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 ID: GAO-05-684 July 29, 2005Federal 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. In fiscal year 2004, about $14 billion in grants and $56 billion in loans were made under title IV while estimated outlay equivalents for postsecondary tax preferences amounted to $10 billion. In light of the relative newness and financial significance of tax preferences, this report examines (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.
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. While both serve students and families with a range of incomes, 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. While both require students and families to fill out forms, tax preferences require more responsibility on the part of students and families because they 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 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 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-05-684, 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
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Report to the Committee on Finance, U.S. Senate:
July 2005:
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:
This report was amended on November 17, 2005 to remove estimated median income data for households with Section 529 Qualified Tuition Program accounts or Coverdell Education Savings Accounts, due to a sample selection bias in the private sector research report that was our source. Median income estimates were removed from Table 2 and the text on page 18.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-684]:
GAO Highlights:
Highlights of GAO-05-684, a report to 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. In fiscal year 2004, about $14
billion in grants and $56 billion in loans were made under title IV
while estimated outlay equivalents for postsecondary tax preferences
amounted to $10 billion. In light of the relative newness and financial
significance of tax preferences, this report examines (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.
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. While
both serve students and families with a range of incomes, 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.
While both require students and families to fill out forms, tax
preferences require more responsibility on the part of students and
families because they 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.
Recipients of Title IV Assistance and Tax Filers Claiming an Education
Tax Credit or Tuition Deduction, 1997-2002:
[See PDF for image]
[End of figure]
Some tax filers do not appear to make optimal education-related tax
decisions. For example, among the limited number of 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
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 report. In 2002, GAO
recommended, among other things, that Education sponsor research into
key aspects of effectiveness of title IV programs. Little progress has
been made by Education; however, according to the Department, it is in
the process of establishing a postsecondary research center that will
sponsor such research. Although Education disagreed with our conclusion
about the extent to which title IV programs have been adequately
studied, it agreed, as it did when we issued our 2002 report, that more
research was warranted.
www.gao.gov/cgi-bin/getrpt?GAO-05-684.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Michael Brostek at (202)
512-9110 or Cornelia M. Ashby at (202) 512-7215.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Tax Preferences Differ from Title IV Assistance in Timing,
Distribution, and Students' and Families' Responsibility for Obtaining
Benefits:
Some Tax Filers May Not Effectively Use Postsecondary Tax Preferences,
Possibly Due to Complexity:
Research on Effectiveness of Federal Postsecondary Assistance Is
Incomplete:
Concluding Observations:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Confidence Intervals:
Appendix III: Postsecondary-Education-Related Tax Preferences:
Appendix IV: Comments from the Department of Education:
Bibliography:
Tables:
Table 1: Description of Federal Student Aid Programs Authorized under
Title IV of the Higher Education Act:
Table 2: Selected Postsecondary Education Tax Preferences:
Table 3: Comparison of Assistance by Timing of Benefit for Selected
Programs and Tax Preferences:
Table 4: Percentage of Aid Recipients and Dollars of Aid by Income
Category for Dependent Students Served by Selected Title IV Programs:
Table 5: Percentage of Aid Recipients and Dollars of Aid by Income
Category for Independent Students Served by Selected Title IV Programs:
Table 6: Percentage of Tax Filers Claiming Hope and Lifetime Learning
Credits and Tuition Deduction and Tax Preference Dollars by Income
Category, Tax Year 2002:
Table 7: Description of Federal Student Aid Programs Authorized under
Title IV of the Higher Education Act:
Table 8: Selected Postsecondary Education Tax Preferences:
Table 9: Tax Filers Claiming an Education Tax Credit or Tuition
Deduction:
Table 10: Percentage of Aid Recipients and Dollars of Aid by Income
Category for Dependent Students Served by Selected Title IV Programs:
Table 11: Percentage of Aid Recipients and Dollars of Aid by Income
Category for Independent Students Served by Selected Title IV Programs:
Table 12: Percentage of Tax Filers Claiming Hope and Lifetime Learning
Credits and Tuition Deduction and Tax Preference Dollars by Income
Category, Tax Year 2002:
Table 13: Percentage of Form 1098-Ts with Postsecondary Expense
Information in 2002: Point Estimates:
Table 14: Percentage of Form 1098-Ts with Postsecondary Expense
Information in 2002: Confidence Intervals:
Table 15: Percentage of Taxpayers Apparently Eligible to Claim an
Education Tax Credit or Tuition Deduction in 2002: Point Estimates:
Table 16: Percentage of Taxpayers Apparently Eligible to Claim an
Education Tax Credit or Tuition Deduction in 2002: Confidence
Intervals:
Table 17: Percentage of Apparently Eligible Taxpayers to Claim an
Education Tax Credit or Tuition Deduction That Failed to Do So in 2002:
Point Estimates:
Table 18: Percentage of Apparently Eligible Taxpayers to Claim an
Education Tax Credit or Tuition Deduction That Failed to Do So in 2002:
Confidence Intervals:
Table 19: Amounts by Which Apparently Eligible Taxpayers Failed to
Reduce Their Tax Liability: Point Estimates:
Table 20: Amounts by Which Apparently Eligible Taxpayers Failed to
Reduce Their Tax Liability: Confidence Intervals:
Table 21: 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:
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: Confidence Intervals:
Table 23: Amounts by Which Apparently Eligible Taxpayers Could Have
Reduced Their Tax Liability in 2002: Point Estimates:
Table 24: Amounts by Which Apparently Eligible Taxpayers Could Have
Reduced Their Tax Liability in 2002: Confidence Intervals:
Table 25: 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:
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: Confidence Intervals:
Table 27: Amounts by Which Apparently Eligible Taxpayers Could Have
