Every year, H&R Block starts running television commercials imploring Americans to “get your billion back,” a plea based on the premise that each year, a chunk of money goes unclaimed by Americans who don’t take full advantage of the array of tax credits and deductions offered to them. Regardless of its numerical accuracy, it’s a fairly accurate representation of the inefficiency of providing public benefits through the tax code. Given that low-income households often don’t have the luxury of professional tax preparation, the tax system might be a particularly brutal delivery mechanism for them. Nowhere is this more apparent than how we currently subsidize the cost of college at tax time.
Along with his highly-touted proposal for two years of tuition-free community college, President Obama proposed several changes to higher education tax policy in the run-up to the State of the Union – including eliminating the student loan interest deduction for new borrowers, consolidating higher education tax credits into the current American Opportunity Tax Credit (AOTC) and increasing its refundability and usefulness for low-income students, reducing the benefits for 529 plans and Coverdell Education accounts, and eliminating a potential tax bomb that awaits students who take advantage of forgiveness programs under the Department of Education’s income-based repayment plans.
{mosads}Taken together, the higher education proposals from the president’s State of the Union are mostly progressive, and in some cases reflect common sense improvements. But while the community college proposal will continue to garner the most attention, New America’s Ben Miller noted that the AOTC actually costs the government $15 billion – more than twice as much money as the tuition-free community college proposal. For a program that provides little benefit to students with the most need, and with limited evidence of effectiveness at getting more students into and through college, it’s fairly remarkable to see it consistently held up as one of the few bipartisan ideas left.
Let’s first stipulate that the AOTC is hardly the worst piece of the tax code. For starters, it’s a partially refundable credit that puts up to $1,000 (and $1,500 if Obama’s new proposal were to pass) in the pockets of low-income families that pay college expenses. It also can be used for books, living expenses, and computers – an important benefit considering that tuition often makes up less than half of the total cost of attending college. And unlike a glut of other tax expenditures, it’s not a complete sop to the wealthy; the full credit is available to those making $80,000 or less, or $160,000 or less for married couples filing a joint return. It’s a remnant of Clinton-era tax policy, and an easy way for both parties to claim to be working for the middle class.
The problem is that the AOTC is undoubtedly the most progressive way we subsidize college costs through the tax code. Half of the aid from the deduction for tuition and fees, for example, goes to families making between $100,000 and $200,000 each year. Other deductions can’t be claimed by low-income households, and precisely zero of these benefits actually do anything to help families pay tuition bills or student loan payments when they’re due.
We currently spend over $30 billion through the tax code to retroactively lower the cost of higher education. This is a convenient number, because students at public colleges and universities borrowed almost that exact amount in federal student loans last year (excluding PLUS loans made to parents). In other words, we could take what we currently offer through tax-based aid and completely eliminate student borrowing at public institutions of higher education. Even if some families are using the money from tax credits to pay off student loans, it would be far more efficient to simply eliminate some of the cost up front.
Tax-based aid could also be distributed only to the students who most struggle to pay college costs. President Obama’s tuition-free community college proposal would have the benefit of nearly doubling the Pell Grant for the average recipient at community colleges. Redirecting all tax-based aid into the Pell Grant would have the practical impact of doubling the Pell Grant for recipients at every college. This would be transformative, considering low-income graduates borrow for college at higher rates, and in higher amounts, than the relatively wealthy few that receive higher education tax breaks – even after receiving Pell Grants.
Every time a policymaker introduces a bold proposal to tackle economic uncertainty, the first question to circulate always involves around cost. By almost any measure, $6 billion a year for tuition-free community college is a shrewd investment, and one that could have positive impacts on future students who know that there will always be an affordable option beyond high school. The President is taking the correct step in proposing to pay for it by reducing or eliminating a few inefficient or regressive benefits. But right now, there’s another large pot of money that, if redirected, could go a long way in returning us to a system where student debt isn’t the primary way to finance college.
Huelsman is senior policy analyst at Demos, a liberal think tank.