Postsecondary Education
Multiple Tax Preferences and Title IV Student Aid Programs Create a Complex Education Financing Environment Gao ID: GAO-07-262T December 5, 2006Federal assistance helps students and families pay for postsecondary education through several policy tools--grant and loan programs authorized by title IV of the Higher Education Act of 1965 and more recently enacted tax preferences. This testimony summarizes and updates our 2005 report on (1) how title IV assistance compares to that provided through the tax code (2) the extent to which tax filers effectively use postsecondary tax preferences, and (3) what is known about the effectiveness of federal assistance. This hearing is an opportunity to consider whether any changes should be made in the government's overall strategy for providing such assistance or to the individual programs and tax provisions that provide the assistance. This statement is based on previously published GAO work and reviews of relevant literature.
Title IV student aid and tax preferences provide assistance to a wide range of students and families in different ways. While both help students meet current expenses, tax preferences also assist students and families with saving for and repaying postsecondary costs. Both serve students and families with a range of incomes, but some forms of title IV aid--grant aid, in particular--provide assistance to those whose incomes are lower, on average, than is the case with tax preferences. Tax preferences require more responsibility on the part of students and families than title IV aid because taxpayers must identify applicable tax preferences, understand complex rules concerning their use, and correctly calculate and claim credits or deductions. While the tax preferences are a newer policy tool, the number of tax filers using them has grown quickly, surpassing the number of students aided under title IV in 2002. Some tax filers do not appear to make optimal education-related tax decisions. For example, among the limited number of 2002 tax returns available for our analysis, 27 percent of eligible tax filers did not claim either the tuition deduction or a tax credit. In so doing, these tax filers failed to reduce their tax liability by $169, on average, and 10 percent of these filers could have reduced their tax liability by over $500. One explanation for these taxpayers' choices may be the complexity of postsecondary tax provisions, which experts have commonly identified as difficult for tax filers to use. Little is known about the effectiveness of title IV aid or tax preferences in promoting, for example, postsecondary attendance or school choice, in part because of research data and methodological challenges. As a result, policymakers do not have information that would allow them to make the most efficient use of limited federal resources to help students and families.
GAO-07-262T, Postsecondary Education: Multiple Tax Preferences and Title IV Student Aid Programs Create a Complex Education Financing Environment
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Testimony:
Before the Committee on Finance, U.S. Senate:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 10:00 a.m. EST:
Tuesday, December 5, 2006:
Postsecondary Education:
Multiple Tax Preferences and Title IV Student Aid Programs Create a
Complex Education Financing Environment:
Statement of Michael Brostek:
Director, Tax Issues:
Strategic Issues Team:
George A. Scott:
Acting Director:
Education, Workforce, and Income Security Issues:
GAO-07-262T:
GAO Highlights:
Highlights of GAO-07-262T, testimony before the Committee on Finance,
U.S. Senate
Why GAO Did This Study:
Federal assistance helps students and families pay for postsecondary
education through several policy tools”grant and loan programs
authorized by title IV of the Higher Education Act of 1965 and more
recently enacted tax preferences. This testimony summarizes and updates
our 2005 report on (1) how title IV assistance compares to that
provided through the tax code (2) the extent to which tax filers
effectively use postsecondary tax preferences, and (3) what is known
about the effectiveness of federal assistance.
This hearing is an opportunity to consider whether any changes should
be made in the government‘s overall strategy for providing such
assistance or to the individual programs and tax provisions that
provide the assistance. This statement is based on previously published
GAO work and reviews of relevant literature.
What GAO Found:
Title IV student aid and tax preferences provide assistance to a wide
range of students and families in different ways. While both help
students meet current expenses, tax preferences also assist students
and families with saving for and repaying postsecondary costs. Both
serve students and families with a range of incomes, but some forms of
title IV aid”grant aid, in particular”provide assistance to those whose
incomes are lower, on average, than is the case with tax preferences.
Tax preferences require more responsibility on the part of students and
families than title IV aid because taxpayers must identify applicable
tax preferences, understand complex rules concerning their use, and
correctly calculate and claim credits or deductions. While the tax
preferences are a newer policy tool, the number of tax filers using
them has grown quickly, surpassing the number of students aided under
title IV in 2002.
Figure: Recipients of Title IV Assistance and Tax Filers Claiming an
Education Tax Credit or Tuition Deduction, 1997-2004:
[See PDF for Image]
Source: GAO analysis of Budget of the United States Government and
Internal Revenue Service data.
[End of Figure]
Some tax filers do not appear to make optimal education-related tax
decisions. For example, among the limited number of 2002 tax returns
available for our analysis, 27 percent of eligible tax filers did not
claim either the tuition deduction or a tax credit. In so doing, these
tax filers failed to reduce their tax liability by $169, on average,
and 10 percent of these filers could have reduced their tax liability
by over $500. One explanation for these taxpayers‘ choices may be the
complexity of postsecondary tax provisions, which experts have commonly
identified as difficult for tax filers to use.
Little is known about the effectiveness of title IV aid or tax
preferences in promoting, for example, postsecondary attendance or
school choice, in part because of research data and methodological
challenges. As a result, policymakers do not have information that
would allow them to make the most efficient use of limited federal
resources to help students and families.
What GAO Recommends:
GAO does not make new recommendations in this testimony. In 2002, GAO
recommended, among other things, that the Department of Education
sponsor research into key aspects of effectiveness of title IV
programs. In April 2006, Education announced it would make multiyear
grants available starting in 2007 to conduct research on topics
addressed in this statement.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-262T].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Michael Brostek at (202)
512-9039 or George Scott at (202) 512-7215.
[End of Section]
Chairman Grassley, Senator Baucus, and Members of the Committee:
We are pleased to be here this morning to discuss the federal
government's efforts to financially support attendance at postsecondary
education institutions. American higher education has long been crucial
to the development of our nation's cultural, social, and economic
capital. At the dawn of the 21st Century, changing workforce
demographics, a more integrated global economy, and numerous
technological advances are placing new demands on our colleges and
universities. For the United States to remain competitive in the rising
global knowledge economy, its citizens will need both the ways and
means to endow themselves with the tools necessary for the task.
However, rising tuition has become a disconcertingly fixed feature of
our higher education system, and in recent months concerns about
postsecondary access and affordability have received notable attention
through the findings of the Secretary of Education's Commission on the
Future of Higher Education and the Comptroller General's recent forum
on the Global Competitiveness of the Nation's Higher Education System.
This hearing is an opportunity to consider whether any changes should
be made in the government's overall strategy and the individual
programs and tax provisions that provide financial assistance to
students and families saving or paying for postsecondary education or
repaying student loans. This opportunity to review the programs and tax
provisions is important for several reasons. The fact that we face
large and growing structural deficits in the future--primarily driven
by demographics and rising health care costs--emphasizes the need to
consider how the government allocates resources. In addition, GAO has
noted that fundamental reexamination of government programs, policies,
and priorities is necessary to assure that they match the needs of the
21st Century. GAO has identified the coordination of student aid
programs[Footnote 1] and the effectiveness of those programs[Footnote
2] both as key topics needing congressional oversight.
My statement today will focus on three issues that emerged in our 2005
report on student grant and loan assistance made available under Title
IV of the Higher Education Act and postsecondary education tax
preferences.[Footnote 3]
* Postsecondary student financial assistance provided through programs
authorized under title IV and the tax code differ in three key ways.
First, title IV grant and loan programs traditionally provide aid to
students and families while students are in college, whereas tax
preferences help both during the college years as well as before and
after college by assisting with saving for or repaying college costs.
Additionally, while student aid programs and tax preferences serve
students and families across a wide range of income groups, some title
IV programs--particularly the Pell grant program--provide much of their
financial assistance to students and families whose incomes are lower,
on average, than students and families who receive student loans, tax
credits, and deductions, or who make use of tax-exempt saving vehicles.
Last, students and families have more responsibility for appropriately
using and thereby obtaining the benefits of tax preferences than they
do with title IV aid.
* Second, postsecondary tax preferences are difficult for families to
understand and use correctly. Perhaps due to the complexity of the tax
provisions, hundreds of thousands of taxpayers fail to claim tax
preferences to which they are entitled or do not claim the tax
preference that would be most advantageous to them.
* Finally, we found that Congress has received little evidence
concerning the effectiveness of assistance provided under title IV or
through tax preferences, including whether such assistance increases
attendance or choice.
Our statement today is drawn from previous GAO reports and testimonies
covering postsecondary title IV programs and tax preferences, which
were done in accordance with generally accepted government auditing
standards, as well as reviews of relevant literature.
Background:
Financial assistance to help students and families pay for
postsecondary education has been provided for many years through
student grant and loan programs authorized under title IV of the Higher
Education Act of 1965, as amended. Examples of these programs include
Pell Grants for low-income students, PLUS loans to parents and graduate
students, and Stafford loans.[Footnote 4] Much of this aid has been
provided on the basis of the difference between a student's cost of
attendance and an estimate of the ability of the student and the
student's family to pay these costs, called the expected family
contribution (EFC). The EFC is calculated based on information provided
by students and parents on the Free Application for Federal Student Aid
(FAFSA). Statutory definitions establish the criteria that students
must meet to be considered independent of their parents for the purpose
of financial aid, and statutory formulas establish the share of income
and assets that are expected to be available for the student's
education.[Footnote 5] In fiscal year 2005, the Department of Education
made approximately $14 billion in grants, and title IV lending programs
made available another $57 billion in loan assistance. Title IV also
authorizes programs funded by the federal government and administered
by participating higher education institutions, including the
Supplemental Educational Opportunity Grant (SEOG), Perkins loans, and
federal work-study aid, collectively known as campus-based aid. Table 1
provides brief descriptions of the title IV programs that we reviewed
in our 2005 report and includes two programs--Academic Competitiveness
Grants and National Science and Mathematics Access to Retain Talent
Grants--that were created since that report was issued.[Footnote 6]
Table 1: Description of Federal Student Aid Programs Authorized under
Title IV of the Higher Education Act:
Title IV student aid program: Pell Grant;
Program description: Grants are awarded on the basis of the difference
between the EFC and the maximum Pell award or the student's cost of
attendance, whichever is less. Grants are not available for
postgraduate study.
Title IV student aid program: Supplemental Educational Opportunity
Grant;
Program description: Schools administer grant funds, which are awarded
to undergraduates with exceptional financial need;
priority is given to Pell Grant recipients. Institutions must match a
portion (at least 25 percent) of the federal funds allocated.
Title IV student aid program: Academic Competitiveness Grant;
Program description: Available to first-and second-year students who
have completed a rigorous course of study in high school. To be
eligible, students must also be eligible to receive a Pell Grant.
Second-year students must also maintain at least a 3.0 grade-point
average.
Title IV student aid program: National Science and Mathematics Access
to Retain Talent (SMART) Grant;
Program description: Available to third-and fourth-year students
pursuing a major in mathematics, science, or a foreign language deemed
critical to national security. To be eligible, students must also be
eligible to receive a Pell Grant and maintain at least a 3.0 grade-
point average in their major.
Title IV student aid program: Federal Work-Study;
Program description: Schools administer funds, which are used to
provide part-time jobs for undergraduate and graduate students with
financial need. Participating schools or nonprofit employers generally
contribute at least 25 percent of student's earnings (50 percent in the
case of for-profit employers).
Title IV student aid program: Federal Perkins Loan;
Program description: Schools administer funds, comprised of federal
capital contributions and school matching funds (at least 1/3 of
federal contributions), to make low-interest (5 percent) loans for both
undergraduate and graduate students with exceptional financial need.