Reduced Their Tax Liability in 2002: Point Estimates:
Table 28: Amounts by Which Apparently Eligible Taxpayers Could Have
Reduced Their Tax Liability in 2002: Confidence Intervals:
Table 29: 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:
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: Confidence Intervals:
Table 31: Percentage of Suboptimal Choices Made by Paid Tax Preparers:
Point Estimates:
Table 32: Percentage of Suboptimal Choices Made by Paid Tax Preparers:
Confidence Intervals:
Figure:
Figure 1: Recipients of Title IV Assistance and Tax Filers Claiming an
Education Tax Credit or Tuition Deduction, 1997-2002:
Letter July 29, 2005:
The Honorable Charles E. Grassley:
Chairman:
The Honorable Max Baucus:
Ranking Minority Member:
Committee on Finance:
United States Senate:
In recent decades, Congress has provided billions of dollars in
assistance each year to help the nation's students and families meet
the costs of postsecondary education. In the past, this assistance has
primarily been provided through student grant and loan programs
authorized under title IV of the Higher Education Act of 1965, as
amended. Much of this aid, called need-based 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. More
recently, however, postsecondary assistance has also been provided
through a range of tax preferences,[Footnote 1] 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 2005, up to a
$1,500 Hope tax credit and/or a $2,000 Lifetime Learning tax credit for
tuition and course-related fees paid. Furthermore, the 2001 Economic
Growth and Tax Relief Reconciliation Act created a new tax deduction
for tuition expenses, which eligible tax filers may use to deduct, in
tax year 2005, up to $4,000 from their taxable income for tuition and
course-related fees paid.[Footnote 2]
Providing federal financial assistance in these varied ways presents
students and their families with an array of tools that may help them
pay postsecondary education expenses. There is concern, however, that
the postsecondary tax preferences create opportunities that are
difficult for families to understand and use correctly. Additionally,
Congress has been provided with little evidence concerning the
effectiveness of assistance provided under title IV or through tax
preferences, such as whether student assistance increases the rate at
which students enroll in postsecondary education or whether assistance
increases the likelihood that students will either earn a degree or
continue their education (often referred to as persistence).
You asked us to explain how the federal government assists students and
families in meeting the costs of postsecondary education, and to
examine the opportunities and challenges associated with these
policies. To address your interests, we answered the following
questions: (1) How does title IV grant and loan assistance compare with
that provided through the tax code? (2) To what extent are tax filers
effectively using the opportunities presented by postsecondary tax
preferences? (3) What is known about the effectiveness of federal
assistance in promoting college attendance, providing students with a
wider range of choices among postsecondary institutions, or encouraging
students to persist in their studies?
To compare title IV federal grant and loan assistance with that
provided through the tax code, we used Department of Education
(Education) and Internal Revenue Service (IRS) data, as well as agency
documents and statutory provisions describing federal student financial
assistance programs and tax preferences related to student financial
assistance for postsecondary education. For the purpose of this review,
we focused on federal grant and loan programs or tax preferences that
served 500,000 or more students and families. We also used two data
sets, the 2003-2004 National Postsecondary Student Aid Study (NPSAS)
from Education and IRS's 2002 Statistics of Income (SOI) individual tax
file.[Footnote 3] We analyzed SOI data to determine, among other
things, whether tax filers made effective use of the Hope and Lifetime
Learning tax credits and the tuition deduction. However, information
required to analyze whether tax filers made effective use of the tax
credits and deduction was not consistently available for tax filers
included in the SOI data. Educational institutions must provide IRS and
students with Forms 1098-T, which document students' enrollment status
at the institution. Educational institutions may also, but are not
required to, report on students' qualified tuition and related
expenses, scholarships, and grants. Consequently, our analysis of SOI
data for this purpose was limited to the approximately 1.8 million tax
filers for whom Forms 1098-T reported such information. We were unable
to determine whether these tax filers were representative of the
approximately 12.4 million tax filers for whom such information was
unavailable. To address issues of complexity as students and families
use postsecondary tax preferences, we reviewed relevant statutes,
regulations, and IRS documents, government reports, and academic
research. We assessed the reliability of NPSAS and SOI data sets in
light of our data reliability standards and found them to be useful for
the purpose of this review. Details of our data reliability assessment
and other aspects of our scope and methodology can be found in appendix
I. To learn what is known about the effectiveness of federal grant and
loan programs and tax preferences, we reviewed the academic literature
on financial aid and education-related tax preferences. We conducted
our review from May 2004 through June 2005 in accordance with generally
accepted government auditing standards.
Results in Brief:
In general, assistance is provided to a wide range of students and
families under both title IV programs and through several tax
preferences, but three key differences exist when comparing the two
sources of aid. First, while title IV aid and tax preferences focus
primarily on helping students meet current expenses, tax preferences
also assist students and families with saving for and repaying
postsecondary costs. Second, 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, while both title IV aid and tax
preferences require students and families to fill out forms, tax
preferences require more responsibility on the part of students and
families for obtaining benefits because they must identify applicable
tax preferences, understand complex rules concerning their use, and
correctly calculate and claim credits or deductions on their returns.
Some tax filers do not appear to be making the most effective use of
certain postsecondary tax preferences and, as a result, fail to
minimize their federal income tax liabilities. Among tax filers
included in the 2002 SOI data set for whom information indicating
eligibility for an education tax credit or tuition deduction was
available, 27 percent failed to claim either (1) a Hope or Lifetime
Learning tax credit or (2) the tuition deduction. By not claiming an
education tax credit or tuition deduction, we estimate that these tax
filers failed to reduce their tax liabilities by $169, on average.
