Student Aid and Tax Benefits
Better Research and Guidance Will Facilitate Comparison of Effectiveness and Student Use Gao ID: GAO-02-751 September 13, 2002Title IV of the Higher Education Act (HEA), as first adopted in 1965, authorizes federal grant and loan programs, providing a total of $53 billion in assistance to 8.1 million students in fiscal year 1999. The Taxpayer Relief Act of 1997 allowed eligible taxpayers to reduce their tax liability by receiving up to $1,500 HOPE or $1,000 Lifetime Learning tax credit for tuition and course-related fees paid. The 2001 Economic Growth and Tax Relief Reconciliation Act created a new tax deduction for tuition expenses and expanded many existing higher education tax provisions. The federal investment in providing student assistance through the tax code has risen sharply from $.0056 billion in 1996 to $7.6 billion in 2002--more than 80 percent of which is comprised of HOPE and Lifetime Learning tax expenditures. GAO reviewed title IV aid programs and higher education tax provisions designed to assist students and families, to help Congress prepare for the reauthorization of HEA. GAO found that, in the 1999-2000 academic year, the Lifetime Learning and HOPE tax credits provided an estimated 4 in 10 undergraduate students with benefits that equaled a varying share of tuition and fees charged and title IV aid received. Some students did not receive the credits on the basis of their income; while others received the credits, but obtained less than the credits' maximum value because their educational expenses were too small to make full use of the credits. Available policy and instructions provide clear guidance about the impact that several, but not all, tax provisions have on title IV aid eligibility. For several higher education tax provisions, the HEA or Education's policies and instructions make clear how the use of tax provisions affects aid eligibility. For some tax provisions, however, Education has not established a policy on how their use affects aid eligibility, or it has established a policy but not communicated it clearly to aid applicants. Little information is available to Congress on the relative effectiveness of title IV grants, loans, and the HOPE and Lifetime Learning tax credits in promoting postsecondary attendance, choice, and completion or on the impact of these programs on college costs. This is due, in part, to the data and methodological challenges intrinsic to conducting studies examining their effects. Moreover, Education has conducted few evaluations of the title IV aid programs, and Treasury has not yet examined the effects of higher education tax credits.
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Report to Congressional Committees:
September 2002:
Student Aid and Tax Benefits:
Better Research and Guidance Will Facilitate Comparison of
Effectiveness and Student Use:
GAO-02-751:
Contents:
Letter:
Results in Brief:
Background:
Hope and Lifetime Learning Credits Provide Benefits for a Substantial
Portion of Undergraduate Students:
Available Policy and Instructions Provide Clear Guidance about the
Impact of Several, but Not All, Tax Provisions on Eligibility for Title
IV Aid:
Little Information Is Available to Congress on the Relative
Effectiveness of Title IV Grants, Loans, and Hope and Lifetime Learning
Tax Credits:
Conclusions:
Recommendations to the Secretaries of Education and Treasury:
Agency Comments:
Appendix I: Estimation of HOPE and Lifetime Learning Tax Credits and
Title IV Student Aid:
Appendix II: Research on the Effects of Grants, Loans, and Tax Credits:
Appendix III: Comments from the Department of Education:
Appendix IV: Comments from the Department of Treasury:
Appendix V: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Staff Acknowledgments:
Bibliography:
Tables:
Table 1: Selected Postsecondary Education Tax Provisions, 2002:
Table 2: Estimated Use of Tax Credits and Title IV Aid Among All
Undergraduates in 1999-2000:
Table 3: Percent of All Undergraduate Students Receiving HOPE Credit:
Table 4: Percent of All Undergraduate Students Receiving Lifetime
Learning Credit:
Table 5: Average Amount of HOPE Credit:
Table 6: Average Amount of Lifetime Learning Credit:
Table 7: HOPE Credit as a Percent of Tuition and Fees Charged and Net
Tuition and Fees Paid by Dependent Students 37:
Table 8: HOPE Credit as a Percent of Tuition and Fees Charged and Net
Tuition and Fees Paid by Independent Students 38:
Table 9: Lifetime Learning Credit as a Percent of Tuition and Fees
Charged and Net Tuition and Fees Paid by Dependent Students:
Table 10: Lifetime Learning Credit as a Percent of Tuition and Fees
Charged and Net Tuition and Fees Paid by Independent Students:
Table 11: Amount of HOPE Credit and Title IV Grant or Loan Assistance
Received by Dependent Students Obtaining Both:
Table 12: Amount of HOPE Credit and Title IV Grant or Loan Assistance
Received by Independent Students Obtaining Both:
Table 13: Amount of Lifetime Learning Credit and Title IV Grant or Loan
Assistance Received by Dependent Students Obtaining Both:
Table 14: Amount of Lifetime Learning Credit and Title IV Grant or Loan
Assistance Received by Independent Students Obtaining Both:
Figures:
Figure 1: Estimated Use of Higher Education Tax Credits and Title IV
Student Aid among All Undergraduates in 1999-2000:
Figure 2: Percent of All Undergraduate Students Receiving HOPE Credit:
Figure 3: Percent of All Undergraduate Students Receiving Lifetime
Credit:
Figure 4: Average Amount of HOPE Credit Received by Dependent and
Independent Students:
Figure 5: Average Amount of Lifetime Learning Credit Received by
Dependent and Independent Students:
Figure 6: HOPE Credit as a Percent of Tuition and Fees Charged and Net
Tuition and Fees Paid by Dependent Students:
Figure 7: HOPE Credit as a Percent of Tuition and Fees Charged and Net
Tuition and Fees Paid by Independent Students:
Figure 8: Lifetime Learning Credit as a Percent of Tuition and Fees
Charged and Net Tuition and Fees Paid by Dependent Students:
Figure 9: Lifetime Learning Credit as a Percentage of Tuition and Fees
Charged and Net Tuition and Fees Paid by Independent Students:
Figure 10: HOPE Credit and Title IV Grant and/or Loan Assistance,
Dependent Students Receiving Both:
Figure 11: HOPE Credit and Title IV Grant and/or Loan Assistance,
Independent Students Receiving Both:
Figure 12: Lifetime Learning Credit and Title IV Grant and/or Loan
Assistance, Dependent Students Receiving Both:
Figure 13: Lifetime Learning Credit and Title IV Grant and/or Loan
Assistance, Independent Students Receiving Both:
Abbreviations:
AGI: adjusted gross income:
EFC: expected family contribution:
FAFSA: Free Application for Federal Student Aid:
GPRA: Government Performance and Results Act of 1993:
IRS: Internal Revenue Service:
HEA: Higher Education Act:
NPSAS: National Postsecondary Student Aid Study:
SEOG: Supplemental Educational Opportunity grants:
SOI: Statistics of Income:
September 13, 2002:
The Honorable Edward M. Kennedy:
Chairman:
The Honorable Judd Gregg:
Ranking Minority Member:
Committee on Health, Education, Labor, and Pensions:
United States Senate:
The Honorable John A. Boehner:
Chairman:
The Honorable George Miller:
Ranking Minority Member:
Committee on Education and the Workforce:
House of Representatives:
The federal government uses a range of policy tools to assist students
in financing postsecondary education, including direct expenditures and
federal tax law. Title IV of the Higher Education Act (HEA), first
adopted in 1965, authorizes federal grant and loan programs, providing
a total of $53 billion in assistance to 8.1 million students in fiscal
year 1999. In the past decade, the federal government has increasingly
relied upon another tool: the tax code. The Taxpayer Relief Act of 1997
allowed eligible taxpayers to reduce their tax liability by receiving
up to a $1,500 HOPE or $1,000 Lifetime Learning tax credit for tuition
and course-related fees paid. The 2001 Economic Growth and Tax Relief
Reconciliation Act created a new tax deduction for tuition expenses,
and expanded many existing higher education tax provisions. For
example, the law excluded the earnings of state-sponsored college
savings and prepaid tuition plans from federal income taxation,
providing they are used to meet tuition and other educational expenses,
and it increased the annual contribution limit for Coverdell Education
Savings Accounts. The federal investment in providing student
assistance through the tax code has risen sharply, from an estimated
$0.0056 billion in 1996 to $7.6 billion in 2002,[Footnote 1] more than
80 percent of which is comprised of HOPE and Lifetime Learning tax
expenditures. In tax year 1999, 6.4 million tax filers obtained about
$4.8 billion dollars in higher education tax credits. In comparison,
the federal government‘s largest student aid program, the Pell grant
program, provided 3.7 million students with $7.2 billion dollars in
grants during the 1999-2000 academic year.
To assist Congress as it prepares for the reauthorization of HEA, we
reviewed the title IV aid programs and higher education tax provisions
designed to assist students and families. Our review focused on three
questions: (1) What assistance do HOPE and Lifetime Learning tax
credits provide, and how do credit benefits compare to the tuition and
fees that students are charged, and to title IV aid they receive? (2)
To what extent do available policy and instructions provide clear
guidance about the impact of tax provisions on eligibility for title IV
financial aid? (3) To what extent is information available to Congress
about the relative effectiveness of title IV grants and loans and the
HOPE and Lifetime Learning tax credits?