Borrower repayments are owed to the school.
Title IV student aid program: Subsidized Federal Family Education Loan
(FFEL) or Direct Stafford Loan;
Program description: Loans made on the basis of financial need to
undergraduate and graduate students who are enrolled at least half-
time. The federal government pays the interest costs on subsidized
loans while the student is in school, for the first 6 months after the
student leaves school, and during a period of deferment.
Title IV student aid program: Unsubsidized FFEL or Direct Stafford
Loan;
Program description: Loans made to undergraduate and graduate students
who are enrolled at least half-time. Unlike subsidized loans, the
federal government does not pay the interest costs on unsubsidized
loans while the student is in school, for the first 6 months after the
student leaves school, and during a period of deferment. Otherwise, the
terms and conditions of unsubsidized loans are the same as those for
subsidized loans.
Title IV student aid program: FFEL or Direct PLUS Loan;
Program description: Loans made to parents on behalf of dependent
undergraduate students enrolled at least half-time. The Higher
Education Reconciliation Act of 2005 makes both graduate and
professional students eligible for these loans as well. Borrowers are
subject to a credit check for adverse credit history and may be denied
a loan.
Source: GAO analysis of applicable laws and regulations.
[End of table]
Postsecondary assistance also has been provided through a range of tax
preferences,[Footnote 7] including postsecondary tax credits, tax
deductions, and tax-exempt savings programs. For example, the Taxpayer
Relief Act of 1997 allows eligible tax filers to reduce their tax
liability by receiving, for tax year 2006, up to a $1,650 Hope tax
credit or up to a $2,000 Lifetime Learning tax credit for tuition and
course-related fees paid for a single student. The fiscal year 2005
federal revenue loss estimate of the postsecondary tax preferences that
we reviewed was $9.15 billion dollars. Tax preferences discussed as
part of our 2005 report include the following:[Footnote 8]
* Lifetime Learning Credit--income-based tax credit claimed by tax
filers on behalf of students enrolled in one or more postsecondary
education courses.
* Hope Credit--income-based tax credit claimed by tax filers on behalf
of students enrolled at least half-time in an eligible program of study
and who are in their first 2 years of postsecondary education.
* Student Loan Interest Deduction--income-based tax deduction claimed
by tax filers on behalf of students who took out qualified student
loans while enrolled at least half-time.
* Tuition and Fees Deduction--income-based tax deduction claimed by tax
filers on behalf of students who are enrolled in one or more
postsecondary education courses and have either a high school diploma
or a General Educational Development (GED) credential.[Footnote 9]
* Section 529 Qualified Tuition Programs--College Savings Programs and
Prepaid Tuition Programs--non-income-based programs that provide
favorable tax treatment to investments and distributions used to pay
the expenses of future or current postsecondary students.
* Coverdell Education Savings Accounts--income-based savings program
providing favorable tax treatment to investments and distributions used
to pay the expenses of future or current elementary, secondary, or
postsecondary students.
As figure 1 demonstrates, the use of tax preferences has increased
since 1997, both in absolute terms and relative to the use of title IV
aid.
Figure 1: Recipients of Title IV Assistance and Tax Filers Claiming an
Education Tax Credit or Tuition Deduction, 1997-2004:
[See PDF for image]
Source: GAO analysis of Budget of the United States Government and
Internal Revenue Service data.
Note: See app. IV for confidence intervals associated with these
estimates.
[End of figure]
Tax Preferences Differ from Title IV Assistance in Timing,
Distribution, and Students' and Families' Responsibility for Obtaining
Benefits:
Postsecondary student financial assistance provided through programs
authorized under title IV of the Higher Education Act and the tax code
differ in timing of assistance, the populations that receive
assistance, and the responsibility of students and families to obtain
and use the assistance.
Title IV and Tax Programs Differ in Benefit Timing:
Title IV programs and education-related tax preferences differ
significantly in when eligibility is established and in the timing of
the assistance they provide. Title IV programs generally provide
benefits to students while they are in school. Education-related tax
preferences, on the other hand, (1) encourage saving for college
through tax-exempt saving, (2) assist enrolled students and their
families in meeting the current costs of postsecondary education
through credits and tuition deductions, and (3) assist students and
families repaying the costs of past postsecondary education through a
tax deduction for student loan interest paid.[Footnote 10]
Beneficiaries of Title IV Programs and Tax Preferences Differ:
While title IV programs and tax preferences assist many students and
families, program and tax rules affect eligibility for such assistance.
These rules also affect the distribution of title IV aid and the
assistance provided through tax preferences. As a result, the
beneficiaries of title IV programs and tax preferences differ.
Title IV programs generally have rules for calculating grant and loan
assistance that give different consideration to family income, assets,
and college costs in the award of financial aid.[Footnote 11] For
example, Pell Grant awards are calculated by subtracting the student's
EFC from the maximum Pell Grant award ($4,050 in academic year 2006-
2007), or the student's cost of attendance, whichever is less. Because
the EFC is closely linked to family income and circumstances (such as
the size of the family and the number of dependents in school), and
modest EFCs are required for Pell eligibility, Pell awards are made
primarily to families with modest incomes. In contrast, the maximum
unsubsidized Stafford loan amount is calculated without direct
consideration of financial need: students may borrow up to their cost
of attendance, minus the estimated financial assistance they will
receive.[Footnote 12] As table 2 shows, 92 percent of Pell financial
support in 2003-2004 was provided to dependent students whose family
incomes were $40,000 or below, and the 38 percent of Pell recipients in
the lowest income category ($20,000 or below) received a higher share
(48 percent) of Pell financial support.
Table 2: Percentage of Aid Recipients and Dollars of Aid by Income
Category for Dependent Students Served by Selected Title IV Programs,
2003-2004:
Program: Pell Grant;
Dependent students: Recipients;
$0-20,000: 38;
$20,001-40,000: 47;
$40,001-60,000: 14;
$60,001-80,000: 2;
$80,001- 100,000: 0;
More than $100,000: 0.
Program: Pell Grant;
Dependent students: Dollars;
$0-20,000: 48;
$20,001-40,000: 44;
$40,001-60,000: 8;
$60,001-80,000: 1;
$80,001-100,000: 0;
More than $100,000: 0.
Program: Stafford Subsidized Loan;
Dependent students: Recipients;
$0- 20,000: 16;
$20,001-40,000: 28;
$40,001-60,000: 23;
$60,001-80,000: 17;
$80,001-100,000: 9;
More than $100,000: 7.
Program: Stafford Subsidized Loan;
Dependent students: Dollars;
$0-20,000: 16;
$20,001-40,000: 28;
$40,001-60,000: 24;
$60,001-80,000: 17;
$80,001-100,000: 9;
More than $100,000: 6.
Program: Stafford Unsubsidized Loan;
Dependent students: Recipients;
$0-20,000: 7;
$20,001-40,000: 14;
$40,001-60,000: 14;
$60,001-80,000: 19;
$80,001-100,000: 18;
More than $100,000: 28.
Program: Stafford Unsubsidized Loan;
Dependent students: Dollars;
$0-20,000: 7;
$20,001-40,000: 12;
$40,001- 60,000: 12;
$60,001-80,000: 18;
$80,001-100,000: 19;
More than $100,000: 32.
Source: GAO analysis of 2003-2004 NPSAS data.
Note: See app. IV for confidence intervals associated with these
estimates. Numbers in rows may not add to 100 percent because of
rounding.
[End of table]
Because independent students generally have lower incomes and
accumulated savings than dependent students and their families,
patterns of program participation and dollar distribution differ.
Participation of independent students in Pell, subsidized Stafford, and
unsubsidized Stafford loan programs is heavily concentrated among those
with incomes of $40,000 or less: from 74 percent (unsubsidized
Stafford) to 95 percent (Pell) of program participants have incomes
below this level. As shown in table 3, the distribution of award
dollars follows a nearly identical pattern.
Table 3: Percentage of Aid Recipients and Dollars of Aid by Income
Category for Independent Students Served by Selected Title IV Programs,
2003-2004:
Program: Pell Grant;
Independent students: Recipients;
$0-20,000: 67;
$20,001-40,000: 28;
$40,001-60,000: 5;
$60,001-80,000: 0;
$80,001- 100,000: 0;
More than $100,000: 0.
Program: Pell Grant;
Independent students: Dollars;
$0- 20,000: 73;
$20,001-40,000: 25;
$40,001-60,000: 3;
$60,001-80,000: 0;
$80,001-100,000: 0;
More than $100,000: 0.
Program: Stafford Subsidized Loan;
Independent students: Recipients;
$0-20,000: 51;
$20,001-40,000: 29;
$40,001-60,000: 12;
$60,001-80,000: 5;
$80,001-100,000: 2;
More than $100,000: 1.
Program: Stafford Subsidized Loan;
Independent students: Dollars;
$0- 20,000: 52;
$20,001-40,000: 28;
$40,001-60,000: 12;
$60,001-80,000: 5;
$80,001-100,000: 2;
More than $100,000: 2.
Program: Stafford Unsubsidized Loan;
Independent students: Recipients;
$0-20,000: 46;
$20,001-40,000: 28;
$40,001-60,000: 14;
$60,001-80,000: 6;
$80,001-100,000: 3;
More than $100,000: 3.
Program: Stafford Unsubsidized Loan;
Independent students: Dollars;
$0-20,000: 46;
$20,001-40,000: 24;
$40,001-60,000: 13;
$60,001-80,000: 7;
$80,001-100,000: 3;
More than $100,000: 5.
Source: GAO analysis of 2003-2004 NPSAS data.
Notes: See app. IV for confidence intervals associated with these
estimates.
Numbers in rows may not add to 100 percent because of rounding.
[End of table]
Many education-related tax preferences have both de facto lower limits
created by the need to have a positive tax liability to obtain their
benefit and income ceilings on who may use them. For example, the Hope
and Lifetime Learning tax credits require that tax filers have a
positive tax liability to use them and income-related phase-out
provisions in 2005 that began at $45,000 and $90,000 for single and
joint filers, respectively. Furthermore, tax-exempt savings are more
advantageous to families with higher incomes and tax liabilities
because, among other reasons, these families hold greater assets to
invest in these tax preferences and have a higher marginal tax rate,
and thus benefit the most from the use of these tax preferences. Table
4 shows the income categories of tax filers claiming the three tax
preferences available to current students and/or their families along
with the reduced tax liabilities from those preferences in 2004.
Table 4: Percentage of Tax Filers Claiming Hope and Lifetime Learning
Credits and Tuition Deduction and Tax Preference Dollars by Income
Category, Tax Year 2004:
Type of aid: Hope Credit;
Tax filers;
$0-20,000: 18;
$20,001-40,000: 34;
$40,001-60,000: 19;
$60,001-80,000: 16;
$80,001-100,000: 12;
More than $100,000: 2.
Type of aid: Hope Credit; Dollars;
$0-20,000: 16;
$20,001-40,000: 33;
$40,001-60,000: 20;
$60,001-80,000: 16;
$80,001-100,000: 12;
More than $100,000: 2.
Type of aid: Lifetime Learning Credit;
Tax filers;
$0-20,000: 17;
$20,001-40,000: 32;
$40,001-60,000: 20;
$60,001-80,000: 19;
$80,001- 100,000: 10;
More than $100,000: 2.
Type of aid: Lifetime Learning Credit;
Dollars;
$0-20,000: 15;
$20,001-40,000: 30;
$40,001-60,000: 20;
$60,001-80,000: 20;
$80,001-100,000: 13;
More than $100,000: 2.