Furthermore, we estimate that 10 percent of these apparently eligible
tax filers failed to reduce their tax liabilities by more than $500. We
also found that 21 percent of tax filers who claimed the tuition
deduction would have reduced their tax liabilities by an additional
$83, on average, had they chosen to claim the Lifetime Learning tax
credit rather than the tuition deduction. While tax filers' suboptimal
choices may arise due to many factors, one reason may be the complexity
of these tax provisions. Experts commonly identify postsecondary tax
preferences as complex for tax filers to use because many of these
preferences have similar objectives, dissimilar definitions, and rules
that require extensive record keeping. Moreover, tax preferences can
interact with title IV aid in a manner that affects the net amount of
federal assistance received, adding to the complexity facing students
and families. Students and families may make costly mistakes to the
extent that they find using tax preferences to be difficult.
Little is known about the effectiveness of federal grant and loan
programs and education-related tax preferences in promoting attendance,
choice, and persistence. Many programs and tax preferences have not
been studied, and even among those that have, important aspects of
their effectiveness remain unexamined. When research exists, it
suggests that federal programs and tax preferences have a range of
results, from no measurable effects to modestly positive impacts on
college attendance and persistence. Data and methodological challenges
limit the certainty with which the effects of title IV programs and tax
preferences, especially the latter, can be identified, and result in
widespread gaps in knowledge of their effectiveness. Without this
information, federal policy makers cannot weigh the relative
effectiveness of postsecondary assistance provided through title IV and
tax preferences. In 2002 we recommended, among other things, that
Education sponsor research into the impact of title IV programs on
postsecondary attendance and choice, completion, and college costs.
Little progress has been made by Education; however, according to the
department, it is in the process of establishing a postsecondary
research center that will sponsor such research.
In commenting on a draft of this report, Education agreed overall that
more research should be done on various federal programs that assist
students enrolled in postsecondary education, but disagreed with our
finding on the extent that title IV programs have been studied.
Education also said that we should have included its research in our
description of available program effectiveness research, including a
particular study of the Pell Grant program. In general, while
Education's research efforts--both the data collections conducted
regularly by the agency and studies based upon those data--provide
useful descriptive information, the data collections and related
studies do not include information on those who do not receive
postsecondary education and are therefore of limited use in
establishing the effectiveness of title IV programs. Education's letter
is reprinted in appendix IV. Also, IRS provided technical comments
which we incorporated where appropriate.
Background:
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. In fiscal year 2004, Education made
approximately $14 billion in grants and provided another $56 billion in
loan assistance (face value) through the title IV programs. The fiscal
year 2004 outlay equivalent cost of the postsecondary tax preferences
reviewed in this study was estimated to be $10 billion.
Federal Grant and Loan Assistance to Postsecondary Students:
Assistance provided under title IV programs include Pell Grants for low-
income students, parent loans known as PLUS loans, and Stafford
loans.[Footnote 4] While Pell Grants reduce 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 5] Stafford and PLUS loans are provided to
students through both the Federal Family Education Loan Program (FFELP)
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 FFELP, private lenders, such as
banks, provide loan capital and make loans, and the federal government
guarantees FFELP 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 (FAFSA) form. Information from the FAFSA, particularly
income and asset information, is used to determine the amount of money-
-called the expected family contribution (EFC)--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.[Footnote
6] 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 7] 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 1, below.
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 details: Grants are made on the basis of 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 2004-2005;
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 made to
undergraduates with exceptional financial need; priority is given to
Pell Grant recipients. Institutions must match a portion (at least 25%)
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: 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% of student's earnings (50% in the case of for-profit
employers);
Annual award amounts: No annual minimum or maximum award amounts;
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;
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;
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 subsidized 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. 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 school year 2003-2004 NPSAS data.
[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.[Footnote 8] 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 2.
Table 2: 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[A]: Single filer: $42,000-$52,000; Joint return: $85,000- $105,000.[B];
Eligible expenses: Tuition and fees at institutions eligible to participate in title IV programs;
Tax benefit: Maximum credit: $1,500 per student. Credit rate is 100 percent on first $1,000 of qualified higher education expenses, 50 percent on next $1,000; 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[A]: Single filer: $42,000-$52,000; Joint return: $85,000-$105,000.[B];
Eligible expenses: Tuition and fees at institutions eligible to participate in title IV programs;
Tax benefit: Maximum credit: $2,000 per tax filer. (20 percent of qualified higher education expenses up to $10,000); 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[A]: Single filer: $50,000-$65,000; Joint return: $100,000-$130,000;
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: 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[C];
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[A]: No phaseout;
Eligible expenses: Tuition, fees, books, supplies, and equipment required for attendance. Room and board if enrolled half time or more;
Tax benefit: 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: About 7.2 million prepaid tuition and college savings program accounts had been established by December 31, 2004, with a reported balance of $64.7 billion in both types of 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[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: 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: Approximately 1 million contributions were made to accounts in tax year 2002.
Tax preference: Tuition Deduction (expires Dec. 31, 2005);
Preference details: Eligibility: Same as Lifetime Learning credit;
Preference details: Income ranges for phasing out benefits[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: 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: In tax year 2002, 3.4 million tax filers deducted $1.3 billion; the average deduction was $377, and the median income of filers using the deduction was $54,326.
Sources: IRS and College Savings Plan Network; 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 phaseout 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] The Economic Growth and Tax Relief Reconciliation Act of 2001 provides that from January 1, 2001 to December 31, 2011 eligible higher education institutions, in addition to states, may offer tuition prepayment programs. States remain the sole tax-exempt sponsors of college savings programs.
[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.[Footnote 9] 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.[Footnote 10] Appendix IV
lists all tax preferences reported by IRS, including ones not included
in this review.
Tax Preferences Are More Recent Than Most Title IV Programs:
Title IV programs have been in place for decades, while most education-
related tax preferences were created much more recently. Between the
late 1950s and the early 1980s each major federal initiative to assist
students with the costs of postsecondary education was provided either
through grant or loan programs. From 1981 through 1995 no new federal
grant or loan-financing vehicles were adopted; however, new financing
options, such as loan consolidation, and new delivery systems, such as
direct student lending, were introduced for student loan programs.
