Restructure Timing of Tax Deductions to Influence College-Going Decisions, Report Says
By Allie Bidwell, Communications Staff
Among the plethora of financial aid programs for students and families are tax-based benefits that often fly under the radar compared with the more well-known options, such as Pell Grants and federal student loans. While tax credits and deductions can help families pay for college, studies have shown that they actually have little to no impact on students’ college-going decisions.
A new working paper from Caroline Hoxby and George Bulman, published by the National Bureau of Economic Research, found that much of the inefficacy of the federal tax deduction for tuition and fees (DTF) can be attributed to the lack of knowledge some families have about the rules and benefits, its timing, and how and when families actually receive the financial benefit.
While grant-based aid, such as Pell Grants, require a student to fill out the FAFSA, the DTF has far less paperwork and lower administrative costs, according to the paper. It could be beneficial to students and families, as well as the government, to make adjustments to the program so it would have more of an impact on college-going decisions.
Under the DTF, families that meet certain income requirements are eligible for an above-the-line deduction of $2,000 to $4,000.
As it stands, the typical family would receive its tax-based aid through the DTF about 10.5 months after tuition and fees for college are paid.
“This timing may make the tax-based aid less likely to relax liquidity constraints than grant-based aid which is timed to coordinate with tuition bills,” the paper said. “In addition, because tax rules are complex, families may not understand that they are eligible for tax-based aid when they are making college-going decisions. Such non-recognition may limit the causal impact of the programs on educational attainment.
Moreover, some families see the DTF aid as a change in their income, rather than a change in the price of college.
To improve the efficacy of the program, Hoxby and Bulman suggest making the DTF based on the modified adjusted gross income of the previous year, rather than the same tax year as the tuition and fees. In theory, after the family filed its taxes for the year its child was 17 – or presumably in the senior year of high school – it would receive a notification of its eligibility for the DTF, around the same time it would receive information about other financial aid. When it came time to pay tuition and fees, the family could notify the college of its eligibility, and the college would then collect the discount from the Treasury.
“Since the discount formula would be predetermined, there would be little reason why the Treasury could not send the funds to the college quickly – just as the U.S. Department of Education sends Pell grants to colleges quickly,” the report said. “This simple modification would make the DTF much more salient. It would ensure that most people knew about the DTF when making key college-going decisions.”
Publication Date: 9/25/2015
Mark L | 9/25/2015 10:12:19 AM
One problem with this concept is equity. It creates a new, special class within the tax system. How is this different from the situation of a first-time home buyer? There will be a substantial tax benefit in the next year, which the buyer cannot put toward the purchase price and a consequent reduction ion the mortgage.
We can further extend the analogy to those who pay federal sales tax for a vehicle and first-time business creators.
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