Type of aid: Tuition Deduction;
Tax filers;
$0-20,000: 24;
$20,001- 40,000: 13;
$40,001-60,000: 15;
$60,001-80,000: 10;
$80,001-100,000: 13;
More than $100,000: 25.
Type of aid: Tuition Deduction;
Dollars;
$0-20,000: 11;
$20,001-40,000: 7;
$40,001-60,000: 18;
$60,001- 80,000: 12;
$80,001-100,000: 15;
More than $100,000: 37.
Source: GAO analysis of 2004 SOI data.
Notes: See app. IV for confidence intervals associated with these
estimates.
Numbers in rows may not add to 100 percent because of rounding.
[End of table]
Students and Families Have More Responsibility for Obtaining Benefits
of Tax Preferences in Comparison to Title IV Aid:
The federal government and postsecondary institutions have significant
responsibilities in assisting students and families in obtaining
assistance provided under title IV programs but only minor roles with
respect to tax filers' use of education-related tax preferences. To
obtain federal student aid, applicants must first complete the FAFSA, a
form which required students to complete up to 100 fields in 2006-2007.
Submitting a completed FAFSA to the Department of Education largely
concludes students' and families' responsibility in obtaining aid. The
Department of Education is responsible for calculating students' and
families' EFC on the basis of the FAFSA, and students' educational
institutions are responsible for determining aid eligibility and the
amounts and packaging of awards.
In contrast, higher education tax preferences require students and
families to take more responsibility. Although postsecondary
institutions provide students and IRS with information about higher
education attendance, they have no other responsibilities for higher
education tax credits, deductions, or tax-preferred savings. The
federal government's primary role with respect to higher education tax
preferences is the promulgation of rules; the provision of guidance to
tax filers; and the processing of tax returns, including some checks on
the accuracy of items reported on those tax returns. The responsibility
for selecting among and properly using tax preferences rests with tax
filers. Unlike title IV programs, users must understand the rules,
identify applicable tax preferences, understand how these tax
preferences interact with one another and with federal student aid,
keep records sufficient to support their tax filing, and correctly
claim the credit or deduction on their return.
Some Tax Filers May Not Effectively Use Postsecondary Tax Preferences,
Possibly Due to Complexity:
According to our analysis of IRS data on the use of Hope and Lifetime
tax credits and the tuition deduction in our 2005 report, some tax
filers appear to make less-than-optimal choices among them.[Footnote
13] The apparent suboptimal use of postsecondary tax preferences may
arise, in part, from the complexity of these provisions.
Some Tax Filers Appear to Make Suboptimal Choices:
Making poor choices among tax preferences for postsecondary education
may be costly to tax filers. For example, families may strand assets in
a tax-exempt savings vehicle and incur tax penalties on their
distribution if their child chooses not to go to college. They may also
fail to minimize their federal income tax liability by claiming a tax
credit or deduction that yields less of a reduction in taxes than a
different tax preference or by failing to claim any of their available
tax preferences. For example, if a married couple filing jointly with
one dependent in his/her first 2 years of college had an adjusted gross
income of $50,000, qualified expenses of $10,000 in 2006, and tax
liability greater than $2,000, their tax liability would be reduced by
$2,000 if they claimed the Lifetime Learning credit but only $1,650 if
they claimed the Hope credit.
In our 2005 report, we found that some people who appear to be eligible
for tax credits and/or the tuition deduction did not claim them. The
files of about 77 percent of the tax year 2002 tax returns that we were
able to review were apparently eligible to claim one or more of the
three tax preferences. However, about 27 percent of those returns,
representing about 374,000 tax filers, failed to use the any of them.
The amount by which these tax filers failed to reduce their tax
averaged $169; 10 percent of this group could have reduced their tax
liabilities by over $500.[Footnote 14]
Suboptimal choices were not limited to tax filers who prepared their
own tax returns. A possible indicator of the difficulty people face in
understanding education-related tax preferences is how often the
suboptimal choices we identified were found on tax returns prepared by
paid tax preparers. We estimate that about 50 percent of the returns we
found that appear to have failed to optimally reduce the tax filer's
tax liability were prepared by paid tax preparers. Generalized to the
population of tax returns we were able to review, returns prepared by
paid tax preparers represent about 223,000 of the approximately 447,000
suboptimal choices we found. Our April 2006 study of paid tax preparers
corroborated the problem of confusion over which of the tax preferences
to claim.[Footnote 15] Of the 9 undercover investigation visits we made
to paid preparers with a taxpayer with a dependent college student, 3
preparers did not claim the credit most advantageous to the taxpayer
and thereby cost these taxpayers hundreds of dollars in refunds. In our
investigative scenario, the expenses and the year in school made the
Hope education credit far more advantageous to the taxpayer than either
the tuition and fees deduction or the Lifetime Learning credit.
The Suboptimal Use of Postsecondary Tax Preferences May Result from
Their Complexity:
The apparently suboptimal use of postsecondary tax preferences may
arise, in part, because of the complexity of using these provisions.
Tax policy analysts have frequently identified postsecondary tax
preferences as a set of tax provisions that 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. They
suggest that this complexity arises from multiple postsecondary tax
preferences with similar purposes, from key definitions that vary
across these provisions, and from rules that coordinate the use of
multiple tax provisions. Twelve tax preferences are outlined in the IRS
publication, Tax Benefits for Education, for use in preparing 2005
returns (the most recent publication available). The publication
includes 4 different tax preferences for educational saving. Three of
these preferences--Coverdell Education Savings Accounts, Qualified
Tuition Programs, and U.S. education savings bonds--differ across more
than a dozen dimensions, including the tax penalty that occurs when
account balances are not used for qualified higher education expenses,
who may be an eligible beneficiary, annual contribution limits, and
other features.
In addition to learning about, comparing, and selecting tax
preferences, filers who wish to make optimal use of multiple tax
preferences must understand how the use of one tax preference affects
the use of others. The use of multiple education-related tax
preferences is coordinated through rules that prohibit the application
of the same qualified higher education expenses for the same student to
more than one education-related tax preference, sometimes referred to
as "anti-double-dipping rules." These rules are important because they
prevent tax filers from underreporting their tax liability.
Nonetheless, anti-double-dipping rules are potentially difficult for
tax filers to understand and apply, and misunderstanding them may have
consequences for a filer's tax liability.[Footnote 16]
Research on Effectiveness of Federal Postsecondary Assistance Is
Incomplete:
Little is known about the effectiveness of federal grant and loan
programs and education-related tax preferences in promoting attendance,
choice, and the likelihood that students either earn a degree or
continue their education (referred to as persistence). Many federal aid
programs and tax preferences have not been studied, and for those that
have been studied, important aspects of their effectiveness remain
unexamined. In our 2005 report, we found no research on any aspect of
effectiveness for several major title IV federal postsecondary programs
and tax preferences. For example, no research had examined the effects
of federal postsecondary education tax credits on students' persistence
in their studies or on the type of postsecondary institution they
choose to attend. Gaps in the research-based evidence of federal
postsecondary program effectiveness may be due, in part, to data and
methodological challenges that have proven difficult to overcome. The
relative newness of most of the tax preferences also presents
challenges because relevant data are just now becoming available.
In 2002, we recommended that Education sponsor research into key
aspects of effectiveness of title IV programs, that Education and the
Department of the Treasury collaborate on such research into the
relative effectiveness of title IV programs and tax preferences, and
that the Secretaries of Education and Treasury collaborate in studying
the combined effects of tax preferences and title IV aid.[Footnote 17]
In April 2006, Education's Institute for Education Sciences (IES)
issued a Request for Applications to conduct research on, among other
things, "evaluating the efficacy of programs, practices, or policies
that are intended to improve access to, persistence in, or completion
of postsecondary education." Multiyear projects funded under this
subtopic are expected to begin in July 2007.
As we noted in our 2002 report, research into the effectiveness of
different forms of postsecondary education assistance is
important.[Footnote 18] Without such information federal policymakers
cannot make fact-based decisions about how to build on successful
programs and make necessary changes to improve less effective programs.
The budget deficit and other major fiscal challenges facing the nation
necessitate rethinking the base of existing federal spending and tax
programs, policies, and activities by reviewing their results and
testing their continued relevance and relative priority for a changing
society.[Footnote 19]
Concluding Observations:
In light of the long-term fiscal challenge this nation faces and the
need to make hard decisions about how the federal government allocates
resources, this hearing provides an opportunity to continue a
discussion about how the federal government can best help students and
their families pay for postsecondary education. Some questions that
Congress should consider during this dialog include:
* Should the federal government consolidate postsecondary education tax
provisions to make them easier for the public to use and understand?
* Given its limited resources, should the government further target
title IV programs and tax provisions based on need or other factors?
* How can Congress best evaluate the effectiveness and efficiency of
postsecondary education aid provided through the tax code?
* Can tax preferences and title IV programs be better coordinated to
maximize their effectiveness?
Mr. Chairman and Members of the Committee, this concludes our
statement. We welcome any questions you have at this time.
Staff Contacts and Acknowledgments:
For further information regarding this testimony, please contact
Michael Brostek at (202) 512-9039 or brostekm@gao.gov or George Scott
at (202) 512-7215 or scottg@gao.gov. Individuals making contributions
to this testimony include David Lewis, Assistant Director;
Jeff Appel, Assistant Director; Shirley Jones, Sheila McCoy, John
Mingus, Jeff Procak, Carlo Salerno, Andrew Stephens, and Michael Volpe.
[End of section]
Appendix I: Postsecondary Aid Programs:
The federal government helps students and families save, pay for, and
repay the costs of postsecondary education through grant and loan
programs authorized under title IV of the Higher Education Act of 1965,
and through tax preferences--reductions in federal tax liabilities that
result from preferential provisions in the tax code, such as exemptions
and exclusions from taxation, deductions, credits, deferrals, and
preferential tax rates.
Federal Grant and Loan Assistance to Postsecondary Students:
Assistance provided under title IV programs include Pell Grants for low-
income students, the newly established Academic Competitiveness and
National Science and Mathematics Access to Retain Talent Grants, PLUS
loans, which parents as well as graduate and professional students may
apply for, and Stafford loans.[Footnote 20] While each of the three
grant types reduces the price paid by the student, student loans help
to finance the remaining costs and are to be repaid according to
varying terms. Stafford loans may be either subsidized or unsubsidized.
The federal government pays the interest cost on subsidized loans while
the student is in school, and during a 6-month period known as the
grace period, after the student leaves school. For unsubsidized loans,
students are responsible for all interest costs.[Footnote 21] Stafford
and PLUS loans are provided to students through both the FFEL program
and the William D. Ford Direct Loan Program (FDLP). The federal
government's role in financing and administering these two loan
programs differs significantly. Under the FFEL program, private
lenders, such as banks, provide loan capital and make loans, and the
federal government guarantees FFEL lenders a minimum yield on the loans
they make and repayment if borrowers default. Under FDLP, federal funds
are used as loan capital and loans are provided through participating
schools. The Department of Education and its private-sector contractors
jointly administer the program. Title IV also authorizes programs
funded by the federal government and administered by participating
higher education institutions, including the Supplemental Educational
Opportunity Grant (SEOG), Perkins loans, and federal work-study aid,
collectively known as campus-based aid.
