Report: Tax Credits Show ‘Little Evidence’ of Making Impact on College Affordability

By Brittany Hackett, Communications Staff

Despite the widespread use of various tax credits to address college affordability, the tax code is not the right tool to make college more affordable and increase access to higher education, the Tax Foundation states in a new report

According to the report, education tax credits were a $17.4 billion program claimed by over 7 million taxpayers in 2011, up from a $4.5 billion program claimed by only 4.7 million taxpayers in 2008. And while these tax credits are intended to help reduce the cost of higher education, student loan debt has increased in the last decade from just over $400 billion to nearly $1 trillion in 2012. In addition, the cost of college rose 70 percent at the same time, allowing colleges to “capture the maximum value of tax credits,” the report states.

The tax credits are also poorly targeted toward low- and middle-income families, the report states. About 30 percent of the current benefits of education tax credits accrue to taxpayers earning more than $100,000 per year with an additional 18 percent accruing to those earing more than $75,000 annually.

“In other words, “ the report states, “many tax credit dollars are going towards future doctors and lawyers: those who would be more likely than not [to] be able to pay back a loan … amount[ing] to reverse distribution up the income ladder.”

The report notes that the overuse of tax credits - which are “prone” to improper payments and fraud - has turned the Internal Revenue Service into a spending agency, a role for which is it not equipped.  

The Tax Foundation argues that the tax credits “violate the principles of sound tax policy by greatly increasing the complexity and distortions in the tax code.” Moreover, “there is little evidence that they have accomplished what they intended to do” and should therefore be eliminated within a comprehensive tax reform package.

By trading the elimination of education tax credits for lower marginal tax rates through tax reform, the Tax Foundation states that the economy would grow by $19 billion per year and 121,000 jobs would be created.

There are other solutions Congress should consider in combination with tax reform, the report says, including simplifying savings opportunities in the tax code, such as universal savings accounts. Congress could also encourage new markets designed to incentivize colleges to keep their costs low, such as pre-paid tuition plans. 

“Finally, if the goal is to help low-income students with college costs, it would make far more sense to shift resources away from tax programs like credit and focus the funds on spending programs like Pell Grants which are more targeted and less susceptible to improper payments and fraud,” the report states. 

For more on how we can help disadvantaged students make the most of their education tax credits check out this Student Aid Perspectives piece! 


Publication Date: 7/21/2014

Sheree B | 7/22/2014 10:36:28 AM

I am about sick of the middle class continually taking the brunt of everything. If you make $75,000 per year gross, you are most likely taking home more like $60,000 after taxes, social security, and medical insurance (since you make too much to qualify for a subsidy), and even less if you have the nerve to try and save for retirement. Even paying for a state school is around $10,000 in tuition only per kid, not counting room and board or out of state tuition. Imagine having two kids in college at the same time. You are looking at a minimum of around $20,000 per year. That is a huge chunk of your net income. What if you have to pay for dorms. Your price tag just doubled. What if the student has to go to school out of state. Doubled again. You don't get Pell, as you make too much to qualify, you don't get need-based grants, you might not even qualify for subsidized loans depending on the school's COA. So you take out monstrous amounts of unsubsidized, PLUS, and private loans and wind up a statistic towards the $1 trillion in student lending, and have to hear politicians scream about student over-borrowing.

The one thing you do get is an education credit. The "most needy" don't generally get education credits because they already owe $0 in taxes and are still managing to get back substantial refunds. Oh wait, now that some education credits are refundable they get back even bigger refunds. In the meantime, the middle class tend not to qualify for refundable credits. So they get this one, tiny break. Now, you want to take this away too? Then they try to tell us that they seriously don't understand why the middle class is shrinking.

If you are concerned that people making more than $100,000 per year are getting education credits that they don't need, then change the maximum income levels for education credits to $100,000. Problem solved. Don't end one of the very few breaks geared towards middle class.

James E | 7/21/2014 9:35:36 AM

Interesting article, and I largely agree that tax credits, in general, do very little for college access, and certainly not college access for the truly needy.

I did find this quite puzzling, however...maybe somebody can help me to understand it:

"Because of the Free Application for Federal Student Aid (FAFSA), the college has intimate knowledge of each student’s (or family’s) income and assets and therefore knows to what extent a student’s family can afford college and if they are eligible for tax credits, loans, or other financial aid. This information allows the college to simply adjust its financial aid package in order to capture the maximum value of the tax credit."

Are you kidding me? Now I have only been doing this since 1984, but which of you have indexed your financial aid offers to families that either do, or do not, qualify for educational tax credits?

If anything, since reported IRS 1040 Line 49 educational tax credits actually reduce the EFC in FM, we give more aid -- not less -- to those families that qualify.



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