Since 1995, on the other hand, every federal initiative for the
financing of postsecondary education has been implemented through the
federal tax code, primarily through the Tax Relief Act of 1997 and the
Economic Growth and Tax Relief Reconciliation Act of 2001. By 2002 the
number of tax filers claiming a tax credit or tuition deduction was
broadly comparable to the number of students aided through title IV
programs: about 8.4 million students received a title IV grant and/or
loan, and about 9.6 million tax filers filed returns claiming a Hope
tax credit, Lifetime Learning tax credit, or tuition deduction. (See
fig. 1.)[Footnote 11]
Figure 1: Recipients of Title IV Assistance and Tax Filers Claiming an
Education Tax Credit or Tuition Deduction, 1997-2002:
[See PDF for image]
[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 three key ways. First, tax preferences and title IV programs
differ in the timing and the distribution of benefits they provide.
Title IV grant and loan programs primarily provide aid to students and
families while students are in college, whereas tax preferences help
both during the college years and before and after college by assisting
with saving for or repaying college costs. Additionally, although
student aid programs and tax preferences assist students and families
across a wide range of income levels, some title IV programs, such as
the Pell Grant and subsidized Stafford student loan programs, provide
much of their financial assistance to students and families whose
incomes are lower, on average, than students who receive unsubsidized
Stafford loans, tax deductions, or 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 compared with title IV aid.
Tax and Title IV Programs Differ in Benefit Timing:
Title IV programs and education-related tax preferences differ
significantly as to when eligibility is established and in the timing
of the assistance they provide. Eligibility for title IV programs is
generally established at the time of enrollment and prior to each
subsequent school year thereafter, and title IV programs generally
provide benefits to students while they are in school. Education-
related tax preferences reach widely across the life span. They
encourage saving for college, especially among families with dependent
children through tax-exempt saving; assist enrolled students and their
families in meeting the current costs of postsecondary education
through credits and a tuition deduction; and assist students and
families repaying the costs of past postsecondary education by allowing
tax filers to claim a deduction for student loan interest paid. Thus,
tax filers must determine their eligibility for these preferences every
year that contributions are made to Coverdell Education Savings
Accounts or every year that a former student claims a student loan
interest deduction. Table 3 shows a comparison of the timing of title
IV assistance and the assistance provided through various tax
preferences.
Table 3: Comparison of Assistance by Timing of Benefit for Selected
Programs and Tax Preferences:
Type of assistance: Grant programs;
Pay current expenses: Pell Grants; Supplemental Educational;
Opportunity Grants.
Type of assistance: Loan programs;
Pay current expenses: Subsidized and Unsubsidized; Stafford Loans;
Federal Perkins Loans; Federal PLUS Loans.
Type of assistance: Tax preferences;
Save for future expenses: Coverdell Educational Savings Accounts;
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;
Pay current expenses: Federal Work Study.
Source: GAO.
[End of table]
Beneficiaries of Title IV Programs and Tax Preferences Differ:
While title IV programs and tax preferences assist many students and
families, a variety of program and tax rules affect students' and
families' 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, as discussed below.
Title IV Assistance:
Title IV programs 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 12] Pell Grant awards are
calculated by subtracting the student's expected family contribution
(EFC) from the maximum Pell Grant award ($4,050 in academic year 2004-
2005), or the student's cost of attendance, whichever is less. Because
the expected family contribution 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 received primarily by families with modest
incomes. The maximum subsidized Stafford loan that a student may obtain
is based upon his or her cost of attendance, minus the expected family
contribution and the estimated financial assistance that the student
will receive.[Footnote 13] For a given cost of attendance, therefore,
the amount of a subsidized Stafford loan increases as EFC decreases. 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 14]
The different award rules for Pell Grants and subsidized and
unsubsidized Stafford loans result in different patterns of program
participation among students of different incomes, and different
distributions of dollar support among students. As table 4 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.
With respect to subsidized Stafford loans, 67 percent of recipients had
family incomes of $60,000 or less and received a proportional share of
total subsidized loan volume. In contrast, 65 percent of unsubsidized
Stafford loan recipients had family incomes above $60,000 and received
69 percent of total unsubsidized loan volume.
Table 4: Percentage of Aid Recipients and Dollars of Aid by Income
Category for Dependent Students Served by Selected Title IV Programs:
Program: Pell Grant;
Dependent students: Recipients;
$0-20,000: 38;
$21,001-40,000: 47;
$40,001-60,000: 14;
$60,001-80,000: 2;
$80,001-100,000: 0;
More than $100,000: 0.
Dependent students: Dollars;
$0-20,000: 48;
$21,001-40,000: 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;
$21,001-40,000: 28;
$40,001-60,000: 23;
$60,001-80,000: 17;
$80,001-100,000: 9;
More than $100,000: 7.
Dependent students: Dollars;
$0-20,000: 16;
$21,001-40,000: 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;
$21,001-40,000: 14;
$40,001-60,000: 14;
$60,001-80,000: 19;
$80,001-100,000: 18;
More than $100,000: 28.
Dependent students: Dollars;
$0-20,000: 7;
$21,001-40,000: 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.
Notes: See appendix II 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 5, the distribution of award
dollars follows a nearly identical pattern.
Table 5: Percentage of Aid Recipients and Dollars of Aid by Income
Category for Independent Students Served by Selected Title IV Programs:
Program: Pell Grant;
Independent students: Recipients;
$0-20,000: 67;
$21,001-40,000: 28;
$40,001-60,000: 5;
$60,001-80,000: 0;
$80,001-100,000: 0;
More than $100,000: 0.
Independent students: Dollars;
$0-20,000: 73;
$21,001-40,000: 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;
$21,001-40,000: 29;
$40,001-60,000: 12;
$60,001-80,000: 5;
$80,001-100,000: 2;
More than $100,000: 1.
