Report Outlines How Eliminating Tax Breaks Could Help Shore-Up Funds for Pell

With student aid funding under continual threat, a new report by the Education Sector details how eliminating education tax breaks that increasingly benefit upper-income students could help shore up more funds for programs like the Pell Grant program that support low-income students.

Using IRS data collected by the College Board, the report, "Moving On Up: How Tuition Tax Breaks Increasingly Favor the Upper-Middle Class," shows that in the years between 1999 and 2001, nearly 83 percent of the higher education tax benefits went to families earning less than $75,000 per year. In the last three years, however, families making between $100,000 and $180,000 received nearly a quarter of the benefits, while the share of middle-income families receiving those benefits sharply declined.

"When the Clinton administration and Congress first introduced the Hope and Lifetime Learning Tax Credit programs in the late 1990s, their aim was to make college more affordable for the middle class.," the report states. "But in the years since, federal officials have added new tax breaks to the mix that have increasingly steered benefits to families with higher incomes."

The report notes that recent political focus on reducing the deficit and cutting spending has made a target out of funding for federal student aid programs. Federal financial aid has already seen a number of cuts in the form of eliminated programs and subsidies and reduced student eligibility. Meanwhile tax benefits have increased in popularity, since they do not appear to increase the deficit.

"Policymakers who have championed these programs say that delivering student aid through the tax code is the easiest way for them to provide relief to students and families who are facing ever-rising college prices," the report states. "That’s because, unlike  federal grant and loan programs, the tax benefits are not counted as spending in the federal budget and therefore do not appear to increase the deficit, even though they reduce the amount of revenue the government collects each year."

The data show that the government will spend approximately $55 billion on tuition tax break programs from 2010 through 2014. Education Sector’s Stephen Burd argues that eliminating the American Opportunity Tax Credit and the other federal tuition tax break programs will help provide much needed funding for the Pell Grant program, which is expected to reach a $7.5 billion shortfall in fiscal year 2014. 

"At a time when the budget axe is falling on the Pell Grant program, providing billions of dollars in tax benefits to upper-middle income families who would send their children to college without the help is a luxury that the government can no longer afford," Burd argues. "Congress should allow the AOTC to expire at the end of this year, eliminate all of the other tuition tax breaks, and use the savings to ensure that the Pell Grant program remains on a sustainable path."