College tax credits didn’t make the grade, badly needed reform

As Congress moves forward with tax reform, one sticking point that has popped up has been concern over changes to higher education tax credits.

Congress has geared a great deal of tax law toward making higher education more affordable and accessible — tax credits for higher education totalled $35 billion in foregone revenue in fiscal year 2014.

Unfortunately, these efforts have largely failed, and Congress is right to take steps away from this inefficient and ineffective method of providing access to higher education.

{mosads}One major problem with higher education tax credits is who they end up benefiting. Much of the rhetoric surrounding higher education tax credits suggests that they benefit poor and working-class Americans who most need help with paying for education expenses.

However, an individual needs to have a tax liability to begin with to benefit from nonrefundable tax credits. Individuals who most need federal assistance in accessing higher education tend to have lower incomes and, as a result, minimal tax liability.

Nearly all higher education tax credits are nonrefundable, meaning that lower-income Americans benefit very little from them.

Deductions in the tax code for higher education tend to benefit higher-income individuals as well. Elimination of the student loan interest deduction has long been an area of bipartisan agreement, as the Obama administration recommended eliminating it.

Established before other education benefits, such as Income-Based Repayment, the student loan interest deduction has become redundant. Additionally, as high-income graduate students tend to take out the most debt, the deduction’s benefits flow toward wealthier graduates.

Tax credits for higher education have also been found to be riddled with fraud and abuse. A 2010 report by the Treasury Inspector General for Tax Administration studied higher education tax credit claims between January and June of 2010 and found that 2.1 million claims totalling $3.2 billion were erroneous. 

Even when tax credits do manage to make their way to their intended recipients, there is minimal evidence that they increase college enrollment. A 2014 study by George Bulman and Caroline Hoxby found that higher education tax credits had “little or no effect” on college-going.

One potential reason for this is another practical issue with tax credits: Families must pay tuition, on average, 9 to 10 months prior to receiving tax benefits. For families struggling to make ends meet, that can simply be too big of a gap.

Federal involvement in higher education can also have negative side effects. A 2015 report by the Federal Reserve Bank of New York found that tuition increases can be tied to increased federal aid for higher education.

The tax reform effort would benefit less-wealthy families seeking to send students on to postsecondary education.

Consolidating programs such as the Hope Scholarship and the Lifetime Learning Credit under an expanded American Opportunity Tax Credit (AOTC), the House plan would add a fifth year of eligibility for the AOTC, for a maximum credit of $1,250.

Given that the AOTC is partially refundable, this would help less-wealthy families seeking to send children to college.

Tax reform would benefit families with students in other ways as well. An expanded child credit, as well as decreased rates across the board, means that Americans will have more money to save up for future college expenses.

These savings could be put toward 529 plans that, under the House tax reform plan, would be eligible to be put toward apprenticeship programs as well as traditional colleges. 

Tax reform makes important changes to a stagnant and ineffective tax credit system for higher education. This effort makes important modifications that help ensure that the federal role in education accomplishes its stated goal: helping the least fortunate provide their children with a fulfilling education.

Andrew Wilford is an associate policy analyst with the National Taxpayers Union Foundation, which attempts to show Americans how taxes, government spending, and regulations affect them. It is closely affiliated with the National Taxpayers Union, a conservative taxpayers advocacy organization. Follow him on Twitter @PolicyWilford.