To receive title IV aid, students (along with parents, in the case of
dependent students) must complete a Free Application for Federal
Student Aid form. Information from the FAFSA, particularly income and
asset information, is used to determine the amount of money--called the
expected family contribution--that the student and/or family is
expected to contribute to the student's education. Statutory
definitions establish the criteria that students must meet to be
considered independent of their parents for the purpose of financial
aid, and statutory formulas establish the share of income and assets
that are expected to be available for the student's education. Once the
EFC is established, it is compared with the cost of attendance at the
institution chosen by the student. The cost of attendance comprises
tuition and fees; room and board; books and supplies; transportation;
miscellaneous personal expenses; and, for some students, additional
expenses.[Footnote 22] If the EFC is greater than the cost of
attendance, the student is not considered to have financial need,
according to the federal aid methodology. If the cost of attendance is
greater than the EFC, then the student is considered to have financial
need. Title IV assistance that is made on the basis of the calculated
need of aid applicants is called need-based aid. Key characteristics of
title IV programs are summarized in table 5 below.
Table 5: Description of Federal Student Aid Programs Authorized under
Title IV of the Higher Education Act:
Title IV student aid program: Pell Grant;
Program details: Grants are awarded on the basis of the difference
between the EFC and the maximum Pell award or the student's cost of
attendance, whichever is less. Grants are not available for
postgraduate study;
Annual award amounts: $400 to $4,050 for school year 2006-2007;
Number and characteristics of beneficiaries: Dependent students: About
2.1 million grants were awarded in school year 2003-2004, totaling $5.3
billion. The average grant award was $2,573;
the median income of recipients was $24,576;
Independent students: About 3 million grants were awarded in school
year 2003-2004, totaling $7.4 billion. The average grant award was
$2,436;
the median income of recipients was $12,925.
Title IV student aid program: Supplemental Educational Opportunity
Grant;
Program details: Schools administer grant funds, which are awarded to
undergraduates with exceptional financial need;
priority is given to Pell Grant recipients. Institutions must match a
portion (at least 25 percent) of the federal funds allocated;
Annual award amounts: $100 to $4,000;
Number and characteristics of beneficiaries: Dependent students: About
554,000 grants were awarded in school year 2003-2004, totaling $494.2
million. The average grant award was $892;
the median income of recipients was $22,827;
Independent students: About 715,000 grants were awarded in school year
2003-2004, totaling $391.9 million. The average grant award was $548;
the median income of recipients was $11,040.
Title IV student aid program: Academic Competitiveness Grant;
Program details: Available to first-and second-year students who have
completed a rigorous course of study in high school. To be eligible,
students must also be eligible to receive a Pell Grant. Second-year
students must also maintain at least a 3.0 grade-point average;
Annual award amounts: $750 for first-year students and $1,300 for
second year students;
Number and characteristics of beneficiaries: Students: About 310,000
first-year grants and 110,000 second-year grants are expected to be
awarded in school year 2006-2007, totaling an estimated $340.0 million.
The average grant award is estimated to be $657 and $1,245
respectively.
Title IV student aid program: National Science and Mathematics Access
to Retain Talent (SMART) Grant;
Program details: Available to third-and fourth-year students pursuing a
major in mathematics, science, or a foreign language deemed critical to
national security. To be eligible, students must also be eligible to
receive a Pell Grant and maintain at least a 3.0 grade-point average in
their major;
Annual award amounts: $4,000;
Number and characteristics of beneficiaries: Students: About 40,000
third-year grants and 40,000 fourth-year grants are expected to be
awarded in school year 2006-2007, totaling an estimated $310.0 million.
The average grant award is estimated to be $3,718 and $3,875
respectively.
Title IV student aid program: Federal Work-Study;
Program details: Schools administer funds, which are used to provide
part-time jobs for undergraduate and graduate students with financial
need. Participating schools or nonprofit employers generally contribute
at least 25 percent of student's earnings (50 percent in the case of
for-profit employers);
Annual award amounts: Up to $300 more than the student's determined
financial need; if employment continues past this point, federal funds
may not be used to subsidize the employment;
Number and characteristics of beneficiaries: Dependent students: About
1.1 million awards were awarded in school year 2003-2004, totaling $2
billion. The average award was $1,901;
the median income of recipients was $46,441;
Independent students: About 438,000 awards were awarded in school year
2003-2004, totaling $1 billion. The average award was $2,303;
the median income of recipients was $10,561.
Title IV student aid program: Federal Perkins Loan;
Program details: Schools administer funds, comprised of federal capital
contributions and school matching funds (at least 1/3 of federal
contributions), to make low-interest (5 percent) loans for both
undergraduate and graduate students with exceptional financial need.
Borrower repayments are owed to the school;
Annual award amounts: $4,000 maximum for undergraduate students and
$6,000 for graduate students; no minimum award amount. (Aggregate
limits: $8,000 for undergraduates who have not completed 2 academic
years;
$20,000 for undergraduates who have completed 2 years;
and, $40,000 for graduate students, including loans borrowed as an
undergraduate.);
Number and characteristics of beneficiaries: Dependent students: About
495,000 loans were made in school year 2003- 2004, totaling $956
million. The average loan amount was $1,932; the median income of
recipients was $39,175; Independent students: About 329,000 loans were
made in school year 2003-2004, totaling $905.3 million. The average
loan amount was $2,752;
the median income of recipients was $10,277.
Title IV student aid program: Subsidized FFEL or Direct Stafford
Loan[A];
Program details: Loans made on the basis of financial need to
undergraduate and graduate students who are enrolled at least half-
time. The federal government pays the interest costs on subsidized
loans while the student is in school, for the first 6 months after the
student leaves school, and during a period of deferment;
Annual award amounts: $2,625 to $8,500 depending upon year of
schooling. Aggregate limits are $23,000 for undergraduates and $65,500
for graduate students;
Number and characteristics of beneficiaries: Dependent students: About
2.6 million loans were made in school year 2003-2004, totaling $8.1
billion. The average loan amount was $3,188; the median income of
recipients was $44,678; Independent students: About 3.8 million loans
were made in school year 2003-2004, totaling $16.3 billion. The average
loan amount was $4,340; the median income of recipients was $19,430.
Title IV student aid program: Unsubsidized FFEL or Direct Stafford
Loan[A];
Program details: Loans made to undergraduate and graduate students who
are enrolled at least half-time. Unlike subsidized loans, the federal
government does not pay the interest costs on unsubsidized loans while
the student is in school, for the first 6 months after the student
leaves school, and during a period of deferment. Otherwise, the terms
and conditions of unsubsidized loans are the same as those for
subsidized loans;
Annual award amounts: $2,625 to $18,500 depending on year of schooling
(including any subsidized loan amounts received for the same period).
Aggregate limits are $23,000 for dependent undergraduates, $46,000 for
independent undergraduates, and $138,500 for graduate students;
Number and characteristics of beneficiaries: Dependent students: About
1.6 million loans were made in school year 2003-2004, totaling $5.3
billion. The average loan amount was $3,293; the median income of
recipients was $75,835; Independent students: About 3.3 million loans
were made in school year 2003-2004, totaling $18.5 billion. The average
loan amount was $5,671; the median income of recipients was $22,108.
Title IV student aid program: FFEL or Direct PLUS Loan;
Program details: Loans made to parents on behalf of dependent
undergraduate students enrolled at least half-time. The Higher
Education Reconciliation Act of 2005 makes both graduate and
professional students eligible for these loans as well. Borrowers are
subject to a credit check for adverse credit history and may be denied
a loan;
Annual award amounts: Maximum loan amounts are limited to cost of
attendance less other federal, state, private, and institutional aid
received for the period of enrollment;
Number and characteristics of beneficiaries: About 634,000 loans were
made in school year 2003-2004, totaling $5.7 billion. The average loan
amount was $9,019; the median income of recipients was $71,397.
Source: GAO analysis of applicable laws and regulations and school year
2003-2004 NPSAS data.
[A] New slightly higher limits for these loans will take effect on July
1, 2007.
[End of table]
Tax Preferences:
Prior to the 1990s, virtually all major federal initiatives to assist
students with the costs of postsecondary education were provided
through grant and loan programs authorized under title IV of the Higher
Education Act. Since the 1990s, however, federal initiatives to assist
families and students in paying for postsecondary education have
largely been implemented through the federal tax code. The federal tax
code now contains a range of tax preferences that may be used to assist
students and families in saving for, paying, or repaying the costs of
postsecondary education. These tax preferences include credits and
deductions, both of which allow tax filers to use qualified higher
education expenses to reduce their federal income tax liability. The
tax credits reduce the tax filers' income tax liability on a dollar-
for-dollar basis but are not refundable. Tax deductions permit
qualified higher education expenses to be subtracted from income that
would otherwise be taxable. To benefit from a higher education tax
credit or tuition deduction, a tax filer must use tax form 1040 or
1040A, have an adjusted gross income below the provisions' statutorily
specified income limits, and have a positive tax liability after other
deductions and credits are calculated, among other requirements.
Tax preferences also include tax-exempt savings vehicles. Section 529
of the tax code makes tax free the investment income from qualified
tuition programs. There are two types of qualified tuition programs:
savings programs established by states and prepaid tuition programs
established either by states or by one or more eligible educational
institutions. Another tax-exempt savings vehicle is the Coverdell
Education Savings Account. Tax penalties apply to both 529 programs and
Coverdell savings accounts if the funds are not used for allowable
education expenses. Key features of these and other education-related
tax preferences are described below, in table 6.
Table 6: Selected Postsecondary Education Tax Preferences:
Tax preference: Hope Credit;
Preference details: Eligibility: Tax filer on behalf of self, spouse,
or dependent who is working toward a degree or certificate at least
half-time in the first 2 years of postsecondary enrollment;
Preference details: Income ranges for phasing out benefits (2006)a:
Single filer: $45,000-$55,000; Joint return: $90,000- $110,000.b;
Eligible expenses: Tuition and fees at institutions eligible to
participate in title IV programs;
Tax benefit (2006): Maximum credit: $1,650 per student. Credit rate is
100 percent on first $1,100 of qualified higher education expenses, 50
percent on next $1,100.d; Nonrefundable: if filer has no tax liability
due to offsetting deductions, exemptions, or competing tax credits,
filer cannot receive credit;
Number and characteristics of beneficiaries: In tax year 2002, 3.3
million tax filers claimed $3.2 billion in Hope credits;
the average credit claimed was $991, and the median income of filers
claiming the credit was $39,203.
Tax preference: Lifetime Learning Credit;
Preference details: Eligibility: Tax filer on behalf of self, spouse,
or dependent who is enrolled in undergraduate or graduate courses, or
any course that aids in learning new or improving existing job skills,
for as many years as the student is enrolled;
Preference details: Income ranges for phasing out benefits (2006)a:
Single filer: $45,000-$55,000; Joint return: $90,000-$110,000.b;
Eligible expenses: Tuition and fees at institutions eligible to
participate in title IV programs;
Tax benefit (2006): Maximum credit: $2,000 per tax filer. (20 percent
of qualified higher education expenses up to $10,000).d; Nonrefundable:
if filer has no tax liability due to offsetting deductions, exemptions,
or competing tax credits, filer cannot receive credit;
Number and characteristics of beneficiaries: In tax year 2002, 3.5
million tax filers claimed $1.7 billion in Lifetime Learning credits;
the average credit claimed was $477, and the median income of filers
claiming the credit was $39,706.
Tax preference: Student Loan Interest Deduction;
Preference details: Eligibility: Tax filer, on behalf of self, spouse,
or dependent, available even to those who do not itemize interest paid.
