New Report Says Despite Significant Investment, Higher Education Tax Credits Lead To Few Results

By Katy Hopkins, Communications Staff and Jesse O’Connell, Policy & Federal Relations Staff

A new academic report finds higher education tax credits have almost no causal effects on college-going -- but not because of changes in other financial aid. 

Through the introduction of the American Opportunity Tax Credit (AOTC), many more families across the income spectrum were eligible for a higher education tax credit. And while the expansion led to many more claimants, there was no discernible effect on college outcomes, such as whether students enrolled or what tuition prices they paid, “The Returns to the Federal Tax Credits for Higher Education,” a new working paper from the National Bureau of Economic Research (NBER) found.

The expansion also dramatically increased the cost of tax credits -- leading to a $23 billion price tag in 2014, up 177 percent from 2008. That investment is not likely to be recouped, the report argues. 

“Overall, we conclude that there are shaky evidential foundations for arguments based on the idea that the Treasury, federal government, or society will recoup the tax credits with interest through higher education investments.”

Changes in other financial aid is not likely the culprit of the tax credits’ “meager” effects on student outcomes, the report concludes. 

“If every increase in the generosity of the higher education tax credits is offset by a corresponding decrease in financial aid, we would expect the credits to have few or no effects on college,” the report notes. “The tax credits would serve merely as a transfer to state governments and private philanthropies that would have provided the aid and can now use the funds for other purposes. However, we find no evidence that grants received by students fall when the credits rise.

“Thus, financial aid offset is very unlikely to be the reason why the tax credits have few effects on college-going.”

Neither is the Bennett Hypothesis, a theory that increased federal support for higher education leads to increased tuition prices, likely the correct explanation, the report concludes.

“[W]e do not find any evidence that the tax credits induce students to attend schools with higher list tuition or to pay higher tuition conditional on attending. Thus, our results provide no support for the Bennett Hypothesis as an explanation of the tax credits’ inefficacy,” the authors write.

Rather, the fact that students are not liquidity constrained -- whether because they receive grants or can take out loans -- is a “plausible” reason for the the inefficacy, the report authors conclude. The tax credits’ structure -- that they arrive after college decisions are made and costs are paid, and often go directly to a parent filer, not the enrolled student -- could be another, they write. 

That’s one argument for eliminating tax credits in favor of other higher education support, according to the Congressional Budget Office (CBO)

“Education benefits administered through the tax system are poorly timed because families must pay tuition and fees before they can claim the benefits on their tax returns,” the CBO says. “In contrast, federal spending programs such as the Pell grant program are designed to provide assistance when the money is needed -- at the time of enrollment.” 

While some have suggested repurposing the significant amount of money the federal government spends on higher education tax credits each year, simply eliminating these credits and redirecting those funds into other federal student aid programs is a difficult task for several reasons. For one, it is a politically difficult proposition — these tax credits have many stakeholders, a result of the broad swath of middle-class families that benefit from them. Moreover, even if the politics of the issue were easily navigable, higher education tax credits lie outside of the normal legislative apparatus for education programs in Congress, as they fall into the jurisdiction of the tax-writing committees.

During the first phase of the Bill & Melinda Gates Foundation’s Reimagining Aid Design and Delivery (RADD) project, some groups did suggest the elimination of tax credits, but so far this policy idea has found a limited audience on Capitol Hill. NASFAA’s RADD paper, which didn’t discuss tax credits, can be found here, in addition to coverage of our ongoing work on additional phases of the RADD initiative.


Publication Date: 1/20/2015

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