To answer question one, we estimated the HOPE and Lifetime Learning tax
credits students received on the basis of the credits‘ design and on
data in the National Postsecondary Student Aid Study (NPSAS). NPSAS
examines how students and their families pay for education and is based
on a nationally representative sample of students. Appendix I describes
our estimation methodology. We also used NPSAS to estimate the title IV
aid received by students considered to be financially dependent on
their parents and by financially independent students.[Footnote 2] To
answer question two, we reviewed the HEA, Internal Revenue Code, title
IV financial aid policies and instructions developed by the Department
of Education (Education), and interviewed Education officials. To
answer question three, we reviewed studies of the effectiveness of
title IV aid and the HOPE and Lifetime Learning tax credits. We focused
on their effects on college attendance and choice, completion, and
costs. These outcomes were chosen because they have been the focus of
congressional concern, as expressed in committee reports, statutorily
established study commissions, and requests for our work from Congress.
We also interviewed Education and Department of Treasury (Treasury)
officials about their research and evaluation concerning title IV aid
and tax credits. Appendix II provides details about our review of the
studies. We conducted our work from August 2001 to July 2002 in
accordance with generally accepted government auditing standards.
Results in Brief
In the 1999-2000 academic year, the Lifetime Learning and HOPE tax
credits provided, we estimate, more than 4 in 10 undergraduate students
with benefits that equaled a varying share of tuition and fees charged
and title IV aid received. Some students did not receive the credits on
the basis of their (or their family‘s) income: those with incomes above
$100,000 were not eligible to claim the credits, and those with incomes
under $20,000 typically lacked a sufficient tax liability to use the
credits. Others received the credits, but obtained less than the
credits‘ maximum value because their educational expenses were too
small to make full use of the credits. Among all dependent students who
received the HOPE credit, it equaled, on average, about 20 percent of
the tuition and fees they were charged, while among all independent
students the HOPE credit equaled 30 percent of the tuition and fees
they were charged, according to our estimates. Some students received
both a tax credit and title IV aid. For these students, HOPE credits
equaled, on average, about one-fifth of the face value of the title IV
aid they received, while the Lifetime Learning credit equaled about one-
tenth of the face value of their title IV aid. As figure 1 shows, title
IV student aid and higher education tax credits, taken together, now
assist more than 70 percent of undergraduate students and families in
paying for postsecondary education.
Figure 1: Estimated Use of Higher Education Tax Credits and Title IV
Student Aid among All Undergraduates in 1999-2000:
This figure is a pie chart showing estimated use of higher education
tax credits and title IV student aid among all undergraduates in 1999-
2000.
33%: Tax credits only;
28%: Neither credits nor title IV aid;
25%: Title IV aid only;
14%: Tax credits and title IV aid.
Note: See appendix I for our methodology used to generate credit
estimates and the confidence intervals associated with these estimates.
Source: GAO calculations based upon 1999-2000 NPSAS data.
[End of figure]
Available policy and instructions provide clear guidance about the
impact that several, but not all, tax provisions have on title IV aid
eligibility. For several higher education tax provisions, the HEA or
Education‘s policies and instructions make clear how the use of tax
provisions affects aid eligibility. For some tax provisions, however,
Education has not established a policy on how their use affects aid
eligibility, or it has established a policy but not communicated it
clearly to aid applicants. Specifically, Education has not decided
whether aid applicants should report the untaxed earnings of state-
sponsored college savings plans, prepaid tuition plans, or Coverdell
Educational Savings accounts when applying for title IV aid, as is the
case with other types of untaxed income. As a result, those who wish to
use these tax provisions are faced with uncertainty about how this
income affects aid eligibility. Education has decided how assets in
state-sponsored college savings plans, Coverdell Educational Savings
accounts, and Savings Bonds should be reported on the title IV aid
application form and used in calculating aid eligibility. However, the
form provides unclear instructions about who should report the
ownership of these assets, the student or parent. This may cause aid
applicants to err in reporting ownership of these assets, and result in
their eligibility for aid being miscalculated. We make recommendations
in this report to address these problems.
Little information is available to Congress on the relative
effectiveness of title IV grants and loans and the HOPE and Lifetime
Learning tax credits in promoting postsecondary attendance, choice, and
completion, or their impact on college costs. This is due, in part, to
the data and methodological challenges intrinsic to conducting studies
examining their effects. Moreover, Education has conducted few
evaluations of the title IV aid programs, while Treasury has not yet
examined the effects of higher education tax credits. Using statistical
techniques and research designs that respond to these data and
methodological challenges, academic researchers have begun to produce
findings about the impact of student financial aid. For example, most
studies that we reviewed found that grant aid results in increased
rates of college attendance, though estimates of its magnitude vary.
Education has focused its analysis of title IV programs on program
delivery, rather than impact. Lacking access to individual taxpayer
data, Education has been unable to analyze the use of higher education
tax credits or their effects. Treasury has access to taxpayer data but
has not used these data as a basis for evaluating the impact of tax
credits. In addition, Treasury does not possess data on the receipt of
title IV aid, limiting its capacity to assess the credits‘ effects. As
a result, little information has been available to help Congress weigh
the relative effectiveness of grants, loans, and tax credits. We
recommend that the Secretaries of Education and Treasury take steps to
address this lack of information.
We provided Education and Treasury with a copy of our draft report for
review and comment. In written comments on our draft report, Education
and Treasury generally agreed with our reported findings and
recommendations. Education‘s and Treasury‘s comments appear in appendix
III and IV, respectively.
Background:
Education is the primary agency overseeing federal investments in
support of students enrolled in postsecondary education. Education‘s
grant and loan programs are the largest source of student aid in the
United States; however, tax provisions recently enacted by Congress
have created new sources of support to assist students in paying for
postsecondary education. These two sources of student assistance”grants
and loans, and tax benefits”are intended to promote access to higher
education and to ensure its affordability. To help track progress
toward these and other goals, Education has developed strategic and
performance goals in accordance with the Government Performance and
Results Act of 1993 (GPRA).[Footnote 3]
Title IV Aid:
Title IV of the HEA of 1965, as amended, authorizes the federal
government‘s financial aid programs for postsecondary education. Title
IV programs include Pell grants for low-income students, parent loans
known as PLUS loans, and Stafford loans. Stafford loans may be either
subsidized or unsubsidized. The federal government pays the interest
cost on subsidized loans while the student is in school. The terms and
conditions of unsubsidized loans are the same as those for subsidized
loans, but the federal government does not pay the interest costs on
the loan while the student is in school; rather, students are
responsible for all interest costs. Title IV also authorizes programs
funded by the federal government and administered by participating
higher education institutions, commonly known as campus-based
aid”Supplemental Educational Opportunity grants (SEOG), Perkins loans,
and federal work-study aid. In academic year 1999-2000, Education
awarded approximately $53 billion to students through the title IV
programs.
In order to receive title IV aid, a student must apply using the Free
Application for Federal Student Aid (FAFSA). Information from the FAFSA
is used to determine the amount of money”called the expected family
contribution (EFC)”that the student and/or the family is expected to
contribute to the student‘s education. Statutory definitions establish
the criteria that students must meet to be considered independent of or
dependent on their parents for purposes 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 4] Once the EFC is
established, it is compared to the cost of attendance at the
institution chosen by the student. If the EFC is greater than the cost
of attendance, the student is not considered to have financial need for
federal title IV aid programs. If the cost of attendance is greater
than the EFC, then the student is considered to have financial need.
Financial aid administrators at the student‘s school then create a
federal financial aid package that may include grants, loans, and work-
study. As part of the financial aid package students may also receive
state, institutional, or private aid.
In 1999-2000, about one in four undergraduates (23 percent) received
federal Pell or SEOG grant aid. Awarded on the basis of financial need,
these grants were highly targeted. About 75 percent of dependent
students receiving Pell and SEOG grants had family incomes of $30,000
or less,[Footnote 5] while three-quarters of independent students
receiving them had incomes of $20,000 or less.[Footnote 6] Stafford
loans were received by 28 percent of undergraduates, and served a more
varied population. A broad range of dependent undergraduates made use
of need-based (or subsidized) student loans. Of the unsubsidized loans
received by dependent undergraduates, 60 percent were received by those
with family incomes of $60,000 or above per year. Of all loans received
by independent students” subsidized and unsubsidized”three quarters of
their total dollar amount went to students whose incomes were less than
$30,000 per year.
Tax Provisions:
In recent years Congress has enacted eight higher education tax
provisions that are specifically designed to help individuals and
families save for, repay, or meet the current costs of higher
education, and accomplish this by permitting tax filers to use their
qualified educational expenses to reduce their federal income tax
liability (see table 1).
Table 1: Selected Postsecondary Education Tax Provisions, 2002:
[See PDF for image]
Source: Internal Revenue Code, Department of Treasury, Joint Committee
on Taxation, and Congressional Research Service.
[A] Under the Taxpayer Relief Act of 1997, the income phase-out amounts
are indexed to inflation.
[End of figure]
Source: Internal Revenue Code, Department of Treasury, Joint Committee
on Taxation, and Congressional Research Service.
