggest concern for me is the complexity of these tax credits and deductions. I’m a firm believer that one of the most pressing concerns in higher education is the pernicious information gap that prevents students, especially first-generation students who have no one to guide their way, from making informed decisions about higher education. Tax credits complicate the decision-making process because many low- and moderate-income families do not realize they can claim these benefits. Even worse, these tax breaks arrive months after students have paid their tuition, long after their immediate need has passed.
Some may say that we need to roll back the thresholds of these tax benefits to make sure they are better targeted to low- and middle-income families. But I’m taking a bolder stance: let’s get rid of all of them—the American Opportunity, Lifetime Learning, and Hope tax credits, plus both the Tuition and Fees, and Student Loan Interest deductions. In 2009 alone the federal government spent $14.7 billion on tax credits. Imagine if we had that money to invest into and overhaul our federal financial aid programs? We could better target low- and middle-income students who need the most financial help by restructuring Pell Grants and our student loan programs. President Obama hopes to make AOTC permanent, and it’s no wonder since it polls incredibly well. But, just because it’s popular doesn’t mean it’s the right thing to do.