Student must have been enrolled at least half-time in a degree program;
Preference details: Income ranges for phasing out benefits (2006)a:
Single filer: $50,000-$65,000; Joint return: $105,000-$135,000.c;
Eligible expenses: Eligible loans are those used to pay for tuition,
fees, room and board, and related expenses and include, for example,
student loans provided under title IV;
Tax benefit (2006): Maximum deduction: $2,500; interest paid on
eligible education loans is deductible;
Number and characteristics of beneficiaries: In tax year 2002, 6.6
million tax filers deducted $892.6 million of student loan interest;
the average deduction was $134, and the median income of filers
deducting student loan interest was $43,544.
Tax preference: Section 529 qualified tuition programs--prepaid tuition
programs and state-sponsored college savings programs;
Preference details: Eligibility: Specifics depend on particular
program. Normally a prepaid program is open for contributions only on
behalf of young children and accounts must be closed within some number
of years after the beneficiary reaches college age. Generally, savings
programs do not have age restrictions;
Preference details: Income ranges for phasing out benefits (2006)a: No
phase-out;
Eligible expenses: Tuition, fees, books, supplies, and equipment
required for attendance. Room and board if enrolled half-time or more;
Tax benefit (2006): No tax is due on a distribution from an account
unless the amount distributed is greater than the beneficiary's
adjusted qualified education expenses;
Number and characteristics of beneficiaries: Section 529 qualified
tuition programs--prepaid tuition programs and state-sponsored college
savings programs.
Tax preference: Coverdell Education Savings Accounts;
Preference details: Eligibility: Distributions can be used for students
enrolled on full-time, half-time, or less than half-time basis;
Account must be closed within 30 days after beneficiary reaches age 30;
Preference details: Income ranges for phasing out benefits (2006)a: For
contributions, $95,000-$110,000 for single filers and $190,000-
$220,000 for joint returns;
Eligible expenses: Tuition, fees, books, supplies, and equipment
required for attendance; Room and board if enrolled half-time or more;
Tax benefit (2006): No tax is due on a distribution from an account
unless the amount distributed is greater than the beneficiary's
adjusted qualified education expenses; Annual contribution limit is
$2,000 per year per student (through age 17);
Number and characteristics of beneficiaries: Coverdell Education
Savings Accounts.
Tax preference: Tuition Deduction (expired Dec. 31, 2005)e;
Preference details: Eligibility: Same as Lifetime Learning credit;
Preference details: Income ranges for phasing out benefits (2006)a:
Single filer: $65,000-80,000; Joint Return: $130,000-160,000;
Eligible expenses: Tuition and fees at institutions eligible to
participate in title IV programs;
Tax benefit (2006): Maximum deduction: $4,000 per return for individual
filers whose modified adjusted gross income is less than $65,000
($130,000 for joint filers);
$2,000 per return for individuals whose modified adjusted gross income
is more than $65,000 ($130,000) but less than $80,000 ($160,000);
Number and characteristics of beneficiaries: Tuition Deduction (expired
Dec. 31, 2005)e.
Sources: IRS, Investment Company Institute, and College Savings Plan
Network documents; GAO analysis of IRS Statistics of Income data for
tax year 2002.
[A] Modified adjusted gross income amounts are provided.
[B] Under the Taxpayer Relief Act of 1997, the income phase-out amounts
are indexed to inflation according to a formula specified in law for
this purpose, which may or may not result in a yearly increase.
[C] Under the 26 U.S.C. § 221(f), the income phase-out amounts are
indexed to inflation according to a formula specified in law for this
purpose, which may or may not result in a yearly increase.
[D] For students attending otherwise eligible educational institutions
located within the Gulf Opportunity Zone, the maximum Hope tax credit
and maximum Lifetime Learning tax credit are doubled for taxable years
2005 and 2006. Gulf Opportunity Zone Act, Pub. L. No. 109-135, § 102,
119 Stat. 2577, 2594 (2005).
[E] Although the tuition deduction has expired, H.R. 5970, 109th Cong.
§ 201 (2006), among other bills, would renew the deduction for tuition
expenses through December 31, 2007. H.R. 5970 passed in the House on
July 29, 2006, but had not yet passed the Senate.
[End of table]
Our review of tax preferences did not include exclusions from income,
which permit certain types of education-related income to be excluded
from the calculation of adjusted gross income on which taxes are based.
For example, qualified scholarships covering tuition and fees and
qualified tuition reductions from eligible educational institutions are
not included in gross income for income tax purposes. Similarly,
student loans forgiven when a graduate goes into certain professions
for a certain period of time are also not subject to federal income
taxes. We also did not include special provisions in the tax code that
also extend existing tax preferences when tax filers support a
postsecondary education student. For example, tax filers may claim
postsecondary education students as dependents after age 18, even if
the student has his or her own income over the limit that would
otherwise apply. Also, gift taxes do not apply to funds used for
certain postsecondary educational expenses, even for amounts in excess
of the usual $11,000 limit on gifts. In addition, funds withdrawn early
from an Individual Retirement Account are not subject to the usual 10
percent penalty when used for either a tax filer's or his or her
dependent's postsecondary educational expenses.
[End of section]
Appendix II: Comparison of Assistance by Timing of Benefit for Selected
Programs and Tax Preferences:
Table 7: Comparison of Assistance by Timing of Benefit for Selected
Programs and Tax Preferences:
Type of assistance: Grant programs;
Save for future expenses: [Empty];
Pay current expenses: Pell Grants; Supplemental Educational;
Opportunity Grants; Academic Competitiveness Grants; SMART Grants;
Repay expenses: [Empty].
Type of assistance: Loan programs;
Save for future expenses: [Empty];
Pay current expenses: Subsidized and Unsubsidized; Stafford Loans;
Federal Perkins Loans; Federal PLUS Loans;
Repay expenses: [Empty].
Type of assistance: Tax preferences;
Save for future expenses: Coverdell Educational Savings Accounts and
Section 529 Qualified Tuition; Programs;
Pay current expenses: Hope Credit; Lifetime Learning Credit; Tuition
Deduction;
Repay expenses: Student Loan Interest; Deduction.
Type of assistance: Work-Study program;
Save for future expenses: [Empty];
Pay current expenses: Federal Work Study;
Repay expenses: [Empty].
Source: GAO.
[End of table]
[End of section]
Appendix III: Effects of Tax Rules on Tax Preference Use:
For an example of how the use of college savings programs and the
tuition deduction is affected by "anti-double-dipping" rules, consider
the following: To calculate whether a distribution from a college
savings program is taxable, tax filers must determine if the total
distributions for the tax year are more or less than the total
qualified educational expenses reduced by any tax-free educational
assistance, i.e., their adjusted qualified education expenses (AQEE).
After subtracting tax-free assistance from qualified educational
expenses to arrive at the AQEE, tax filers multiply total distributed
earnings by the fraction (AQEE / total amount distributed during the
year). If parents of a dependent student paid $6,500 in qualified
education expenses from a $3,000 tax-free scholarship and a $3,600
distribution from a tuition savings program, they would have $3,500 in
AQEE. If $1,200 of the distribution consisted of earnings, then $1,200
x ($3,500 AQEE / $3,600 distribution) would result in $1,167 of the
earnings being tax free, while $33 would be taxable. However, if the
same tax filer had also claimed a tuition deduction, anti-double-
dipping rules would require the tax filer to subtract the expenses
taken into account in figuring the tuition deduction from AQEE. If
$2,000 in expenses had been used toward the tuition deduction, then the
taxable distribution from the section 529 savings program would rise to
$700.[Footnote 23] For families such as these, anti-double-dipping
rules increase the computational complexity they face and may result in
unanticipated tax liabilities associated with the use of section 529
savings programs.
[End of section]
Appendix IV: Confidence Intervals:
We used two data sets for this testimony: Education's 2003-2004
National Postsecondary Student Aid Study and the Internal Revenue
Service's 2002 and 2004 Statistics of Income. Estimates from both data
sets are subject to sampling errors and the estimates we report are
surrounded by a 95 percent confidence interval. The following tables
provide the lower and upper bounds of the 95 percent confidence
interval for all estimate figures in the tables in this testimony. For
figures drawn from these data, we provide both point estimates and
confidence intervals.
Table 8: Federal Student Aid Programs Authorized under Title IV of the
Higher Education Act, Academic Year 2003-2004:
Dependent students:
Type of assistance: Pell Grant;
Number of recipients: Lower bound: 2,026,011;
Number of recipients: Upper bound: 2,115,312;
Total award: Lower bound: 5,201,091,600;
Total award: Upper bound: 5,452,845,564;
Average award: Lower bound: 2,543;
Average award: Upper bound: 2,573;
Median income: Lower bound: 24,165;
Median income: Upper bound: 24,999.
Type of assistance: Supplemental Educational Opportunity Grant;
Number of recipients: Lower bound: 530,408;
Number of recipients: Upper bound: 577,316;
Total award: Lower bound: 466,079,305;
Total award: Upper bound: 522,325,472;
Average award: Lower bound: 857;
Average award: Upper bound: 892;
Median income: Lower bound: 22,022;
Median income: Upper bound: 23,484.
Type of assistance: Federal Work-Study;
Number of recipients: Lower bound: 1,023,755;
Number of recipients: Upper bound: 1,089,687;
Total award: Lower bound: 1,927,247,135;
Total award: Upper bound: 2,090,819,033;
Average award: Lower bound: 1,856;
Average award: Upper bound: 1,901;
Median income: Lower bound: 45,000;
Median income: Upper bound: 48,231.
Type of assistance: Federal Perkins Loan;
Number of recipients: Lower bound: 472,640;
Number of recipients: Upper bound: 517,207;
Total award: Lower bound: 907,800,538;
Total award: Upper bound: 1,004,290,295;
Average award: Lower bound: 1,887;
Average award: Upper bound: 1,932;
Median income: Lower bound: 37,623;
Median income: Upper bound: 40,814.
Type of assistance: Subsidized FFEL or Direct Stafford Loan;
Number of recipients: Lower bound: 2,505,118;
Number of recipients: Upper bound: 2,604,668;
Total award: Lower bound: 7,962,531,788;
Total award: Upper bound: 8,329,729,995;
Average award: Lower bound: 3,155;
Average award: Upper bound: 3,188;
Median income: Lower bound: 43,834;
Median income: Upper bound: 45,446.
Type of assistance: Unsubsidized FFEL or Direct Stafford Loan;
Number of recipients: Lower bound: 1,578,160;
Number of recipients: Upper bound: 1,664,757;
Total award: Lower bound: 5,173,481,648;
Total award: Upper bound: 5,505,576,910;
Average award: Lower bound: 3,244;
Average award: Upper bound: 3,293;
Median income: Lower bound: 74,263;
Median income: Upper bound: 77,439.
Type of assistance: FFEL or Direct PLUS Loan;
Number of recipients: Lower bound: 609,125;
Number of recipients: Upper bound: 659,071;
Total award: Lower bound: 5,458,550,634;
Total award: Upper bound: 5,979,275,038;
Average award: Lower bound: 8,787;
Average award: Upper bound: 9,019;
Median income: Lower bound: 69,547;
Median income: Upper bound: 73,439.
Independent students:
Type of assistance: Pell Grant;
Number of recipients: Lower bound: 2,967,340;
Number of recipients: Upper bound: 3,087,638;
Total award: Lower bound: 7,212,123,299;
Total award: Upper bound: 7,540,282,035;
Average award: Lower bound: 2,409;
Average award: Upper bound: 2,436;
Median income: Lower bound: 12,614;
Median income: Upper bound: 13,262.
Type of assistance: Supplemental Educational Opportunity Grant;
Number of recipients: Lower bound: 684,528;
Number of recipients: Upper bound: 745,839;
Total award: Lower bound: 368,492,546;
Total award: Upper bound: 415,343,758;
Average award: Lower bound: 526;
Average award: Upper bound: 548;
Median income: Lower bound: 10,425;
Median income: Upper bound: 11,626.