Education's Strategic and Annual Performance Goals:
Education has a strategic goal that is particularly relevant to its
title IV programs, to ’Enhance the Quality of and Access to
Postsecondary Education.“ To ensure its progress toward this goal,
Education has developed annual goals that focus on (1) reducing the
gaps in student achievement and completion among students differing by
race, ethnicity, income, and disability; and (2) improving the
effectiveness of its title IV funding mechanisms in terms of, among
other things, tuition prices and borrower indebtedness.
Hope and Lifetime Learning Credits Provide Benefits for a Substantial
Portion of Undergraduate Students:
In the 1999-2000 academic year, more than 4 in 10 undergraduate
students received a higher education tax credit, according to our
estimate. On average, the HOPE tax credit equaled about 20 percent of
the tuition and fees that were charged to dependent students, and 30
percent of those charged to independent students. The Lifetime Learning
credit equaled 8 percent of tuition and fees charged to dependent
students, and 11 percent for independent students. For both groups of
students the HOPE and Lifetime Learning credits comprised a larger
share of the net tuition and fees they paid”that is, tuition and fees
charged, minus all types of grant assistance. In addition to the
credits, some students”about 14 percent”also received title IV aid. For
these students, credit amounts ranged from 4 to 26 percent of the face
value[Footnote 7] of the title IV aid that they received. Taken
together, credits and title IV student aid now assist about 7 out of 10
undergraduate students in meeting the costs of postsecondary education.
Hope and Lifetime Learning Tax Credits Were Received by Many, but Not
All:
According to our estimates, more than 4 in 10 undergraduate students
received a higher education tax credit in 1999-2000, a larger share of
students than participated in the federal government‘s title IV
programs. About 29 percent received a Lifetime Learning tax credit,
while 17 percent received a HOPE tax credit. Students may receive title
IV aid and a HOPE or Lifetime Learning credit, and many did”an
estimated 14 percent of undergraduate students received both.
Not all undergraduates were eligible to receive a HOPE or Lifetime
Learning tax credit. One factor that affects eligibility is income.
Students from families with parents who filed jointly and had incomes
above $100,000 were ineligible to receive the credits. In addition, in
order to receive a credit, tax filers must have a positive tax
liability. For a twoparent family with one dependent college student,
federal income tax liability began in 2000 at about $15,750.[Footnote
8] As shown in figures 2 and 3, a small proportion of those dependent
students whose family incomes were below $20,000 received the credits.
Figure 2: Percent of All Undergraduate Students Receiving HOPE Credit:
This figure is a bar chart showing percent of all undergraduate
students receiving HOPE credit. The X axis represents income, and the Y
axis represents percent.
$0-19,999: Dependent: 4;
$0-19,999: Independent: 9.
$20-39,999: Dependent: 27;
$20-39,999: Independent: 18.
$40-59,999: Dependent: 33;
$40-59,999: Independent: 16
$60-79,999: Dependent: 34;
$60-79,999: Independent: 12.
$80-99,999: Dependent: 32;
$80-99,999: Independent: 14.
Note: See appendix I for confidence intervals associated with these
estimates.
[A] Dependent income equals 1998 parental adjusted gross income (AGI);
independent income equals 1998 student AGI and, if married, spouse‘s
AGI.
Source: GAO calculations based upon 1999-2000 NPSAS data.
[End of figure]
Figure 3: Percent of All Undergraduate Students Receiving Lifetime
Credit:
This figure is a bar graph showing percent of all undergraduate
students receiving lifetime credit. The X axis represents income, and
the Y axis represents percent.
$0-19,999: Dependent: 5;
$0-19,999: Independent: 19.
$20-39,999: Dependent: 29;
$20-39,999: Independent: 46.
$40-59,999: Dependent: 33;
$40-59,999: Independent: 48
$60-79,999: Dependent: 32;
$60-79,999: Independent: 48.
$80-99,999: Dependent: 39;
$80-99,999: Independent: 42.
Note: See appendix I for confidence intervals associated with these
estimates.
[A] Dependent income equals 1998 parental AGI; independent income
equals 1998 student AGI and, if married, spouse‘s AGI.
Source: GAO calculations based upon 1999-2000 NPSAS data.
Figures 4 and 5 show that students who received the credits did not
necessarily receive the full amount. Students may not have a
sufficiently large tax liability or qualified educational expenses
necessary to receive a tax credit‘s full value. Tax filers must have
qualified educational expenses of $2,000 per student to receive the
maximum HOPE credit, while they must have $5,000 of qualified expenses
(for themselves or others claimed on their return) to receive the
maximum value of the Lifetime Learning credit. Tax filers must subtract
the nontaxable aid they received, such as Pell grants or scholarships,
from qualified educational expenses. The reduction of qualified
educational expenses by nontaxable aid reduces the number of students
who might otherwise receive the credits, and it reduces the credit
amounts obtained, particularly, we estimate, among dependent students
with family incomes in the $10-$50,000 range.
Figure 4: Average Amount of HOPE Credit Received by Dependent and
Independent Students:
This figure is a bar graph showing the average amount of HOPE credit
received by dependent and independent students. The X axis represents
income, and the Y axis represents dollars.
[See PDF for image]
Note: See appendix I for confidence intervals associated with these
estimates.
[A] Dependent income equals 1998 parental AGI; independent income
equals 1998 student AGI and, if married, spouse‘s AGI.
Source: GAO calculations based upon 1999-2000 NPSAS data.
[End of figure]
Figure 5: Average Amount of Lifetime Learning Credit Received by
Dependent and Independent Students:
This figure is a bar chart showing average amount of lifetime learning
credit received by dependent and independent students.
[See PDF for image]
Note: See appendix I for confidence intervals associated with these
estimates.
[A] Dependent income equals 1998 parental AGI; independent income
equals student 1998 AGI and, if married, spouse‘s AGI.
Source: GAO calculations based upon 1999-2000 NPSAS data.
[End of figure]
Credits Equaled a Varying Share of Tuition and Fees:
For the 47 percent of all undergraduates who received a tax credit in
1999-2000, the higher education tax credits equaled a varying share of
the tuition and fees. On average, the HOPE tax credit equaled about 20
percent of the tuition and fees that were charged to dependent
students, and 30 percent of independent students‘ tuition and fee
charges. The Lifetime Learning credit equaled 8 percent of tuition and
fees charged to dependent students, and 11 percent for independent
students. Many students receive private, institutional, state, and
federal grants that reduce the tuition and fee costs that they must pay
out of their own resources. In claiming the HOPE and Lifetime Learning
credits, tax filers must reduce their qualified educational expenses,
tuition and fees, by these (and any other) forms of nontaxable aid. We
calculated students‘ net tuition and fees as the tuition and fees they
were charged minus all private, institutional, state, and federal grant
aid they received. We estimate that the HOPE credit equaled, on
average, 28 percent of dependent students‘ net tuition and fees, and 36
percent of independent students‘ net tuition and fees. The Lifetime
Learning credit equaled about 12 percent of dependents‘ net tuition and
fees, and 15 percent of independents‘ net tuition and fees. Figure 6
compares the estimated HOPE credit to the total tuition and fees
charged to dependent students, and to the net tuition and fees they
paid. Figure 7 presents the same comparisons for independent students.
Figure 8 compares the estimated Lifetime Learning credits received to
the total tuition and fees charged to dependent students, and to the
net tuition and fees they paid. Figure 9 presents the same comparisons
for independent students.
Figure 6: HOPE Credit as a Percent of Tuition and Fees Charged and Net
Tuition and Fees Paid by Dependent Students:
This figure is a bar graph showing Hope credit as a percent of tuition
and fees charged and net tuition and feed paid by dependent students.
The X axis represents the income, and the Y axis represents the
percent.
$0-19,999: Dependent: 6;
$0-19,999: Independent: 12.
$20-39,999: Dependent: 20;
$20-39,999: Independent: 31.
$40-59,999: Dependent: 21;
$40-59,999: Independent: 31;
$60-79,999: Dependent: 22;
$60-79,999: Independent: 32.
$80-99,999: Dependent: 12;
$80-99,999: Independent: 15.
[See PDF for image]
Source: GAO calculations based upon 1999-2000 NPSAS data.
Note: See appendix I for confidence intervals associated with these
estimates.
[A] Dependent income equals 1998 parental AGI; independent income
equals 1998 student AGI and, if married, spouse‘s AGI.
Source: GAO calculations based upon 1999-2000 NPSAS data.
[End of figure]
Figure 7: HOPE Credit as a Percent of Tuition and Fees Charged and Net
Tuition and Fees Paid by Independent Students:
This figure is a bar graph showing HOPE credit as a percent of tuition
and fees charged and net tuition and fees paid by independent students.
The X axis is income, and the Y axis is percent.
$0-19,999: Dependent: 21;
$0-19,999: Independent: 26.
$20-39,999: Dependent: 34;
$20-39,999: Independent: 41.
$40-59,999: Dependent: 39;
$40-59,999: Independent: 43;
$60-79,999: Dependent: 44;
$60-79,999: Independent: 50.
$80-99,999: Dependent: 25;
$80-99,999: Independent: 28.
Note: See appendix I for confidence intervals associated with these
estimates.
[A] Dependent income equals 1998 parental AGI; independent income
equals 1998 student AGI and, if married, spouse‘s AGI.