Independent students: Dollars;
$0-20,000: 52;
$21,001-40,000: 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;
$21,001-40,000: 28;
$40,001-60,000: 14;
$60,001-80,000: 6;
$80,001-100,000: 3;
More than $100,000: 3.
Independent students: Dollars;
$0-20,000: 46;
$21,001-40,000: 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 appendix II for confidence intervals associated with these
estimates.
Numbers in rows may not add to 100 percent because of rounding.
[End of table]
Tax Preferences:
Many education-related tax preferences have both de facto lower limits created by the need to have a positive tax liability in order 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 2004 that begin at $42,000 and $85,000 for single and joint filers, respectively. The income-related phase-out provision for the tuition deduction, in comparison, begins in 2004 at $65,000 and $130,000 for single and joint filers, respectively. As a result, the majority of tax filers claiming the Hope and Lifetime Learning tax credits in 2002 had incomes under $40,000. Among those who claimed the tuition deduction, in contrast, 38 percent of tax filers had incomes in this range, while 62 percent had incomes over $40,000. Table 6 shows the income categories of tax filers claiming the three tax preferences available to current students and/or their families along with the distribution of dollars through those preferences in 2002.
The reduction in tax liability associated with the use of the Hope and Lifetime tax credits also differs from that associated with the use of the tuition deduction. In 2002 tax filers claimed Hope credits worth about $3.2 billion and Lifetime Learning credits totaling about $1.7 billion. As shown in table 6, below, about 80 percent of the 2002 Hope and Lifetime credits' reduction in tax liability went to tax filers with incomes between $20,001 and $80,000. The distribution of benefits for the tuition deduction shows a substantially different pattern: more than half (52 percent) of the approximately $1.3 billion reduction in tax liability associated with the use of the deduction in 2002 went to families with incomes of $80,001 and above.
Table 6: Percentage of Tax Filers Claiming Hope and Lifetime Learning
Credits and Tuition Deduction and Tax Preference Dollars by Income
Category, Tax Year 2002:
Type of aid: Hope Credit; Tax filers;
$0-20,000: 18;
$20,001-40,000: 33;
$40,001-60,000: 20;
$60,001-80,000: 18;
$80,001-100,000: 11;
More than $100,000: 0.
Type of aid: Dollars;
$0-20,000: 10;
$20,001-40,000: 33;
$40,001-60,000: 23;
$60,001-80,000: 24;
$80,001-100,000: 10;
More than $100,000: 0.
Type of aid: Lifetime Learning Credit; Tax filers;
$0-20,000: 16;
$20,001-40,000: 34;
$40,001-60,000: 25;
$60,001-80,000: 16;
$80,001-100,000: 8;
More than $100,000: 0.
Type of aid: Dollars;
$0-20,000: 12;
$20,001-40,000: 34;
$40,001-60,000: 25;
$60,001-80,000: 21;
$80,001-100,000: 7;
More than $100,000: 0.
Type of aid: Tuition Deduction; Tax filers;
$0-20,000: 20;
$20,001-40,000: 18;
$40,001-60,000: 16;
$60,001-80,000: 13;
$80,001-100,000: 16;
More than $100,000: 17.
Type of aid: Dollars;
$0-20,000: 11;
$20,001-40,000: 10;
$40,001-60,000: 13;
$60,001-80,000: 14;
$80,001-100,000: 23;
More than $100,000: 29.
Source: GAO analysis of 2002 SOI data.
Notes: See appendix II for confidence intervals associated with these
estimates.
Numbers in rows may not add to 100 percent because of rounding.
[End of table]
Although many families are eligible to participate in tax-exempt savings programs, the programs are more advantageous to those with higher incomes and tax liabilities. Families with higher than average incomes are more likely to use tax-exempt savings opportunities for a range of reasons, including, among others, that (1) these families hold greater assets to invest in these vehicles; (2) these families have a higher marginal tax rate, and thus benefit the most from the use of these vehicles; and (3) higher-income families may gain a reduction in tax liability even if withdrawals are not used for postsecondary expenses.[Footnote 15]
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
form, which in its 2004 paper version was over eight pages long and
contained more than 100 questions. While concerns have been raised that
the FAFSA application may deter potentially eligible students from
participating in title IV grant and loan programs,[Footnote 16] filling
out the FAFSA and submitting it to the Department of Education
completes, by and large, students' and families' responsibility in
obtaining aid. To benefit from title IV programs, students need not
learn the rules of the federal student aid methodology, eligibility
rules for individual programs, or understand the ways in which federal
student aid programs interact with one another. Rather, the Department
of Education is responsible for calculating students' and families' EFC
on the basis of the FAFSA, and a student's educational institution is
responsible for determining aid eligibility and the amounts and
packaging of aid awards. In addition, title IV educational institutions
assist Education in verifying the information submitted on the FAFSA
form for a sample of aid applicants.
Higher education tax preferences, in contrast to federal grants and
student loans, require more responsibility on the part of students and
families. 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 limited to the promulgation of
rules; the provision of guidance to tax filers; and to the processing
of tax returns, including some checks on the accuracy of items reported
on those tax returns. In contrast, the primary responsibility for
selecting among and properly using tax preferences rests with tax
filers: they must understand the rules in light of their own situation,
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, some tax filers appear to make
less-than-optimal choices among them. The apparently suboptimal use of
postsecondary tax preferences may arise, in part, from the complexity
of using these provisions; however, our analysis of tax data does not
permit us to identify why they are making these choices. Tax policy
analysts consistently identify 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.[Footnote 17]
Additional complexity associated with the use of postsecondary tax
preferences also arises from the interaction of tax preferences and
title IV student aid.
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 2004, 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 $1,500 if
they claimed the Hope credit.