Type of assistance: Federal Work-Study;
Number of recipients: Lower bound: 676,216;
Number of recipients: Upper bound: 766,317;
Total award: Lower bound: 933,916,755;
Total award: Upper bound: 1,084,530,206;
Average award: Lower bound: 2,192;
Average award: Upper bound: 2,303;
Median income: Lower bound: 9,808;
Median income: Upper bound: 11,525.
Type of assistance: Federal Perkins Loan;
Number of recipients: Lower bound: 522,918;
Number of recipients: Upper bound: 595,499;
Total award: Lower bound: 839,749,704;
Total award: Upper bound: 970,851,318;
Average award: Lower bound: 2,648;
Average award: Upper bound: 2,752;
Median income: Lower bound: 9,181;
Median income: Upper bound: 11,628.
Type of assistance: Subsidized FFEL or Direct Stafford Loan;
Number of recipients: Lower bound: 3,658,692;
Number of recipients: Upper bound: 3,869,237;
Total award: Lower bound: 15,604,880,694;
Total award: Upper bound: 17,068,144,196;
Average award: Lower bound: 4,244;
Average award: Upper bound: 4,340;
Median income: Lower bound: 18,754;
Median income: Upper bound: 20,148.
Type of assistance: Unsubsidized FFEL or Direct Stafford Loan;
Number of recipients: Lower bound: 3,154,948;
Number of recipients: Upper bound: 3,359,231;
Total award: Lower bound: 17,728,962,613;
Total award: Upper bound: 19,212,909,259;
Average award: Lower bound: 5,531;
Average award: Upper bound: 5,671;
Median income: Lower bound: 21,190;
Median income: Upper bound: 23,095.
Type of assistance: FFEL or Direct PLUS Loan;
Number of recipients: Lower bound: 0;
Number of recipients: Upper bound: 0;
Total award: Lower bound: 0;
Total award: Upper bound: 0;
Average award: Lower bound: 0;
Average award: Upper bound: 0;
Median income: Lower bound: 0;
Median income: Upper bound: 0.
Source: GAO analysis of 2003-2004 National Postsecondary Student Aid
Study data.
[End of table]
Table 9: Selected Postsecondary Education Tax Preferences, Tax Year
2002:
Type of assistance: Hope Credit;
Number of returns: Lower bound: 3,115,595;
Number of returns: Upper bound: 3,414,023;
Total benefits: Lower bound: 3,064,601,005;
Total benefits: Upper bound: 3,399,426,275;
Average benefit: Lower bound: 965;
Average benefit: Upper bound: 1,016;
Median income: Lower bound: 37,506;
Median income: Upper bound: 41,004.
Type of assistance: Lifetime Learning Credit;
Number of returns: Lower bound: 3,307,354;
Number of returns: Upper bound: 3,612,179;
Total benefits: Lower bound: 1,560,825,683;
Total benefits: Upper bound: 1,740,857,453;
Average benefit: Lower bound: 462;
Average benefit: Upper bound: 493;
Median income: Lower bound: 38,060;
Median income: Upper bound: 41,001.
Type of assistance: Student Loan Interest Deduction;
Number of returns: Lower bound: 6,432,399;
Number of returns: Upper bound: 6,849,170;
Total benefits: Lower bound: 848,115,632;
Total benefits: Upper bound: 937,085,664;
Average benefit: Lower bound: 129;
Average benefit: Upper bound: 140;
Median income: Lower bound: 42,378;
Median income: Upper bound: 44,657.
Type of assistance: Tuition Deduction;
Number of returns: Lower bound: 3,295,741;
Number of returns: Upper bound: 3,599,012;
Total benefits: Lower bound: 1,226,452,349;
Total benefits: Upper bound: 1,370,953,823;
Average benefit: Lower bound: 364;
Average benefit: Upper bound: 391;
Median income: Lower bound: 51,808;
Median income: Upper bound: 56,842.
Source: GAO analysis of Statistics of Income data for 2002.
[End of table]
Table 10: Tax Filers Claiming an Education Tax Credit or Tuition
Deduction:
Hope Credit, Lifetime Learning Credit, and Tuition Deduction;
Lower bound;
1998: 4,482,106;
1999: 6,233,732;
2000: 6,606,583;
2001: 6,997,019;
2002: 9,319,692;
2003: 10,370,110;
2004: 11,360,283.
Hope Credit, Lifetime Learning Credit, and Tuition Deduction;
Upper bound;
1998: 4,827,719;
1999: 6,639,576;
2000: 7,024,049;
2001: 7,428,088;
2002: 9,809,833;
2003: 10,882,359;
2004: 11,892,067.
Source: GAO analysis of Statistics of Income data.
[End of table]
Table 11: Percentage of Aid Recipients and Dollars of Aid by Income
Category for Dependent Students Served by Selected Title IV Programs,
School Year 2003-2004:
Program: Pell Grant;
Dependent students: Recipients;
Lower bound;
$0- 20,000: 36.66;
$20,001-40,000: 45.41;
$40,001-60,000: 13.17;
$60,001- 80,000: 1.41;
$80,001-100,000: 0;
More than $100,000: 0.
Program: Pell Grant;
Dependent students: Recipients;
Upper bound;
$0-20,000: 38.89;
$20,001-40,000: 47.72;
$40,001-60,000: 14.76;
$60,001-80,000: 2.02;
$80,001-100,000: 0;
More than $100,000: 0.
Program: Pell Grant;
Dependent students: Dollars;
Lower bound;
$0-20,000: 46.29;
$20,001- 40,000: 42.41;
$40,001-60,000: 7.38;
$60,001-80,000: 0.65;
$80,001- 100,000: 0;
More than $100,000: 0.
Program: Pell Grant;
Dependent students: Dollars;
Upper bound;
$0-20,000: 48.82;
$20,001-40,000: 44.89;
$40,001-60,000: 8.5;
$60,001-80,000: 1.04;
$80,001-100,000: 0;
More than $100,000: 0.
Program: Stafford Subsidized Loan;
Dependent students: Recipients;
Lower bound;
$0-20,000: 15.41;
$20,001-40,000: 26.79;
$40,001-60,000: 22.45;
$60,001-80,000: 16.1;
$80,001-100,000: 8.38;
More than $100,000: 6.23.
Program: Stafford Subsidized Loan;
Dependent students: Recipients;
Upper bound;
$0-20,000: 16.94;
$20,001-40,000: 28.73;
$40,001-60,000: 24.3;
$60,001-80,000: 17.72;
$80,001-100,000: 9.61;
More than $100,000: 7.33.
Program: Stafford Subsidized Loan;
Dependent students: Dollars;
Lower bound;
$0-20,000: 15.32;
$20,001- 40,000: 27.14;
$40,001-60,000: 22.83;
$60,001-80,000: 15.68;
$80,001- 100,000: 7.92;
More than $100,000: 5.87.
Program: Stafford Subsidized Loan;
Dependent students: Dollars;
Upper bound;
$0-20,000: 17.07;
$20,001-40,000: 29.35;
$40,001-60,000: 24.94;
$60,001-80,000: 17.51;
$80,001-100,000: 9.3;
More than $100,000: 7.08.
Program: Stafford Unsubsidized Loan;
Dependent students: Recipients;
Lower bound;
$0-20,000: 6.51;
$20,001-40,000: 12.83;
$40,001-60,000: 13.15;
$60,001-80,000: 17.69;
$80,001-100,000: 16.68;
More than $100,000: 27.
Program: Stafford Unsubsidized Loan;
Dependent students: Recipients;
Upper bound;
$0-20,000: 7.88;
$20,001-40,000: 14.76;
$40,001-60,000: 15.21;
$60,001-80,000: 19.94;
$80,001-100,000: 18.84;
More than $100,000: 29.5.
Program: Stafford Unsubsidized Loan;
Dependent students: Dollars;
Lower bound;
$0-20,000: 6.22;
$20,001- 40,000: 11.05;
$40,001-60,000: 11.31;
$60,001-80,000: 16.69;
$80,001- 100,000: 17.55;
More than $100,000: 30.3.
Program: Stafford Unsubsidized Loan;
Dependent students: Dollars;
Upper bound;
$0-20,000: 7.75;
$20,001- 40,000: 12.99;
$40,001-60,000: 13.41;
$60,001-80,000: 19.2;
$80,001- 100,000: 20.15;
More than $100,000: 33.37.
Source: GAO analysis of 2003-2004 National Postsecondary Student Aid
Study data.
[End of table]
Table 12: Percentage of Aid Recipients and Dollars of Aid by Income
Category for Independent Students Served by Selected Title IV Programs,
Academic Year 2003-2004:
Program: Pell Grant;
Recipients;
Lower bound;
$0-20,000: 66.28;
$20,001-40,000: 26.59;
$40,001-60,000: 4.59;
$60,001-80,000: 0;
$80,001-100,000: 0;
More than $100,000: 0.
Program: Pell Grant;
Recipients;
Upper bound;
$0-20,000: 68.35;
$20,001-40,000: 28.57;
$40,001-60,000: 5.62;
$60,001-80,000: 0;
$80,001-100,000: 0;
More than $100,000: 0.
Program: Pell Grant;
Dollars;
Lower bound;
$0-20,000: 71.68;
$20,001-40,000: 23.62;
$40,001- 60,000: 2.32;
$60,001-80,000: 0;
$80,001-100,000: 0;
More than $100,000: 0.
Program: Pell Grant;
Dollars;
Upper bound;
$0-20,000: 73.77;
$20,001-40,000: 25.65;
$40,001-60,000: 2.96;
$60,001-80,000: 0;
$80,001-100,000: 0;
More than $100,000: 0.
Program: Stafford Subsidized Loan;
Recipients;
Lower bound;
$0-20,000: 49.67;
$20,001-40,000: 27.54;
$40,001-60,000: 10.78;
$60,001-80,000: 4.04;
$80,001-100,000: 1.3;
More than $100,000: 0.86.
Program: Stafford Subsidized Loan;
Recipients;
Upper bound;
$0-20,000: 52.62;
$20,001-40,000: 30.38;
$40,001-60,000: 13.48;
$60,001-80,000: 5.36;
$80,001-100,000: 1.98;
More than $100,000: 2.38.
Program: Stafford Subsidized Loan;
Dollars;
Lower bound;
$0-20,000: 49.93;
$20,001-40,000: 25.26;
$40,001- 60,000: 10.05;
$60,001-80,000: 3.87;
$80,001-100,000: 1.2;
More than $100,000: 0.46.
Program: Stafford Subsidized Loan;
Dollars;
Upper bound;
$0-20,000: 54.61;
$20,001-40,000: 29.79;
$40,001-60,000: 14.73;
$60,001-80,000: 5.4;
$80,001-100,000: 2.05;
More than $100,000: 2.65.
Program: Stafford Unsubsidized Loan;
Recipients;
Lower bound;
$0- 20,000: 44.65;
$20,001-40,000: 26.59;
$40,001-60,000: 12.09;
$60,001- 80,000: 5.48;
$80,001-100,000: 2.31;
More than $100,000: 2.26.
Program: Stafford Unsubsidized Loan;
Recipients;
Upper bound;
$0-20,000: 47.82;
$20,001-40,000: 29.75;
$40,001-60,000: 15.18;
$60,001-80,000: 6.87;
$80,001-100,000: 3.18;
More than $100,000: 4.08.