Source: GAO calculations based upon 1999-2000 NPSAS data.
[End of figure]
Figure 8: Lifetime Learning Credit as a Percent of Tuition and Fees
Charged and Net Tuition and Fees Paid by Dependent Students:
This figure is a bar chart showing lifetime learning credit as a
percent of tuition and fees charged and net tuition and fees paid by
dependent students. The X axis is the income, and the Y axis is the
percent.
$0-19,999: Dependent: 5
$0-19,999: Independent: 9.
$20-39,999: Dependent: 9;
$20-39,999: Independent: 14.
$40-59,999: Dependent: 9;
$40-59,999: Independent: 13;
$60-79,999: Dependent: 10;
$60-79,999: Independent: 13.
$80-99,999: Dependent: 5;
$80-99,999: Independent: 6.
[See PDF for image]
Note: See appendix I for confidence intervals associated with these
estimates.
[A] Dependent income equals 1998 parental AGI; independent income
equals 1998 student AGI and, if married, spouse‘s AGI.
Source: GAO calculations based upon 1999-2000 NPSAS data.
[End of figure]
Figure 9: Lifetime Learning Credit as a Percentage of Tuition and Fees
Charged and Net Tuition and Fees Paid by Independent Students:
This figure is a bar graph showing lifetime learning credit as a
percentage of tuition and fees charged and net tuition and fees paid by
independent students. The X axis is income, and the Y axis is the
percent.
[See PDF for image]
Note: See appendix I for confidence intervals associated with these
estimates.
[A] Dependent income equals 1998 parental AGI; independent income
equals 1998 student AGI and, if married, spouse‘s AGI.
Source: GAO calculations based upon 1999-2000 NPSAS data.
[End of figure]
For Title IV Recipients, Higher Education Tax Credits Equaled in a
Varying Share of Their Aid:
Approximately 14 percent of undergraduate students received both title
IV aid and a higher education tax credit in 1999-2000; for these
students, the HOPE and Lifetime Learning tax credits equaled a varying
share of the face value of the title IV aid they received. The HOPE
credit equaled, on average, about one-fifth of the average title IV aid
received by students. The Lifetime Learning tax credit provided a
smaller benefit relative to title IV aid than the HOPE credit,
equaling, on average, about one-tenth of the title IV aid received by
dependent and independent students. For dependent students with family
incomes of $20,000-$40,000, we estimate that the average HOPE credit
($924) was larger than the average title IV grant award ($569). For
students with family incomes of $40,000-$80,000, who typically do not
receive grant aid, the HOPE credit provides a significant benefit in
comparison to the face value of their federal loan assistance. Figures
10 and 11 show, for dependent and independent students, the estimated
HOPE credit and title IV grant and loan aid amounts received. Figures
12 and 13 compare the estimated Lifetime Learning credit and title IV
grant and loan aid amounts received by dependent and independent
students.
Figure 10: HOPE Credit and Title IV Grant and/or Loan Assistance,
Dependent Students Receiving Both:
This figure is a shaded bar chart showing HOPe credit and Title IV
grant and/or loan assistance, dependent students receiving both. The X
axis is income, and the Y axis is dollars. Mean credit, mean loan, and
mean grant are represented in the graph.
Notes: These calculations report the face value of loans, rather than
their economic subsidy value to the student. Recent estimates of the
economic subsidy value of title IV student loans put the value at about
15 to 30 percent of the face value of the loan, depending upon the type
of loan.
See appendix I for confidence intervals associated with these
estimates.
[A] Dependent income equals 1998 parental AGI.
Source: GAO calculations based upon 1999-2000 NPSAS data.
Figure 11: HOPE Credit and Title IV Grant and/or Loan Assistance,
Independent Students Receiving Both:
This figure is a bar graph showing HOPE credit and Title IV and/or loan
assistance, independent students receiving both. The X axis is income,
and the Y axis is dollars. Mean credit, mean loan, and mean grant are
represented in the graph.
[See PDF for image]
Notes: These calculations report the face value of loans, rather than
their economic subsidy value to the student. Recent estimates of the
economic subsidy value of title IV student loans put the value at about
15 to 30 percent of the face value of the loan, depending upon the type
of loan.
See appendix I for confidence intervals associated with these
estimates.
[A] Independent income equals 1998 student AGI and, if married,
spouse‘s AGI.
Source: GAO calculations based upon 1999-2000 NPSAS data.
[End of figure]
Figure 12: Lifetime Learning Credit and Title IV Grant and/or Loan
Assistance, Dependent Students Receiving Both:
This figure is a bar graph showing lifetime learning credit and Title
IV grant and/or loan assistance, dependent students receiving both. The
X axis is the income, and the Y axis is dollars. Mean credit, mean
loan, and mean grant are represented in the graph.
[See PDF for image]
Notes: These calculations report the face value of loans, rather than
their economic subsidy value to the student. Recent estimates of the
economic subsidy value of title IV student loans put the value at about
15 to 30 percent of the face value of the loan, depending upon the type
of loan.
See appendix I for confidence intervals associated with these
estimates.
[A] Dependent income equals 1998 parental AGI; independent income
equals 1998 student AGI and, if married, spouse‘s AGI.
Source: GAO calculations based upon 1999-2000 NPSAS data.
[End of figure]
Figure 13: Lifetime Learning Credit and Title IV Grant and/or Loan
Assistance, Independent Students Receiving Both:
This figure is a bar graph showing lifetime learning credit and Title
IV grant and/or loan assistance, independent students receiving both.
Mean credit, mean loan, and mean grant are represented in the graph.
[See PDF for image]
Notes: These calculations report the face value of loans, rather than
their economic subsidy value to the student. Recent estimates of the
economic subsidy value of title IV student loans put the value at about
15 to 30 percent of the face value of the loan, depending upon the type
of loan.
See appendix I for confidence intervals associated with these
estimates.
[A] Dependent income equals 1998 parental AGI; independent income
equals 1998 student AGI and, if married, spouse‘s AGI.
Source: GAO calculations based upon 1999-2000 NPSAS data.
[End of figure]
For Students Who Did Note Receive Title IV Aid, Credits Equaled, on
Average, from One-Tenth to One-Half of the Tuition and Feed They Were
Charged:
About 6 out of 10 undergraduates did not receive title IV student
assistance in 1999-2000. We estimate that slightly more than half of
these students received a higher education tax credit. Among those
dependent students who received no federal financial aid, the HOPE tax
credit equaled about 25 percent of the tuition and fees they were
charged, while among independents this share was nearly 50 percent. The
Lifetime Learning tax credit equaled a smaller share of tuition and
fees charged to both, 10 percent and 14 percent, respectively.
Available Policy and Instructions Provide Clear Guidance about the
Impact of Several, but Not All, Tax Provisions on Eligibility for Title
IV Aid:
Available policy and instructions provide clear guidance about the
impact of several higher education tax provisions on eligibility for
title IV aid, but in a few instances they do not. Education has not
established a policy on how the income that students and parents report
as part of the expected family contribution is affected by the tax-free
earnings of state savings plans, prepaid tuition plans, and Coverdell
accounts. As a result, those who wish to use these provisions are faced
with uncertainty about how using them affects title IV aid eligibility.
Although Education has established policies about the ownership of
these assets for the purpose of calculating the EFC, these policies
have not been clearly communicated to aid applicants. Specifically,
families who choose to use state savings plans, Coverdell accounts, and
Series EE Savings Bonds receive unclear instructions on the FAFSA form
about who should claim these assets, the student or parent(s). As a
result, they may err when reporting these assets, and their eligibility
for aid may be miscalculated.
For many of the higher education tax provisions that we reviewed, the
HEA or Education‘s guidance make clear how their use affects aid
eligibility. The HEA prohibits including HOPE and Lifetime Learning tax
credits as income or assets in the computation of EFC.[Footnote 9] In
contrast, the act specifies that assets in a tuition prepayment plan do
reduce students‘ eligibility for title IV aid because they reduce
students‘ cost of attendance.[Footnote 10] In specifying how federal
taxation affects the EFC, the HEA also accounts for the effects of two
other tax provisions: the student loan interest deduction and the
higher education tax deduction. Under the rules of the federal
financial aid methodology, aid applicants reduce their reported income
by federal income and payroll taxes, and by an allowance for state
taxes. The use of these tax provisions lowers an applicant‘s tax
liability and their adjusted gross income, reducing their EFC and
increasing their aid eligibility.[Footnote 11] The HEA also specifies
that interest on tax-free bonds, including Savings Bonds, must be
reported as part of the untaxed income included in the EFC. As a
result, the HEA makes clear that the use of Series EE Savings Bonds
increases an aid applicant‘s EFC, and reduces their aid eligibility.
In a few instances, neither the HEA‘s financial aid methodology nor
Education‘s policies establish how parents‘ and students‘ use of
certain tax provisions”state savings plans, prepaid tuition plans, and
Coverdell accounts”affects their eligibility for title IV aid. Before
January 2002, the earnings portion of prepaid tuition and state savings
plans was taxable upon distribution. As part of the student‘s taxable
income, it was reported on the FAFSA form and included in the
calculation of the EFC. After January 2002, in accordance with the
Economic Growth and Tax Relief Reconciliation Act, the earnings of
these plans were no longer subject to federal taxation. Education has
not yet determined whether interest earned on prepaid tuition plans,
savings plans, or Coverdell accounts should be reported on the FAFSA
form and included in the calculation of EFC as a type of untaxed
income.[Footnote 12] As a result, those who use either tax provision
cannot predict whether interest earnings from these plans will increase
the income that they report on the FAFSA, thereby increasing their EFC
and reducing eligibility for most title IV aid.