To assess whether tax filers faced difficulty with choosing among these
preferences, we examined whether tax filers who were confronted with a
relatively common tax choice--whether to claim the Hope or Lifetime
Learning credit or the tuition deduction--chose the tax preference that
minimized their tax liability. We analyzed information that IRS was
provided with by educational institutions using Form 1098-T and tax
return information in IRS's 2002 Statistics of Income sample. Because
87 percent of Form 1098-T returns did not contain educational expense
information, we were able to analyze only the remaining 13 percent of
tax returns (representing about 1.8 million returns) in the SOI sample
that received a Form 1098-T and contained information concerning
students' educational expenses. We were unable to determine if this 13
percent of returns is representative of the entire population of Form
1098-Ts. (See appendix I for details.) All estimates and their
associated confidence intervals can be found in appendix II.
We found that some people who appear to be eligible for tax credits
and/or the tuition deduction did not claim them. The filers of about 77
percent of the tax returns that we were able to review were apparently
eligible to claim one or more of the three tax preferences: the tax
filers appear to have had a positive income tax liability, qualified
educational expenses, an adjusted gross income below statutory phase-
out limits, and were otherwise eligible.[Footnote 18] Among filers who
were apparently eligible to claim one of the three tax preferences, 27
percent, representing about 374,000 tax filers, failed to do so. 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.
Some tax filers used a higher education tax credit or the tuition
deduction but chose one that yielded a smaller reduction in their tax
liability than they could have otherwise realized.[Footnote 19] Among
those who claimed the tuition deduction, we estimate that 21 percent
(representing about 51,000 tax filers) would have been better off
claiming the Lifetime Learning tax credit while 8 percent (representing
about 22,000 tax filers) of those claiming the Lifetime Learning credit
would have reduced their taxes by a greater amount if they had claimed
the tuition deduction instead. The average amount by which these tax
filers failed to reduce their taxes was $83 for tax filers claiming the
tuition deduction and $138 for those claiming the Lifetime Learning
credit. Some tax filers making these decisions failed to realize larger
reductions in their tax liabilities--10 percent of suboptimal tuition
deduction claimants could have reduced their tax liabilities by about
$158 or more and 10 percent of suboptimal Lifetime Learning credit
claimants could have reduced their tax liabilities by about $237 or
more. On the other hand, we found no cases where tax filers claiming a
Hope credit would have been better off by claiming a Lifetime Learning
credit instead.
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.
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. Additional complexity associated with the use
of these provisions may arise from the interaction of tax preferences
and title IV student aid. Complexity may lead some not to claim a
credit because they judge the added costs of filing for the credit to
outweigh its benefits.
Multiple Tax Preferences:
Multiple tax preferences with similar purposes may place substantial
demands on the knowledge and skills of millions of students and
families. Twelve tax preferences are outlined in the IRS publication,
Tax Benefits for Education,[Footnote 20] including four different tax
preferences for educational saving.[Footnote 21] 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.[Footnote 22] Attempting to learn about, compare, and choose
from among these tax-preferred higher education savings options may
require substantial knowledge and skill on the part of parents with
young dependents beyond that required of savings and investment
decisions in general.
Among the tax preferences we reviewed, three help students meet current
costs--the Hope credit, Lifetime Learning credit, and the tuition
deduction.
These tax preferences also differ across many dimensions.[Footnote 23]
Though similar in purpose, the three preferences have different
eligibility criteria, benefit levels, and income-related phase-outs.
For tax filers to obtain the maximum benefit from these preferences,
they must first ascertain which preference they are eligible to
use,[Footnote 24] and then correctly calculate which preference
minimizes their tax liability by making separate calculations between
the Hope and Lifetime Learning credits. If filers are within the phase-
out range, they must calculate whether the tuition deduction is
preferable to either credit. Tax filers with more than one student in
postsecondary education may be eligible to claim multiple preferences,
and may need to test different combinations of benefits to optimize tax
savings.
Varying Qualified Expense Definitions:
Additional demands on the skill and knowledge of students and families
may result from the fact that higher education tax preferences do not
all use the same definition of qualified higher education expenses.
What tax filers are allowed to claim as a qualified higher education
expense varies, for example, between tax-exempt savings vehicles and
tax credits. For example, while Coverdell Education Savings Accounts
and section 529 Qualified Tuition Programs permit tax filers to include
tuition, fees, books, supplies, and equipment required for enrollment
as part of their qualified educational expenses, higher education tax
credits permit only tuition and fees required for enrollment to be
counted as qualified higher education expenses.[Footnote 25] These
dissimilar definitions require that tax filers keep track of expenses
separately, applying some expenses to some tax preferences, but not
others, and the Joint Committee on Taxation has suggested that they may
increase the likelihood of inadvertent errors and may also increase
taxpayer frustration.[Footnote 26]:
Tax Rules Coordinating the Use of Multiple Preferences:
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.
Consider, for example, how the use of college savings programs and the
tuition deduction is affected by these rules. To calculate whether a
distribution from a college savings program is taxable, a tax filer
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 27] 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.
Interaction between Tax Preferences and Student Financial Aid:
Because the use of federal higher education tax preferences may affect
a student's eligibility for title IV federal student assistance--and
the receipt of title IV federal student assistance may affect a
student's ability to use federal higher education tax preferences--many
students and families must develop knowledge and skill sufficient to
understand the relationship between the two. For example, the Internal
Revenue Code requires tax filers to reduce the qualified higher
education expenses they apply toward higher education tax credits by
the amount of nontaxable aid they receive, including federal aid such
as a Pell Grant. As a result, receiving a Pell Grant has the potential
to reduce the amount of Hope or Lifetime Learning tax credit for which
a filer is eligible. More generally, tax filers must take care to
reduce their qualified higher education expenses by the amount of all
nontaxable assistance that they receive--federal and nonfederal--
applying only adjusted qualified higher education expenses toward
credits, deductions, and distributions from tax-exempt savings
vehicles.