Program: Stafford Unsubsidized Loan;
Dollars;
Lower bound;
$0-20,000: 44.28;
$20,001-40,000: 22.51;
$40,001- 60,000: 11.96;
$60,001-80,000: 6.22;
$80,001-100,000: 2.86;
More than $100,000: 3.42.
Program: Stafford Unsubsidized Loan;
Dollars;
Upper bound;
$0-20,000: 48.37;
$20,001-40,000: 26;
$40,001-60,000: 14.78;
$60,001-80,000: 8.49;
$80,001-100,000: 4.12;
More than $100,000: 6.99.
Source: GAO analysis of 2003-2004 National Postsecondary Student Aid
Study data.
[End of table]
Table 13: Percentage of Tax Filers Claiming Hope and Lifetime Learning
Credits and Tuition Deduction and Tax Preference Dollars by Income
Category, Tax Year 2004:
Type of aid: Hope Credit;
Tax filers;
Lower bound;
$0-20,000: 16.5;
$20,001-40,000: 31.4;
$40,001-60,000: 17;
$60,001-80,000: 14.3;
$80,001-100,000: 10.4;
More than $100,000: 1.2.
Type of aid: Hope Credit;
Tax filers;
Upper bound;
$0-20,000: 20.1;
$20,001-40,000: 35.7;
$40,001-60,000: 20.4;
$60,001-80,000: 17.6;
$80,001-100,000: 13.3;
More than $100,000: 2.
Type of aid: Hope Credit;
Dollars;
Lower bound;
$0-20,000: 14.7;
$20,001-40,000: 30.6;
$40,001-60,000: 18.1;
$60,001-80,000: 14.6;
$80,001-100,000: 10.7;
More than $100,000: 1.4.
Type of aid: Hope Credit;
Dollars;
Upper bound;
$0-20,000: 18.2;
$20,001-40,000: 35.2;
$40,001-60,000: 22.1;
$60,001-80,000: 18.2;
$80,001-100,000: 13.9;
More than $100,000: 2.3.
Type of aid: Lifetime Learning Credit;
Tax filers;
Lower bound;
$0-20,000: 15.5;
$20,001-40,000: 30.3;
$40,001- 60,000: 18.7;
$60,001-80,000: 17.5;
$80,001-100,000: 8.3;
More than $100,000: 1.4.
Type of aid: Lifetime Learning Credit;
Tax filers;
Upper bound;
$0-20,000: 18.6;
$20,001-40,000: 34.1;
$40,001-60,000: 21.9;
$60,001-80,000: 20.7;
$80,001-100,000: 10.7;
More than $100,000: 2.2.
Type of aid: Lifetime Learning Credit;
Dollars;
Lower bound;
$0-20,000: 13.2;
$20,001-40,000: 28;
$40,001-60,000: 17.5;
$60,001-80,000: 17.4;
$80,001-100,000: 11.1;
More than $100,000: 1.7.
Type of aid: Lifetime Learning Credit;
Dollars;
Upper bound;
$0-20,000: 16.9;
$20,001-40,000: 32.9;
$40,001-60,000: 21.7;
$60,001-80,000: 21.7;
$80,001-100,000: 14.8;
More than $100,000: 3.
Type of aid: Tuition Deduction;
Tax filers;
Lower bound;
$0-20,000: 21.9;
$20,001-40,000: 11.4;
$40,001-60,000: 13.6;
$60,001-80,000: 9.3;
$80,001-100,000: 11.9;
More than $100,000: 23.6.
Type of aid: Tuition Deduction;
Tax filers;
Upper bound;
$0-20,000: 25.1;
$20,001-40,000: 13.9;
$40,001-60,000: 16.3;
$60,001-80,000: 11.7;
$80,001-100,000: 14.5;
More than $100,000: 26.7.
Type of aid: Tuition Deduction;
Dollars;
Lower bound;
$0-20,000: 10;
$20,001- 40,000: 5.8;
$40,001-60,000: 16.2;
$60,001-80,000: 9.9;
$80,001- 100,000: 13.5;
More than $100,000: 34.5.
Type of aid: Tuition Deduction;
Dollars;
Upper bound;
$0-20,000: 12.1;
$20,001-40,000: 7.6;
$40,001-60,000: 20.4;
$60,001-80,000: 13.4;
$80,001-100,000: 17.2;
More than $100,000: 39.5.
Source: GAO analysis of Statistics of Income data for 2004.
[End of table]
Table 14: Percentage of Form 1098-Ts with Postsecondary Expense
Information in 2002: Point Estimates:
1098Ts with expense information;
Number of returns: 1,795,180;
Percent of returns: 13.
1098Ts without expense information;
Number of returns: 12,356,444;
Percent of returns: 87.
Source: GAO analysis of Statistics of Income data for 2002.
[End of table]
Table 15: Percentage of Form 1098-Ts with Postsecondary Expense
Information in 2002: Confidence Intervals:
1098Ts with expense information;
Number of returns: Lower bound: 1,687,744.88;
Number of returns: Upper bound: 1,902,614.62;
Percent of returns: Lower bound: 11.97;
Percent of returns: Upper bound: 13.4.
1098Ts without expense information;
Number of returns: Lower bound: 12,087,410.46;
Number of returns: Upper bound: 12,625,476.86;
Percent of returns: Lower bound: 86.6;
Percent of returns: Upper bound: 88.03.
Source: GAO analysis of Statistics of Income data for 2002.
[End of table]
Table 16: Percentage of Taxpayers Apparently Eligible to Claim an
Education Tax Credit or Tuition Deduction in 2002: Point Estimates:
Total;
Number of returns: 1,795,180;
Percent of returns: 100.
Potentially eligible;
Number of returns: 1,386,659;
Percent of returns: 77.
All other;
Number of returns: 408,521;
Percent of returns: 23.
Source: GAO analysis of Statistics of Income data for 2002.
[End of table]
Table 17: Percentage of Taxpayers Apparently Eligible to Claim an
Education Tax Credit or Tuition Deduction in 2002: Confidence
Intervals:
Total;
Number of returns: Lower bound: 1,795,176.75;
Number of returns: Upper bound: 1,795,179.75;
Percent of returns: Lower bound: 100;
Percent of returns: Upper bound: 100.
Potentially eligible;
Number of returns: Lower bound: 1,290,394.34;
Number of returns: Upper bound: 1,482,923.26;
Percent of returns: Lower bound: 74.83;
Percent of returns: Upper bound: 79.66.
All other;
Number of returns: Lower bound: 360,292.26;
Number of returns: Upper bound: 456,749.64;
Percent of returns: Lower bound: 20.34;
Percent of returns: Upper bound: 25.17.
Source: GAO analysis of Statistics of Income data for 2002.
[End of table]
Table 18: Percentage of Apparently Eligible Taxpayers to Claim an
Education Tax Credit or Tuition Deduction That Failed to Do So in 2002:
Point Estimates:
Failed to claim;
Number of returns: 373,595;
Percent of returns: 27.
Source: GAO analysis of Statistics of Income data for 2002.
[End of table]
Table 19: Percentage of Apparently Eligible Taxpayers to Claim an
Education Tax Credit or Tuition Deduction That Failed to Do So in 2002:
Confidence Intervals:
Failed to claim;
Number of returns: Lower bound: 323,504.26;
Number of returns: Upper bound: 423,686.08;
Percent of returns: Lower bound: 23.85;
Percent of returns: Upper bound: 30.04.
Source: GAO analysis of Statistics of Income data for 2002.
[End of table]
Table 20: Amounts by Which Apparently Eligible Taxpayers Failed to
Reduce Their Tax Liability in 2002: Point Estimates:
Median;
Inaction led to increased tax liability: 52.45.
Mean;
Inaction led to increased tax liability: 168.66.
10th percentile;
Inaction led to increased tax liability: 4.34.
25th percentile;
Inaction led to increased tax liability: 10.94.
75th percentile;
Inaction led to increased tax liability: 207.2.
90th percentile;
Inaction led to increased tax liability: 532.96.
Maximum value;
Inaction led to increased tax liability: 1,116.
Source: GAO analysis of Statistics of Income data for 2002.
[End of table]
Table 21: Amounts by Which Apparently Eligible Taxpayers Failed to
Reduce Their Tax Liability in 2002: Confidence Intervals:
Median: Lower bound;
Inaction led to increased tax liability: 34.69.
Median: Upper bound;
Inaction led to increased tax liability: 73.57.
Mean: Lower bound;
Inaction led to increased tax liability: 136.57.
Mean: Upper bound;
Inaction led to increased tax liability: 200.76.
10th percentile: Lower bound;
Inaction led to increased tax liability: 3.01.
10th percentile: Upper bound;
Inaction led to increased tax liability: 6.57.
25th percentile: Lower bound;
Inaction led to increased tax liability: 8.66.
25th percentile: Upper bound;
Inaction led to increased tax liability: 16.72.
75th percentile: Lower bound;
Inaction led to increased tax liability: 137.73.
75th percentile: Upper bound;
Inaction led to increased tax liability: 312.14.
90th percentile: Lower bound;
Inaction led to increased tax liability: 429.22.
90th percentile: Upper bound;
Inaction led to increased tax liability: 729.58.
Source: GAO analysis of Statistics of Income data for 2002.
[End of table]
Table 22: Percentage of Apparently Eligible Taxpayers That Claimed the
Tuition Deduction but Would Have Been Better off Claiming the Lifetime
Learning Credit in 2002: Point Estimates:
Would have been better off claiming Lifetime Learning Credit;
Number of returns: 50,908;
Percent of returns: 21.
Source: GAO analysis of Statistics of Income data for 2002.
[End of table]
Table 23: Percentage of Apparently Eligible Taxpayers That Claimed the
Tuition Deduction but Would Have Been Better off Claiming the Lifetime
Learning Credit in 2002: Confidence Intervals:
Would have been better off claiming Lifetime Learning Credit;
Number of returns: Lower bound: 34,819.89;
Number of returns: Upper bound: 70,274.77;
Percent of returns: Lower bound: 14.53;
Percent of returns: Upper bound: 29.33.
Source: GAO analysis of Statistics of Income data for 2002.
[End of table]
Table 24: Amounts by Which Apparently Eligible Taxpayers Could Have
Reduced Their Tax Liability in 2002: Point Estimates:
Median;
Lifetime Learning Credit produced larger reduction: 50.67.
Mean;
Lifetime Learning Credit produced larger reduction: 83.22.
10th percentile;
Lifetime Learning Credit produced larger reduction: 7.35.
25th percentile;
Lifetime Learning Credit produced larger reduction: 26.23.
75th percentile;
Lifetime Learning Credit produced larger reduction: 119.6.
90th percentile;
Lifetime Learning Credit produced larger reduction: 157.91.
Maximum value;
Lifetime Learning Credit produced larger reduction: 556.
Source: GAO analysis of Statistics of Income data for 2002.
[End of table]
Table 25: Amounts by Which Apparently Eligible Taxpayers Could Have
Reduced Their Tax Liability in 2002: Confidence Intervals:
Median: Lower bound;
Lifetime Learning Credit produced larger reduction: 32.89.
Median: Upper bound;
Lifetime Learning Credit produced larger reduction: 84.27.
Mean: Lower bound;
Lifetime Learning Credit produced larger reduction: 49.76.
Mean: Upper bound;
Lifetime Learning Credit produced larger reduction: 116.68.
10th percentile: Lower bound;
Lifetime Learning Credit produced larger reduction: .
10th percentile: Upper bound;
Lifetime Learning Credit produced larger reduction: 27.14.
25th percentile: Lower bound;
Lifetime Learning Credit produced larger reduction: 10.7.