For state savings plans and Coverdell accounts, as well as Series EE
Saving Bonds, the FAFSA form does not provide clear instructions for
reporting to whom these assets belong, the student or parent. The FAFSA
has a single set of instructions directing parents and students to
report their assets, including state savings plan assets, bonds, and
Coverdell accounts. However, the instructions do not indicate who
should claim which assets.[Footnote 13] As a result, parents may claim
assets that should be reported as student assets, or vice versa. A
mistake of this type has consequences because the HEA specifies that a
larger share of student assets is to be included in the EFC than
parental assets.[Footnote 14] Errors in reporting of these assets on
the FAFSA may result in a miscalculation of the EFC, and students
receiving more or less aid than they would if the assets were correctly
reported.
Little Information Is Available to Congress on the Relative
Effectiveness of Title IV Grants, Loans, and Hope and Lifetime Learning
Tax Credits:
Little information is available to Congress on the relative
effectiveness of title IV grants and loans and the HOPE and Lifetime
Learning tax credits in promoting postsecondary attendance, choice, and
completion, or their impact on college costs. Data and methodological
challenges make it difficult to isolate the impact of grants, loans,
and tax credits. Some academic research has addressed these challenges,
and developed evidence about the effects of student assistance, chiefly
grant aid. Our review of research found little work undertaken by
Education to assess the effectiveness of title IV programs. Treasury
has studied the impact of some tax provisions, but has not yet done so
for the HOPE or Lifetime Learning tax credits. As a result, Congress
has little information to help it weigh the relative effectiveness of
these policy tools.
Identifying Impact of Grants, Loans, and Tax Credits Is Difficult, and
Little is Known Beyond the Effect of Grants on Attendance:
Data and methodological challenges make it difficult to identify the
impact of grants, loans, and tax credits on college attendance and
choice, completion, or costs. Many factors in addition to financial aid
may influence college-going decisions, including academic preparation,
family income and wealth, and the expected costs and benefits of
college attendance. To isolate the effect of financial aid on college
attendance, for example, researchers need data about each of these
factors”both for those who chose to attend college and those who did
not. National surveys do not contain complete data on all of these
factors for those who attend and do not attend college.[Footnote 15]
Moreover, researchers have little evidence about how postsecondary
institutions respond to changes in the availability of federal aid.
Despite such challenges, researchers have begun to establish a body of
findings about the effects of federal aid, much of it focusing on the
effects of grant aid. They have done so by using a variety of
statistical techniques and research designs[Footnote 16] that mitigate
these challenges.
Much of the research we identified examined the impact of grants on
attendance. While some studies conclude that grants have not had a
large effect on college attendance,[Footnote 17] most indicate that
grants have a positive impact on attendance, though their estimates of
its magnitude vary. Recent research by Dynarski (2001) and Seftor and
Turner (2002) found that changes in grant aid significantly increased
the probability that recipients would attend college.[Footnote 18]
Little is known about the effects of the higher education tax credits
on college attendance and choice, completion or costs. No studies we
identified used individual taxpayer data, collected after the credits
were enacted, to estimate any of these effects. A few researchers have
simulated the effects of the HOPE tax credit on rates of college
attendance. One simulation estimated that 90 percent of the cost of the
HOPE credit is received by students who would have attended college in
its absence.[Footnote 19] None of the studies that we reviewed examined
whether the credits have influenced the type of institution that
students choose to attend or their rates of college completion.
Moreover, none examined whether the credits have made college more
affordable for recipients or have led instead to offsetting tuition
increases or reductions in institutional aid to credit recipients.
Education and Treasury Have Not Focused on Impact of the Federal
Grants, Loans, and Higher Education Tex Credits:
Education is authorized to conduct studies on the impact of title IV
programs; however, it has focused primarily on customer service and
program delivery for two reasons. First, Congress has consistently
expressed concern about the management and financial integrity of the
title IV programs.[Footnote 20] A second reason, according to
Education, is that it is difficult to ’isolate the behavioral effects
of title IV aid programs.“ Therefore, Education has chosen to ’assess
the effectiveness of the student aid programs without attempting to
establish a causal link between program funding and achievement of
specific outcomes.“[Footnote 21] As discussed earlier, academic
researchers facing the same methodological challenges have begun to
produce a body of findings.
Because it lacks reliable data on the individuals using higher
education tax credits, Education is unable to determine how tax credits
affects college attendance and choice, completion, and costs. Section
6103(a) of the Internal Revenue Code prohibits the Internal Revenue
Service, without congressional authorization, from sharing individual
taxpayer data with Education. Education has attempted to collect
information on the use of tax provisions by incorporating questions
about their use into the student survey component of the NPSAS.
Dependent students are often unfamiliar with how their parents use tax
benefits and, as a result, the information they provide on surveys is
unreliable.
Treasury has access to individual taxpayer information, from which data
on the use of higher education tax provisions can be calculated.
Although Treasury has studied the effects of other tax credits, it has
not examined the HOPE or Lifetime Learning credits since their
implementation in 1998.[Footnote 22] Treasury does not possess data on
the receipt of title IV aid for those tax filers who use higher
education tax credits, limiting its capacity to assess the credits‘
effects. Treasury has indicated that its primary evaluation priority is
the impact of tax provisions on rates of saving. It has no work
underway, or scheduled, to evaluate the impact of higher education tax
credits.
Conclusions:
Higher education tax provisions are an important new tool in helping
many students and families meet the costs of postsecondary education.
Millions now receive higher education tax credits, and millions are now
saving for college using a variety of other tax provisions. In the
future a growing share of students and families may be making combined
use of tax credits, other tax provisions and title IV aid. Although
many of these tax provisions have clear consequences for title IV aid
eligibility, some do not. Lacking clear guidance about the impact of
some tax provisions on aid eligibility, some families may find it
difficult to plan how they will pay for college. Faced with unclear
instructions about reporting their use of tax provisions, some students
may make errors that result in inaccurate awards of aid. As an
increasing share of students use both aid and tax provisions, more
families will be faced with uncertainty about aid eligibility and
potential errors in aid awards. Education has the capacity to address
both of these problems.
The adoption of higher education tax provisions creates new
opportunities and choices for federal policymakers, providing them with
a range of tools to accomplish their objectives. For Congress to weigh
the relative effectiveness of these policy tools, it must receive
information about who these tools serve and their impact. Congress does
not yet have this information available to it. Several questions likely
to be important to Congress remain to be fully addressed, including:
Does the provision of student assistance”grants, loans, or tax
credits”result in levels of postsecondary attendance greater than would
otherwise occur, and are some forms of assistance more effective at
promoting attendance than others?
Do changes in the availability of student assistance influence the
types of institutions that students choose to attend?
Do changes in the availability of student assistance affect whether
students complete their postsecondary education? How do postsecondary
institutions respond to the changes in the availability of federal
student assistance? Have grant and loan increases, or the introduction
of tax credits, resulted in tuition increases or reductions in
institutional aid to grant, loan and credit recipients and, if so, to
what degree?
Noting the difficulty of showing the link between title IV spending and
outcomes, Education has undertaken little work identifying the impact
of its grant and loan programs. As a result, it cannot fully assess its
progress in achieving its strategic goal to ’Enhance the Quality of And
Access to Postsecondary Education.“ Moreover, Treasury and Education
have not collaborated to provide Congress with evidence about the
impact of higher education tax credits and title IV student aid.
Determining whether there is a causal link between program and tax
expenditures and desired outcomes is difficult, but not impossible.
Given an annual investment of billions of dollars”in outlays and
revenues foregone”studying their effectiveness is warranted.
Recommendations to the Secretaries of Education and Treasury:
To ensure that students and families understand how using tax
provisions will affect their eligibility for title IV financial aid, we
recommend that the Secretary of Education develop a policy specifying
whether the tax-free earnings of state-sponsored college savings plans,
tuition prepayment plans, and Coverdell Education Savings Accounts
should be included in the calculation of the EFC and, therefore,
reported by aid applicants as untaxed income on the FAFSA form. In
addition, we recommend that the Secretary clarify FAFSA instructions,
clearly explaining who should report ownership of the assets held in
state-sponsored savings plans, Coverdell education savings accounts,
and Series EE Savings Bonds.
In order to provide Congress with information about the effectiveness
of its title IV programs as well as to ensure its programs are
achieving results, we recommend that the Secretary of Education sponsor
research on the impact of title IV programs on postsecondary education
attendance and choice, completion, and costs.
In order to provide Congress with information about the relative
effectiveness of Education‘s direct expenditure programs and Treasury‘s
higher education tax provisions, we recommend that the Secretaries of
Education and Treasury collaborate in studying the impact of tax
credits and title IV student aid programs on college attendance and
choice, completion, and costs. As a first step, the Secretaries will
need to identify opportunities for, and limits to, the sharing of data,
and develop a plan to address them.
