Quick Takeaways:

• While 91 percent of undergraduates are eligible for a tax credit or deduction, about 40 percent of undergraduates couldn’t claim such benefits because they either do not pay tuition or do not file taxes.
• Students who attend higher cost institutions – including for-profit and not-for-profit private schools -- are also able to claim a larger tax benefits than student who attend lower-cost institutions.
• The American Opportunity Tax Credit (AOTC) has not “meaningfully add[ed] to the number of students eligible for a tax benefit,” despite efforts from policymakers to make the benefit partially refundable.

By Brittany Hackett, Communications Staff

Despite the growth of higher education tax credits over the last couple of decades, a large portion of undergraduate students are unable to take advantage of such benefits and students who attend more expensive schools are able to claim a larger tax benefits than students at lower cost institutions like community colleges, according to a new report from New America.

Using data from the Department of Education’s (ED) National Postsecondary Student Aid Study (NPSAS), New America looked at how tuition tax benefits have evolved over time and how eligibility is distributed among undergraduate students. The group estimated the tax benefits undergraduate students were eligible to claim during the following academic years:

• 1999-2000;
• 2003-2004;
• 2007-2008; and
• 2011-2012.

The analysis showed that 91 percent of undergraduates who incur out-of-pocket tuition and fee expenses and file taxes are eligible for a tax credit or deduction. However, about 40 percent of undergraduates couldn’t claim tax benefits because they either do not pay tuition or do not file taxes. Just over 63 percent of these families do not have expenses like tuition and fees to offset and about 31 percent of those were ineligible because they did not file federal income taxes.

According to New America, many of the students in these groups attend community colleges and most earn less than $30,000 per year. In addition, Pell Grants offset eligibility for tax benefits “nearly dollar for dollar” for certain low-income families, the report said. 

Students who attend higher cost institutions – including for-profit and not-for-profit private schools -- are also able to claim a larger tax benefit “because schools with lower prices like community colleges, tend to have more students whose tuition expenses are largely, if not fully, covered through other aid such as grants and tuition discounts,” according to the report. Undergraduates and families with the highest incomes were also eligible for the largest average benefits, with an average benefit of $1,900 for filers who earn more than $106,000. In comparison, families who earn less than $30,000 were eligible, on average, for nearly $800 less.

New America also found that while the American Opportunity Tax Credit (AOTC) – a $4,000 tuition tax benefit scheduled to sunset after tax year 2017 – nearly doubled the average benefits for eligible students, it “did not meaningfully add to the number of students eligible for a tax benefit,” despite efforts from policymakers to make the benefit partially refundable.

In fact, the AOTC’s refundable feature primarily benefitted undergraduates attending for-profit institutions, who only make up about 12.9 percent of undergraduate enrollment. The average refundable portion for eligible undergrads at for-profit institutions was $542, significantly more than the $91 students at community colleges see.

If the AOTC is allowed to expire as scheduled, “the share of undergraduates eligible for a benefit barely changes, although the average benefit would be much smaller,” New America said in the report. Should the tax credit be extended, policymakers “may have new impetus to let the tuition and fees deduction … expire,” the report added. New America noted that only 1.9 percent of undergraduates benefit from the tuition and fees deduction, which is “far fewer” than policymakers may realize.

Publication Date: 11/3/2015

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