While some federal higher education tax preferences, such as tax
credits, have no effect on one's eligibility for title IV federal
student assistance,[Footnote 28] others do: like other family savings,
assets held in tax-exempt savings vehicles, such as a Coverdell
Education Savings Account or a section 529 savings account, are
included in the calculation of the expected family contribution. In
those instances where students are on the margin of eligibility to
participate in need-based title IV federal aid programs, using these
accounts may reduce the aid for which a student is eligible.
The federal financial aid methodology in place prior to January 2004
treated assets held in different savings vehicles in widely varying
ways. According to one set of calculations, each dollar of funds held
in a 529 savings program resulted in a reduction of 15 cents in need-
based aid, while each dollar of funds held in a Coverdell Educational
Savings Account resulted in a $1.22 reduction in need-based
aid.[Footnote 29] For families close to the income limit for
eligibility for need-based aid, a $1,000 pretax investment in a
Coverdell Educational Savings Account yielded a simulated final return
(net of income taxation and foregone student aid) of -$1,194, leaving
the family worse off than if they had not saved, or if they had saved
using a regular savings account (+$490) or a traditional individual
retirement account (+$844). In response to recommendations contained in
our 2002 report on student aid,[Footnote 30] the Department of
Education modified its guidance concerning federal financial aid
methodology,[Footnote 31] announcing that Coverdell assets would be
treated as assets of the parent, rather than the student--and,
therefore, result in the same reduction in need-based aid as 529
savings program assets. Nonetheless, families that save in prepaid
tuition programs remain subject to a dollar-for-dollar reduction in
federal aid for each dollar distributed by the program.[Footnote 32]
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 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. When research exists,
it reaches varying conclusions about the effects of federal programs
and tax preferences. Some studies identify no measurable effects on
college attendance and persistence, while others find positive effects.
(A bibliography listing the studies we reviewed is included at the end
of this report.) Data and methodological challenges limit the certainty
with which the effects of title IV programs and tax preferences,
especially the effects of the latter, can be identified and result in
widespread gaps in the knowledge of their effectiveness.[Footnote 33]
In 2002 we recommended that Education sponsor research into key aspects
of effectiveness of title IV programs and that Education and the
Department of the Treasury collaborate on such research into the
relative effectiveness of title IV programs and tax
preferences.[Footnote 34] Since our prior report, little has been done
to implement these recommendations, although Education is the process
of establishing a postsecondary research center.
Little Is Known about the Effectiveness of Federal Title IV
Postsecondary Programs and Tax Preferences:
We found no research on any aspect of effectiveness for several major
title IV federal postsecondary programs and tax preferences, including
the Federal Work-Study program, the tuition deduction, tax-exempt
savings programs, and others. For other federal programs, no research
exists on important aspects of program effectiveness. For example, no
research has 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.
Limited Research about Federal Assistance Reaches Varying Conclusions
about Some Aspects of Effectiveness:
When research on the effectiveness of federal assistance does exist, it
reaches varying findings about title IV student aid and tax
preferences. Some studies find that title IV programs increase the
rates of college attendance and persistence, while others have
identified no positive effects. Research on Pell Grants shows that they
generally have little or no impact on attendance, with the exception of
one study that found Pell Grants to have increased attendance for
students from 22 to 35 years of age.[Footnote 35] The study attributed
the program's impact to the fact that older students generally attend
less-expensive institutions where Pell Grants represent a larger share
of the cost of college than the same size grants provided to students
in general. The study also suggests that the limited impact of Pell
Grants on attendance in general may be due to the fact that
institutional aid awards may decrease at the same time as Pell Grant
awards increase, creating a substitution effect that could diminish the
impact of Pell Grants on attendance. According to the study, this
occurs less often for older students because they tend to go to
institutions that have less institutional aid for which Pell Grant
awards might substitute.
Some research has also found that Pell Grants, like other grant
programs, appear to increase students' persistence toward completing
their studies.[Footnote 36]
Student loans have been found to modestly increase college attendance,
persistence, and choice, but there are various limitations to consider.
Of the three studies examining the effect of borrowing on college
attendance, only one focuses on lower-income students.[Footnote 37] The
study estimates that a $1,000 increase (in 1977 dollars) resulted in a
4.3 percentage point increase in college enrollment among dependent
students with family incomes below $15,000. However, given long-term
changes in lending markets, returns to schooling, and other conditions,
students' behavioral responses to equivalent changes in loan amounts
may be different today from what they were in 1977.[Footnote 38]
Findings about the impact of loans on persistence and choice are each
based on only one study, and focus only on middle-income
students.[Footnote 39]
We found one study concerning how the Hope and Lifetime Learning tax
credits affect college attendance. The study found the credits to have
no effect on college attendance. This may be because the students who
receive these credits are likely to attend college anyway.[Footnote 40]
The author acknowledges several limitations of the study. For example,
the study uses income categories--as opposed to actual income--thereby
introducing measurement error and attenuating the estimated effects of
the credits on attendance. We also note that the study measured
eligibility for the credits, rather than the receipt of tax credits.
Measuring eligibility rather than the receipt of credits tends to
underestimate the effect of credits on attendance because many tax
filers who appear to be eligible for the credits do not claim
them.[Footnote 41] This study did not examine whether federal student
tax credits affect persistence or choice.
In addition to the research into the federal tax, grant, and loan
programs described above, a large body of research estimates the
effects of both tuition changes and non-title IV financial aid programs
on postsecondary attendance.[Footnote 42] These studies all found
either an inverse relationship between the cost of tuition and level of
enrollment or that financial assistance increased enrollment.[Footnote
43] One survey of this work concludes that a $1,000 reduction in net
costs (in 2001 dollars) would result in a 3 to 6 percent increase in
college enrollment rates.[Footnote 44] Federal Pell Grants and
postsecondary tax credits do not show similar effects in the studies we
examined. Substitution effects caused by offsetting reductions in
nonfederal aid may diminish the enrollment effect of Pell awards. Also,
the impact of tax credits on enrollment may be limited by the fact that
tax filers receive higher education tax credits the year following
tuition outlays. Program design and information may also account for
some of these differences: tuition information and many nonfederal aid
benefits are known when a person is choosing whether or not to attend
college; however, students may not be aware of tax credits and Pell
Grants or their effects on price until after they have already decided
to go to college.