Agency Comments:
In their written comments, Education and Treasury noted that the report
was useful and informative, and generally agreed with our findings and
recommendations. In response to our recommendation that Education
develop policy and clarify instructions on how the use of certain tax
provisions affect title IV aid eligibility, Education stated that it
would take advantage of the opportunity provided by the upcoming HEA
reauthorization to comprehensively review how families now pay for
college and, consequently, the title IV student aid eligibility
formulas. Regarding our recommendation that Education sponsor research
on the effectiveness of title IV programs, Education indicated that it
would identify opportunities to sponsor such research, including how
the federal investment affects students‘ postsecondary education
attendance and completion as well as institutions‘ tuition and
financial aid behavior. In response to our recommendation that
Education and Treasury collaborate in studying the impact of tax
credits and title IV student aid programs, Treasury said that such an
effort would be beneficial. Treasury also noted that it would take time
and staff resources to develop a useful longitudinal database, and that
the confidentiality of individuals‘ tax return information must always
be protected. Education noted that it recently collaborated with
Treasury in developing a legislative proposal that would allow the
agencies to match income information contained on tax returns with
title IV student aid application data for the purpose of reducing
erroneous payments to individuals participating in the title IV
programs. Education said it looked forward to future collaborations
with Treasury.
We are sending copies of this report to the Secretaries of Education
and Treasury and other interested parties. We will also make copies
available to others upon request. In addition, this report will be
available at no charge on the GAO Web site at [hyperlink,
http://www.gao.gov].
If you have any questions about this report, please contact me on (202)
512-8403. Other contacts and acknowledgments are listed in appendix V.
Signed by:
Cornelia M. Ashby:
Director, Education, Workforce, and Income Security Issues:
Appendix I: Estimation of HOPE and Lifetime Learning Tax Credits and
Title IV Student Aid:
All estimates of title IV student financial aid are based upon the 1999-
2000 National Postsecondary Student Aid Study (NPSAS). NPSAS is a
comprehensive study that examines how students and their families pay
for postsecondary education. It includes nationally representative
samples of 50,000 undergraduates, and 12,000 graduate and first-
professional students enrolled at approximately 1,000 postsecondary
institutions during the 1999-2000 academic year. The data are based on
student interviews and administrative records, and NPSAS contains both
students who received financial aid and those who did not. Title IV
financial aid included Pell and SEOG grants, Stafford loans, PLUS
loans, and federal work-study assistance. In reporting on title IV
loans, we indicate the face amount of the loans received.
We computed estimates of the HOPE and Lifetime Learning credits
received by students using data from NPSAS. NPSAS data are collected at
the individual student level, and cannot be aggregated into families or
linked to tax filing status. Therefore, our analysis treated individual
students as if they were the credit claimants and recipients. Credit
amounts for each student in NPSAS were computed by calculating a
completed Internal Revenue Service (IRS) form 8863, the form used by
tax filers to claim the credits, for each student in the NPSAS sample.
We determined a student‘s eligibility for the HOPE credit on the basis
of enrollment status and year in school. We subsequently assumed that
all students not eligible for the HOPE credit were potentially eligible
for the Lifetime Learning credit.
After establishing eligibility for students in the database, we
determined the maximum tax credit each student could receive using the
formulas contained in the IRS form 8863, applying the income
eligibility requirements associated with these credits. Form 8863 uses
adjusted gross income (AGI) for these measures, which is all income
minus exclusions from income such as student-loan interest and IRA
contributions. For one-half of students in the NPSAS database who filed
a Free Application for Federal Student Aid (FAFSA), NPSAS reports the
adjusted gross income for the student (and spouse) if they are
independent, or the parents (if the student is a dependent). For the
other half of students, income is based on a computer-assisted
telephone interview, and/or stochastic imputation.
In addition to income, the amount of credit allowed is limited by the
amount of tax liability reduced by amounts of dependent care and the
elderly and disabled credits claimed. Generally speaking, tax liability
is tax owed on a filer‘s taxable income, which is their AGI minus
personal exemptions and either the standard deduction or the sum of
itemized deductions such as mortgage interest or property taxes.
Without tax data we had no means of estimating potential itemized
deductions, so we assumed that all tax filers used the standard
deduction. We calculated the amount of liability owed using the
standard tax tables provided by the IRS. There is no information in
NPSAS about the amount claimed for dependent care and the elderly and
disabled tax credits. We therefore assumed that these returns only had
education tax credits.
The steps above allowed us to calculate a tax credit for every student
in the NPSAS sample. We estimated that approximately 90 percent of the
students in the NPSAS sample who were eligible to claim the credits did
so. We had no reliable evidence about different rates of tax credit use
across family income or student type; therefore, we randomly selected a
90 percent sample of those students who had a non-zero credit to be the
population of credit recipients used to calculate our tax credit
estimates.
The results of our estimation were compared to data on credits claimed
and allowed, computed from the Statistics of Income (SOI) and provided
to us by the IRS. Our estimate of the net value of HOPE and Lifetime
credits allowed was 94 percent of the SOI estimate. Our estimates of
HOPE credits claimed was significantly lower than the SOI estimate,
while our estimate of Lifetime Learning credits claimed was
significantly higher than the SOI estimate.
Limitations of Our Analysis:
Some aspects of our methodology tend to overstate the credit amounts
claimed, while others aspects of the methodology have the opposite
effect. Tax filers who had more than one family member enrolled in
postsecondary education were able to apply the qualified education
expenses of each to the Lifetime Learning tax credit, up to a $5,000
per household limit. NPSAS data do not allow individual student records
to be linked into households. Therefore, we were unable to adjust our
estimates of students‘ qualified educational expenses to reflect this
feature of the credit. Our estimates of total Lifetime Learning credit
amounts were larger than those estimated from the SOI; some of this
overestimation may have resulted from this limitation.
Tax filers using either the HOPE or Lifetime Learning credit may find
that they are unable to obtain the full value of the credit because
they lack sufficient tax liability to do so. Our methodology assigns
the tax liability of each family to one student, regardless of the
number of family members actually enrolled. For those families that had
more than one student enrolled, our methodology may overestimate the
tax liability available to the student and thus overestimate the credit
received.
We assumed that all tax filers used the standard deduction. Our
estimates of pre-credit tax liability among those with adjusted gross
incomes of $20-30,000 were 17 percent lower than SOI‘s, and 8 percent
lower for tax filers with adjusted gross incomes of $30-$40,000. Our
estimates of tax liability were slightly higher than those of SOI at
AGIs above $75,000. This may result in an underestimation of the
credits claimed by tax filers with adjusted gross incomes below
$40,000.
Some individuals who are eligible to claim the credit may not do so.
There are no reliable data on the rate at which eligible tax filers
claim the HOPE and Lifetime Learning credits. Our methodology estimated
that 90 percent of the students in the NPSAS sample who were eligible
to claim the credits did so. We first calculated a credit amount for
all students. Lacking any empirical basis for establishing different
rates of credit usage among students, we randomly selected a 90 percent
sample of students who had a non-zero credit to be the population of
credit recipients used to calculate our tax credit estimates. To the
extent that the rate of usage varies across student populations by
income or dependency status, our estimates of credit amounts will be
too small for some populations, and too large for others.
Data limitations may also affect the quality of tax credit estimates.
Our estimates of tax credits may be lower than those obtained from the
SOI because SOI data represent pre-audited amounts, and tax filers may
have over claimed the credits. While income data for those students who
did apply for federal financial aid is reported by NPSAS to be very
precise, for the other half of students the income information is
acknowledged by NPSAS to be much less reliable. This lack of
reliability in the measurement of income may result in imprecise
estimates of credit usage and credit amounts received.
Because our estimates come from a sample of the larger population,
NPSAS, there is some sampling error associated with them. Moreover,
taking a 90 percent sample of those data introduces additional sampling
errors. In calculating sampling errors and confidence intervals, we
took into account this complex sample design. Sampling errors are often
represented as a 95 percent confidence interval: an interval that 95
times out of a 100 will contain the true population value. The upper
and lower bounds of the 95 percent confidence intervals for each
estimate are presented in the following tables.
Table 2: Estimated Use of Tax Credits and Title IV Aid Among All
Undergraduates in 1999-2000;
[See PDF for image]
Source: GAO calculations based upon 1999-2000 NPSAS data.
[End of table]
Table 3: Percent of All Undergraduate Students Receiving HOPE Credit
(In percentages):
[See PDF for image]
Source: GAO calculations based upon 1999-2000 NPSAS data.
[End of table]
Table 4: Percent of All Undergraduate Students Receiving Lifetime
Learning Credit (In percentages):
[See PDF for image]
Source: GAO calculations based upon 1999-2000 NPSAS data.
[End of table]
Table 5: Average Amount of HOPE Credit:
[See PDF for image]
Source: GAO calculations based upon 1999-2000 NPSAS data.
[End of table]
Table 6: Average Amount of Lifetime Learning Credit:
[See PDF for image]
Source: GAO calculations based upon 1999-2000 NPSAS data.
