Student Aid and College Tax Credits

Many Americans qualify for federal education tax breaks but don't use them, U.S. study finds.
August 30, 2005

Hundreds of thousands of Americans appear to be eligible for federal higher education tax breaks but are not taking advantage of them, according to a federal study released Monday.

The study was prepared by the Government Accountability Office, Congress's investigative arm. It is mostly a description and side by side comparison of federal grant and loan programs with the set of tax credits, deductions and other incentives that the federal government enacted during the last decade or so. 

Many of the report's conclusions -- that federal grant and loan programs tend to help students from lower-income families, that applying for and receiving tax credits requires more effort and work on the part of families than getting other forms of financial aid does -- are fairly obvious.

But the report contains a few nuggets of information and offers a few conclusions that may interest college officials and policy makers. They include:

  • More Americans (9.6 million) claimed a tax credit or tax deduction in 2002 than received a federal grant or loan through one of the programs governed by Title IV of the Higher Education Act (8.4 million), the GAO found. In general, the recipients of the tax credits were from higher income families than the recipients of federal grants and loans, although a majority of tax filers claiming the Hope and Lifetime Learning tax credits had average family incomes under $40,000 a year.
  • About 77 percent of the tax filers whose returns the GAO examined were apparently eligible for one of the three federal tax breaks for college expenses. But 27 percent of those, representing about 374,000 taxpayers, failed to claim one of the tax preferences, the GAO found. The average amount these taxpayers would have been due was $169, but 10 percent of them could have cut their tax payments by at least $500 each.
  • The agency said the "suboptimal use" of the tax credits may be blamed on the complexity of the tax preferences, which "demand a particularly large investment of knowledge and skill on the part of students and families or expert assistance purchased by those with the means to do so."
  • "Little is known about the effectiveness of federal grant and loan programs and education-related tax preferences in promoting attendance, choice, and persistence," the GAO reported, although the accountability office said that officials from the Education Department noted that its new postsecondary research center will sponsor such research.

The report concluded: "It is important that information about the effectiveness of both tax preferences and Title IV federal grant and loan programs be developed so that decision makers in Congress and in the executive branch can make efficient use of limited federal resources and reexamine, if necessary, the tools used to help students and families pay for postsecondary education."


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