25th percentile: Upper bound;
Lifetime Learning Credit produced larger reduction: 47.56.
75th percentile: Lower bound;
Lifetime Learning Credit produced larger reduction: 62.07.
75th percentile: Upper bound;
Lifetime Learning Credit produced larger reduction: 148.53.
90th percentile: Lower bound;
Lifetime Learning Credit produced larger reduction: 106.35.
90th percentile: Upper bound;
Lifetime Learning Credit produced larger reduction: .
Source: GAO analysis of Statistics of Income data for 2002.
[End of table]
Table 26: Percentage of Apparently Eligible Taxpayers That Claimed the
Lifetime Learning Credit but Would Have Been Better off Claiming the
Tuition Deduction in 2002: Point Estimates:
Would have been better off claiming the Tuition Deduction;
Number of returns: 22,469;
Percent of returns: 8.
Source: GAO analysis of Statistics of Income data for 2002.
[End of table]
Table 27: Percentage of Apparently Eligible Taxpayers That Claimed the
Lifetime Learning Credit but Would Have Been Better off Claiming the
Tuition Deduction in 2002: Confidence Intervals:
Would have been better off claiming the Tuition Deduction;
Number of returns: Lower bound: 12,228.08;
Number of returns: Upper bound: 37,165.3;
Percent of returns: Lower bound: 4.48;
Percent of returns: Upper bound: 13.61.
Source: GAO analysis of Statistics of Income data for 2002.
[End of table]
Table 28: Amounts by Which Apparently Eligible Taxpayers Could Have
Reduced Their Tax Liability in 2002: Point Estimates:
Median;
Tuition deduction produced larger reduction: 108.05.
Mean;
Tuition deduction produced larger reduction: 137.68.
10th percentile;
Tuition deduction produced larger reduction: 17.3.
25th percentile;
Tuition deduction produced larger reduction: 36.42.
75th percentile;
Tuition deduction produced larger reduction: 191.55.
90th percentile;
Tuition deduction produced larger reduction: 237.42.
Maximum value;
Tuition deduction produced larger reduction: 456.
Source: GAO analysis of Statistics of Income data for 2002.
[End of table]
Table 29: Amounts by Which Apparently Eligible Taxpayers Could Have
Reduced Their Tax Liability in 2002: Confidence Intervals:
Median: Lower bound;
Deduction produced larger reduction: 37.39.
Median: Upper bound;
Deduction produced larger reduction: 190.77.
Mean: Lower bound;
Deduction produced larger reduction: 77.08.
Mean: Upper bound;
Deduction produced larger reduction: 198.28.
10th percentile: Lower bound;
Deduction produced larger reduction: 4.36.
10th percentile: Upper bound;
Deduction produced larger reduction: 41.46.
25th percentile: Lower bound;
Deduction produced larger reduction: 20.16.
25th percentile: Upper bound;
Deduction produced larger reduction: 108.84.
75th percentile: Lower bound;
Deduction produced larger reduction: 107.3.
75th percentile: Upper bound;
Deduction produced larger reduction: 244.85.
90th percentile: Lower bound;
Deduction produced larger reduction: 154.73.
90th percentile: Upper bound;
Deduction produced larger reduction: 350.13.
Source: GAO analysis of Statistics of Income data for 2002.
[End of table]
Table 30: Percentage of Apparently Eligible Taxpayers That Claimed a
Hope Credit but Would Have Been Better off Claiming a Lifetime Learning
Credit in 2002: Point Estimates:
Total;
Number of returns: 271,494;
Percent of returns: 100.
Would have been better off claiming Lifetime Learning Credit;
Number of returns: 0;
Percent of returns: 0.
All other;
Number of returns: 271,494;
Percent of returns: 100.
Source: GAO analysis of Statistics of Income data for 2002.
[End of table]
Table 31: Percentage of Apparently Eligible Taxpayers That Claimed a
Hope Credit but Would Have Been Better off Claiming a Lifetime Learning
Credit in 2002: Confidence Intervals:
Total;
Number of returns: Lower bound: 271,491.04;
Number of returns: Upper bound: 271,494.04;
Percent of returns: Lower bound: 100;
Percent of returns: Upper bound: 100.
Would have been better off claiming Lifetime Learning Credit;
Number of returns: Lower bound: 0;
Number of returns: Upper bound: 0;
Percent of returns: Lower bound: 0;
Percent of returns: Upper bound: 0.
All other;
Number of returns: Lower bound: 271,491.04;
Number of returns: Upper bound: 271,494.04;
Percent of returns: Lower bound: 100;
Percent of returns: Upper bound: 100.
Source: GAO analysis of Statistics of Income data for 2002.
[End of table]
Table 32: Percentage of Suboptimal Choices Made by Paid Tax Preparers
in 2002: Point Estimates:
Total;
Taxpayers making suboptimal choice: Number of returns: 446,972;
Taxpayers making suboptimal choice: Percent: 100.
No preparer;
Taxpayers making suboptimal choice: Number of returns: 219,139;
Taxpayers making suboptimal choice: Percent: 49.03.
Paid preparer;
Taxpayers making suboptimal choice: Number of returns: 223,011;
Taxpayers making suboptimal choice: Percent: 49.89.
IRS prepared/reviewed;
Taxpayers making suboptimal choice: Number of returns: 0;
Taxpayers making suboptimal choice: Percent: 0.
VITA/self help/outreach/elderly assistance;
Taxpayers making suboptimal choice: Number of returns: 4,822;
Taxpayers making suboptimal choice: Percent: 1.08.
Source: GAO analysis of Statistics of Income data for 2002.
[End of table]
Table 33: Percentage of Suboptimal Choices Made by Paid Tax Preparers
in 2002: Confidence Intervals:
Total;
Taxpayers making suboptimal choice: Number of returns: Lower bound:
392,039;
Taxpayers making suboptimal choice: Number of returns: Upper bound:
501,905;
Taxpayers making suboptimal choice: Percent: Lower bound: 99.72;
Taxpayers making suboptimal choice: Percent: Lower bound: 100.
No preparer;
Taxpayers making suboptimal choice: Number of returns: Lower bound:
179,777;
Taxpayers making suboptimal choice: Number of returns: Upper bound:
258,500;
Taxpayers making suboptimal choice: Percent: Lower bound: 42.87;
Taxpayers making suboptimal choice: Percent: Lower bound: 55.19.
Paid preparer;
Taxpayers making suboptimal choice: Number of returns: Lower bound:
184,952;
Taxpayers making suboptimal choice: Number of returns: Upper bound:
261,070;
Taxpayers making suboptimal choice: Percent: Lower bound: 43.74;
Taxpayers making suboptimal choice: Percent: Lower bound: 56.05.
IRS prepared/reviewed;
Taxpayers making suboptimal choice: Number of returns: Lower bound: 0;
Taxpayers making suboptimal choice: Number of returns: Upper bound: 0;
Taxpayers making suboptimal choice: Percent: Lower bound: 0;
Taxpayers making suboptimal choice: Percent: Lower bound: 0.28.
VITA/self help/outreach/elderly assistance;
Taxpayers making suboptimal choice: Number of returns: Lower bound:
1,131;
Taxpayers making suboptimal choice: Number of returns: Upper bound:
9,328;
Taxpayers making suboptimal choice: Percent: Lower bound: 0.26;
Taxpayers making suboptimal choice: Percent: Lower bound: 2.91.
Source: GAO analysis of Statistics of Income data for 2002.
[End of table]
FOOTNOTES
[1] GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, GAO-05-325SP (Washington, D.C.: February 2005).
[2] GAO, Suggested Areas for Oversight for the 110th Congress, GAO-07-
235R (Washington, D.C.: Nov. 17, 2006).
[3] See GAO, Student Aid and Postsecondary Tax Preferences: Limited
Research Exists on Effectiveness of Tools to Assist Students and
Families through Title IV Student Aid and Tax Preferences, GAO-05-684
(Washington, D.C.: July 29, 2005).
[4] Consolidation loans are also authorized under title IV. These loans
allow borrowers to combine multiple student loans, possibly from
different lenders and from different loan programs, into a single new
loan with extended repayment periods. Because consolidation loans do
not generally result in an increase in loan principal, they are not
addressed in this testimony.
[5] To be classified as an independent student for the purpose of
receiving title IV financial aid, students must meet one of the
following criteria: (1) be a veteran of the armed services, (2) be age
24 years or older by December 31st of the award year, (3) be married,
(4) be enrolled in a graduate or professional education program, (5)
have legal dependents other than a spouse, or (6) be an orphan or ward
of the court. Financial aid administrators may also classify students
as independent through the exercise of their professional judgment.
[6] For greater detail on federal spending through title IV
postsecondary education assistance programs reviewed in our 2005
report, see app. I.
[7] Tax preferences--also known as tax expenditures--are reductions in
tax liabilities that result from preferential provisions in the tax
code, such as exemptions and exclusions from taxation, deductions,
credits, deferrals, and preferential tax rates.
[8] For expanded descriptions of postsecondary education-related tax
preferences, see app. I.
[9] The Tuition and Fees Deduction expired on December 31, 2005.
Legislation has been introduced to reinstate the deduction.
[10] Additional details on the differences in timing are available in
app. II.
[11] Campus-based aid programs authorized under title IV differ from
these programs in funding and eligibility: institutions provide
matching funding for federal spending, and participating institutions
distribute aid using institution-specific criteria consistent with
federal program requirements. Because they have institution-specific
criteria, the relationship between program rules and the distribution
of benefits is more complex and was excluded from the analysis of our
2005 report.
[12] Additionally, loan amounts for both subsidized and unsubsidized
loans are subject to statutory limits on annual and cumulative
borrowing.
[13] Due to time constraints, we were unable to update these analyses
for this testimony.
[14] Confidence intervals for all estimates in this section are
included in appendix IV.
[15] GAO, Paid Tax Return Preparers: In a Limited Study, Chain
Preparers Made Serious Errors, GAO-06-563T (Washington, D.C.: Apr. 4,
2006).
[16] For an example of this phenomenon, please see app. III.
[17] GAO, Student Aid and Tax Benefits: Better Research and Guidance
Will Facilitate Comparison of Effectiveness and Student Use, GAO-02-751
(Washington, D.C.: Sept. 13, 2002).
[18] GAO-02-751.
[19] GAO-05-325SP.
[20] Consolidation loans are also authorized under title IV. These
loans allow borrowers to combine multiple student loans, possibly from
different lenders and from different loan programs, into a single new
loan with extended repayment periods. Because consolidation loans do
not generally result in an increase in loan principal, consolidation
loans are not addressed in this review. However, the federal government
can incur significant costs in providing borrowers with these loans.
See GAO, Student Loan Programs: As Federal Costs of Loan Consolidation
Rise, Other Options Should Be Examined, GAO-04-101 (Washington, D.C.:
Oct. 31, 2003) and Student Loan Programs: Lower Interest Rates and
Higher Loan Volume Have Increased Federal Consolidation Loan Costs, GAO-
04-568T (Washington, D.C.: Mar. 17, 2004).
[21] While called "unsubsidized," the federal government can still
incur costs on such loans, including the costs associated with
borrowers who default on their loans and, under the Federal Family
Education Loan Program, the costs of making payments to lenders to
ensure them a minimum federally guaranteed yield.
[22] These may include child care expenses for parents of young
dependent children or supportive services for disabled students.
[23] The new nontaxable distribution figure is calculated $1,200 x
($1,500/$3,600) = $500. The taxable portion then becomes $1,200 - $500
= $700.
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