[End of table]
Table 7: HOPE Credit as a Percent of Tuition and Fees Charged and Net
Tuition and Fees Paid by Dependent Students:
[See PDF for image]
Source: GAO calculations based upon 1999-2000 NPSAS data.
[End of table]
Table 8: HOPE Credit as a Percent of Tuition and Fees Charged and Net
Tuition and Fees Paid by Independent Students:
[See PDF for image]
Source: GAO calculations based upon 1999-2000 NPSAS data.
[End of table]
Table 9: Lifetime Learning Credit as a Percent of Tuition and Fees
Charged and Net Tuition and Fees Paid by Dependent Students:
[See PDF for image]
Source: GAO calculations based upon 1999-2000 NPSAS data.
[End of table]
Table 10: Lifetime Learning Credit as a Percent of Tuition and Fees
Charged and Net Tuition and Fees Paid by Independent Students:
[See PDF for image]
Source: GAO calculations based upon 1999-2000 NPSAS data.
[End of table]
Table 11: Amount of HOPE Credit and Title IV Grant or Loan Assistance
Received by Dependent Students Obtaining Both:
[See PDF for image]
[A] No value calculated.
Source: GAO calculations based upon 1999-2000 NPSAS data.
[End of table]
Table 12: Amount of HOPE Credit and Title IV Grant or Loan Assistance
Received by Independent Students Obtaining Both:
[See PDF for image]
[A] No value calculated.
Source: GAO calculations based upon 1999-2000 NPSAS data.
[End of table]
Table 13: Amount of Lifetime Learning Credit and Title IV Grant or Loan
Assistance Received by Dependent Students Obtaining Both:
[See PDF for image]
[A] No value calculated.
Source: GAO calculations based upon 1999-2000 NPSAS data.
[End of table]
Table 14: Amount of Lifetime Learning Credit and Title IV Grant or Loan
Assistance Received by Independent Students Obtaining Both:
[See PDF for image]
[A] No value calculated.
Source: GAO calculations based upon 1999-2000 NPSAS data.
[End of table]
Appendix II: Research on the Effects of Grants, Loans, and Tax Credits:
To identify available information on the relative effectiveness of
title IV aid and the HOPE and Lifetime Learning tax credits, we
reviewed studies of the factors that affect college attendance and
choice, completion, and costs. These outcomes were chosen because they
have been the focus of congressional concern, as expressed in committee
reports, statutorily established study commissions, and requests for
our work from Congress. We examined studies that appeared in books,
refereed journals, working papers, dissertations, or government
reports. Some of these studies were excluded from further assessment
because they did not undertake original data analysis that could
identify the effectiveness of federal financial aid programs. Studies
that provided an original empirical analysis (or, in the case of tax
credits, a simulation methodology) were subsequently assessed according
to professional standards of econometric analysis for their
methodological rigor. Some of these studies explicitly estimated the
effects of federal aid programs. Others estimated how sensitive student
attendance, completion, or choice decisions are to changes in the net
cost of college. The studies are listed in the bibliography. The
results of studies that were judged to contain acceptably identified
statistical estimates formed the basis for our findings about the
availability of information concerning the relative effectiveness of
title IV grants and loans and HOPE and Lifetime Learning tax credits.
Appendix III: Comments from the Department of Education:
United States Department of Education:
400 Maryland Ave., S.W., Washington, D.C. 20202-0500:
[hyperlink, http://www.ed.gov]:
The Deputy Secretary:
September 6, 2003:
Ms. Cornelia M. Ashby:
Director, Education, Workforce, and Income Security Issues:
United States General Accounting Office:
Washington, D.C. 20548:
Dear Ms. Ashby:
Thank you for the opportunity to review and comment on your draft
report, "Student Aid and Tax Benefits: Better Research and Guidance
Will Facilitate Comparison of Effectiveness and Student Use." I am
confident that members of Congress will find this report as useful and
informative as we in the Department have.
We appreciate your examining the wide range of federal efforts to help
students and their families pay postsecondary education expenses, and
providing useful information and suggestions. We also appreciate the
bibliography of publications and working papers that you have included
in the report, which will be useful ad we work toward strengthening the
quality of educational research and increasing its relevance to meet
the needs of our customers. My staff had previously shared our
technical comments with our office that, we think, would help the
reader understand both the direct and tax expenditure programs that
comprise the federal effort to help make college affordable for all.
The formulas that are used to determine a student's eligibility for
federal student aid were codified in the 1986 amendments to the Higher
Education Act of 1965 (HEA). The "expected family contribution" (EFC),
the amount that a student and his or her family can be reasonable
expected to contribute toward postsecondary expenses, is derived from
an assessment of the family's financial (income and assets) and
household circumstances. The HEA defines income for this purpose and
includes both taxable (adjusted gross income as reported on the federal
income tax return) and untaxed income.
Since 1986, a number of new tax preferences and benefits related to
financing higher education have been made available to families,
including federal and state ta credits and deductions as well as
specialized savings plan. Typically, the Department responded in a
piece meal fashion by adjusting the EFC calculation through legislation
or policy guidance. The upcoming HEA reauthorization will provide the
opportunity for a comprehensive review of the ways in which families
now pay for college and, consequently, the student eligibility
formulas. We play to take advantage of this opportunity.
Consistent with our Strategic Plan, we agree with your recommendation
that we ensure our programs are achieving their intended results, and
this report can hep guide our research and evaluation agenda in support
if the Strategic Plan's goals for postsecondary education. We look
forward to identifying opportunities for sponsoring evaluations of
Title IV programs, including how the federal investment affects
students' postsecondary attendance and completion as well as
institutions' tuition and financial aid behavior.
Earlier this summer the Administration, in a joint letter signed by
Treasury Secretary O'Neill, Office of Management and Budget Director
Daniels, and Secretary Paige, forwarded a legislative proposal to the
Congress that would allow the Treasury and Education Departments to
match income information reported on tax returns and federal student
aid applications, This legislation will help reduce erroneous payments
to individuals participating in the federal student aid programs and
ensure that the right people receive the right amount of federal funds.
We look forward to future collaborations with the Treasury Department.
Again, we appreciate the opportunity to comment on the draft report.
Sincerely,
Signed by:
William D. Hansen:
[End of section]
Appendix IV: Comments from the Department of Treasury:
Department of the Treasury:
Washington, D.C. 20220:
August 29, 2002:
Ms. Cornelia M. Ashby:
Director Education, Workforce, and Income Security Issues:
General Accounting Office:
Washington, D.C. 20548:
Thank you for your letter of August 16th to Secretary O'Neill
soliciting the comments of the Treasury Department on your draft
report, Student Aid and Tax Benefits: Better Research and Guidance Will
Facilitate Comparison of Effectiveness and Student Use. The Secretary
has asked the Office of Tax Policy, which carried out the Department's
responsibilities regarding tax-related research, to review the draft
report. We found it to be a useful and informative report on the
interactions between various tax code provisions and Department of
Education grant and loan programs directed toward the policy goals of
increasing enrollments in higher education through enhanced
affordability.
We are in agreement with the report's recommendation regarding the
potential benefits of collaborative research on the part of the
Departments of Education and the Treasury. Most of the tax provisions
discussed in the report are relatively new. Developing a useful
longitudinal data base regarding these provisions will take some time
and will be subject to the limited staff resources of the Office of Tax
Policy and the Internal Revenue Service. In addition, the
confidentiality of information from individual tax returns must always
be projected, which would limit the data that could be shared with the
Department of Education in joint research.
We appreciated the opportunity our staff was given to consult with the
authors of the report during various stages of its development and to
provide a number of minor and technical comments. Thank you again for
those opportunity to make these comments.
Sincerely,
Signed by:
Andrew B. Lyon:
[End of section]
Appendix V: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Jeff Appel (202) 512-9915;
Thomas Weko (202) 512-8796.
Staff Acknowledgments:
In addition to those named above, the following people also made
significant contributions to this report: Paul L. Posner, Managing
Director, Federal Budget Issues, Strategic Issues; Michael Brostek,
Director, Tax Issues; and Patrick di Battista, Malcolm Drewery, Bryon
Gordon, John Mingus, Edward Nannenhorn, Linda Stokes, Andrea Romich
Sykes, and James Wozny.
[End of section]
Bibliography:
Cameron, Stephen V., and James J. Heckman. ’Can Tuition Policy Combat
Rising Wage Inequality?“ Kosters, Marvin H. (ed) Financing College
Tuition: Government Policies and Educational Priorities. Washington,
D.C.: The American Enterprise Institute, 1999.
Cameron, Stephen V., and James J. Heckman. ’The Dynamics of Educational
Attainment for Black, Hispanic, and White Males.“ Journal of Political
Economy, 109, no. 3, (2001): 455-499.
Cronin, Julie-Anne. ’The Economic Effects and Beneficiaries of the
Administration‘s Proposed Higher Education Tax Subsidies“ National Tax
Journal 50 no. 3 (September 1997): 519-540.
Dynarski, Susan. ’Hope for Whom? Financial Aid for the Middle Class and
Its Impact on College Attendance.“ National Tax Journal 53, no.3, part
2 (September 2000): 629-661.
Dynarski, Susan. ’Does Aid Matter? Measuring the Effect of Student Aid
on College Attendance and Completion.“ John F. Kennedy School of
Government, Harvard University Working Paper (RWP01-034), September
2001.
Ellwood, David T., and Thomas J. Kane. ’Who Is Getting a College
Education? Family Background and the Growing Gaps in Enrollment“ in
Danziger, Sheldon, and Jane Waldfogel (eds). Securing the Future:
Investing in Children from Birth to College. New York: Russell Sage
Foundation, 2000.
Gravelle, Jane, and Dennis Zimmerman. ’Tax Subsidies for Higher
Education: An Analysis of the Administration‘s Proposal.“ Congressional
Research Service: Report 97-581E, May 1997.
Heckman, James J., Lance Lochner, and Christopher Taber. ’General-
Equilibrium Treatment Effects: A Study of Tuition Policy.“ The American
Economic Review, 88 no. 2 (1998): 381-386.
Kane, Thomas J. ’Rising Public College Tuition and College Entry: How
Well Do Public Subsidies Promote Access to College?“ National Bureau of
Economic Research Working Paper no. 5164 (July 1995).
Kane, Thomas J. The Price of Admission. Washington, D.C., and New York,
N.Y.: The Brookings Institution and the Russell Sage Foundation, 1999.
Li, Judith. ’Estimating the Effect of Federal Financial Aid on Higher
Education: A Study of Pell Grants.“ (Ph.D. diss., Harvard University,
1999).
Manski, Charles, and David Wise. College Choice in America. Cambridge,
Massachusetts: Harvard University Press, 1983.
McPherson, Michael S. and Morton Owen Schapiro. Keeping College
Affordable Washington, D.C.: The Brookings Institution, 1991.
Oberg, Jon H. ’Testing Federal Student-Aid Fungibility in Two Competing
Versions of Federalism.“ Publius: The Journal of Federalism 27:1
(Winter 1997): 115-134.
Reyes, Suzanne. ’Education Opportunities and Outcomes: The Role of the
Guaranteed Student Loan.“ (Ph.D. diss., Harvard University, 1995).
Rouse, Cecilia Elena. ’What to Do after High School: The Two-Year
versus Four-Year College Enrollment Decision“ in Ronald G. Ehrenberg
(ed). Choices and Consequences: Contemporary Policy Issues in
Education. Ithaca, N.Y.: ILR Press, 1994.
Schwartz, J. Brad. ’Wealth Neutrality in Higher Education: The Effects
of Student Grants.“ Economics of Education Review 5, no. 2 (1986): 107-
117.
Seftor, Neil S., and Sarah E. Turner. ’Back to School: Federal Student
Aid Policy and Adult College Enrollment.“ The Journal of Human
Resources 37 (2002): 336-352.
Turner, Sarah E. ’Does Federal Aid Affect the Price Students Pay for
College? Evidence from the Pell Program.“ mimeo (1998).
[End of section]
[1] Cost is measured in estimated revenues foregone, and expressed in
constant 2002 dollars. Total costs are calculated on the basis of eight
tax provisions that aim to help students and families save, pay for, or
repay the costs of higher education, and do this by permitting tax
filers to reduce their income tax liability through the use of
qualified educational expenses. See table 1.
[2] To be classified as an independent student in the title IV
financial aid process, students must meet one of the following criteria
in academic year 2002-03: (1) veteran of armed services; (2) born
before January 1, 1979; (3) married; (4) enrolled in a graduate or
professional educational 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 independents through the
exercise of their professional judgment.
[3] GPRA seeks to improve the efficiency, effectiveness, and public
accountability of federal agencies as well as to improve congressional
decision-making. To do so, the act outlines a series of steps in which
agencies are required to identify their goals, measure performance, and
report on the degree to which those goals were met.
[4] For students classified as financially dependent on their parents,
the EFC is based on the income and assets of the student and parents.
The student and parent EFC are computed separately and then summed. For
independent students with dependents, the EFC calculation is similar to
that of a parent of a dependent student. For independent students
without dependents, the EFC is based on a portion of their income and
assets.
[5] Dependent students‘ income is measured by parental income for 1998.
If students applied for financial aid, parental income was measured as
adjusted gross income. See appendix I for additional information on
income measurement in NPSAS.
[6] The income of independent students is that of the student and, if
married, that of their spouse, for 1998.
[7] We report the face value of title IV loans awarded, rather than
their economic subsidy value to the student. Although title IV loans
must be repaid, they can provide a subsidy by offering funds to
students who could not otherwise find lenders, and by offering lower
interest rates than are available in the non-title IV private loan
market. In contrast to grants and tax credits, which provide subsidies
that are equal to their face values, loans provide subsidies that are
considerably less, on average, than their face values. Dynarski
(’Loans, Liquidity, and Schooling Decisions,“ February 2002) calculates
that the subsidy for loans of average riskiness is equal to about 30
percent of the face value for subsidized Stafford loans and about 15
percent for unsubsidized Stafford loans. Cameron and Heckman (1999) put
the subsidy value at about a third of the amount of loans disbursed.
[8] Assuming the family filed a joint return and used a standard
deduction.
[9] The act also prohibits including the credits as financial
assistance in the award of title IV aid.
[10] Each dollar of qualified educational expenses paid from a prepaid
tuition plan reduces the student‘s cost of attendance by the same
amount. This results in a reduction in the student‘s calculated
financial need and aid eligibility.
[11] Both tax deductions reduce an applicant‘s tax liability and AGI.
The first of these changes increases the EFC, while the second reduces
it. The net effect of these two changes is to reduce the applicant‘s
EFC.
[12] HEA‘s financial aid methodology includes some forms of untaxed
income in the calculation of the EFC, such as tax-exempt interest
income (from IRS 1040, line 8b) and a variety of governmental payments
(worker‘s compensation, untaxed portions of railroad retirement
benefits, and Black Lung benefits).
[13] Education‘s Web-based instructions in support of the FAFSA form
do, however, provide clear guidance about the ownership of state
savings plan assets. The instructions are available at [hyperlink,
http://www.ed.gov/prog_info/SFA/FAFSA/instr02-03/step4_4.html]
[14] If reported as the asset of a dependent student, 35 percent of net
state savings plan assets would be counted toward the EFC; if reported
as a parental asset, between 2.64 percent and 5.64 percent of their net
value would be counted toward the EFC. Incorrectly reporting this asset
as a student asset would result in an EFC that is larger than it should
be, and an erroneously small estimate of financial need.
[15] Surveys that focus on educational choices and outcomes have sparse
information on potential students‘ parental resources and academic
ability. See Sarah E. Turner, ’Federal Financial Aid: How Well Does It
Work?“, John C. Smart (ed), Higher Education: Handbook of Theory and
Research, vol. XVI (New York: Agathon Press, 2001.
[16] For example, several recent studies use a quasi-experimental
design attempting to isolate the effects of financial aid policy
changes. See Susan Dynarski, ’Does Aid Matter? Measuring the Effect of
Student Aid on College Attendance and Completion.“ John F. Kennedy
School of Government, Harvard University Working Paper (RWP01-034),
September 2001; and Neil S. Seftor and Sarah E. Turner, ’Back to
School: Federal Student Aid Policy and Adult College Enrollment,“ The
Journal of Human Resources 37 (2002): 336-352. Other studies explicitly
model student college attendance decisions to correct for potential
bias from incomplete data. See Stephen V. Cameron and James J. Heckman,
’The Dynamics of Educational Attainment for Black, Hispanic, and White
Males.“ Journal of Political Economy, 109, no. 3 (2001): 455-499.
Charles Manski and David Wise, College Choice in America. Cambridge,
Massachusetts: Harvard University Press, 1983.
[17] See Kane (1999). Cameron and Heckman (2001) estimate that ’a
$1,000 increase in Pell grant entitlements produces less than a 1
percent increase in enrollments—“
[18] Dynarski studied the effects of the elimination of the Social
Security student benefit program in 1982, and concluded that the offer
of a $1,000 grant (year 2000 dollars) would increase the probability of
attending college by 3.6 percentage points. Seftor and Turner find that
changes in the availability of Pell grants had sizeable effects on the
college enrollment of older, independent students.
[19] Cameron and Heckman‘s simulation leads them to conclude, ’The
estimated enrollment response to the HOPE program is a 4.2 percentage
point increase in two-year enrollments and a 0.9 percentage point
decrease in four-year enrollments (3.3 increase for both categories
combined).“
[20] Over the last several years, we have frequently reported to
Congress on these issues. See, for example, U.S. General Accounting
Office, Major Management Challenges and Program Risks: Department of
Education, GAO-01-245 (Washington D.C.: January 2001).
[21] U.S. Department of Education, Planning, and Evaluation Service,
Biennial Report, 1995-96. (As of 2002, this continued to be Education‘s
position.)
[22] Treasury was mandated by P.L. 104-188 to ’study the effect on
adoptions“ of the two adoption tax provisions: a tax credit for
qualified adoption expenses and an exclusion for employer-paid or
reimbursed adoption expenses. The study was prepared in consultation
with the Department of Health and Human Services, and released in
October 2000. Report to the Congress on Tax Benefits for Adoption,
[hyperlink, http://www.treas.gov/taxpolicy/library/adoption.pdf].
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