While federal grants, student loans, and tax credits were created to
result in beneficial consequences, such as increasing college
attendance, they have also been found to result in the raising of
tuition by institutions in some circumstances.[Footnote 45] One
potential explanation is that institutions raise tuition because
federal aid increases the amount students are able to pay.
Alternatively, federal aid may increase the demand for education, and
with no offsetting factors, this drives the price of tuition up.
Data and Methodological Challenges Hinder Research:
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. Additionally, to analyze
the tax programs, actual tax return data are preferred to indirect or
processed data, but researchers are often limited to publicly available
data containing self-reported information on income because of tax data
confidentiality protections.
Methodological challenges add to the difficulty of estimating the
effects of these programs. In general, researchers can reliably
identify the behavioral effects of a program when one factor changes
while all others remain unchanged. For example, if no other factors
change, a researcher could identify the impact of postsecondary tax
credits on enrollment by comparing enrollment rates before and after
the tax credits are enacted. Typically, however, many factors change
simultaneously, either offsetting or enhancing the effect of the policy
intervention being studied. For example, tuition rates may rise at the
same time that postsecondary tax credits are introduced, or other
sources of postsecondary assistance--such as federal, state, or
institutional grants--may decrease. These changes undermine
researchers' ability to reliably isolate the behavioral effects of the
policy under study. While researchers in some fields address this
problem through the use of experiments, few opportunities exist for
experimentation in the study of postsecondary education finance.
Alternatively, researchers may address this problem through the use of
quasi-experimental research designs, which attempt to approximate the
random assignment of participants to treatment and control groups by
matching participants to nonparticipants having similar
characteristics. In practice, however, data limitations often make this
difficult to implement. To isolate the impact of tax credits on college
attendance, for example, researchers may need to compare credit
recipients with nonrecipients who are similar in a range of ways--
including academic preparation, family income and wealth. National
surveys often do not contain complete data on all of these necessary
factors both for those who attend and do not attend college.
Steps to Support Effectiveness Research:
In 2002, we recommended that Education sponsor research into key
aspects of effectiveness of title IV programs, and that Education and
the Department of the Treasury collaborate on such research into the
relative effectiveness of title IV programs and tax
preferences.[Footnote 46] In order to provide Congress with information
about the effectiveness of title IV programs, we recommended in 2002
that Education sponsor research on the impact of title IV programs on
postsecondary attendance, choice, completion, and costs. To provide
information about the relative effectiveness of Education's direct
expenditure programs and Treasury's postsecondary tax provisions, we
recommended that the Secretaries of Education and Treasury collaborate
in studying the combined effects of tax preferences and title IV aid.
Few steps have been taken to implement these recommendations. However,
Education is in the process of establishing a postsecondary research
center that will, among other things, examine the impact of title IV
programs.
As we noted in our 2002 report, research into the effectiveness of
different forms of postsecondary education assistance is important.
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. As we stress in our recent
report 21st Century Challenges: Reexamining the Base of the Federal
Government[Footnote 47], 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.
In our January 2004 report on OMB's Program Assessment Rating Tool
(PART),[Footnote 48] we recommended that OMB target PART assessments
based on such factors as the relative priorities, costs, and risks
associated with related clusters of programs and activities and that
OMB select related or similar programs for review in the same year to
facilitate comparisons and trade-offs.[Footnote 49] Furthermore, in our
June 14, 2005 testimony before the Senate Committee on Homeland
Security and Governmental Affairs, Subcommittee on Federal Financial
Management, Government Information, and International Security, we
reported that it is often critical to understand how programs fit with
a portfolio of tools and strategies in order to capture whether
programs complement and support related programs, are duplicative or
redundant, or work at cross purposes to other initiatives.[Footnote 50]
The different tax preferences and title IV programs in place to help
students and families finance postsecondary education are a good
example of the sort of related clusters of programs and activities to
which we were referring.
Concluding Observations:
Congress has adopted a range of tools to help students and families pay
for postsecondary education, including grants, loans, and tax
preferences. Many title IV financial aid programs have a long history,
while most of the tax preferences do not. The addition of tax
preferences to the title IV grant and loan programs has increased the
number of options and given students and families new choices about how
to combine saving, borrowing, and current income to meet the costs of
postsecondary education. Postsecondary tax preferences are widely
thought to present challenges of complexity to students and families.
As we have shown, tax filers appear to have some difficulty in making
fully effective use of some postsecondary tax preferences now in the
tax code. Also, although millions of tax filers are receiving billions
of dollars in assistance with postsecondary costs through both title IV
programs and tax preferences, little is known about the effectiveness
of any of these forms of assistance in part because of data and
methodological issues. As we recommended in our 2002 report on federal
financial aid,[Footnote 51] it is important that information about the
effectiveness of both tax preferences and title IV federal grant and
loan programs be developed so that decision makers in Congress and in
the executive branch can make efficient use of limited federal
resources and reexamine, if necessary, the tools used to help students
and families pay for postsecondary education.
Agency Comments and Our Evaluation:
We provided a draft of this report to the Internal Revenue Service, the
Department of the Treasury, and the Department of Education for review
and comment. The Internal Revenue Service provided technical comments,
which we incorporated. The Department of the Treasury did not provide
comments on our report.
In its written comments, Education disagreed with our conclusion on the
extent that title IV programs have been studied. Education also said
that we did not properly acknowledge the role that its National
Postsecondary Student Aid Study (NPSAS) played in our analysis and that
the report did not cite many Departmental publications prepared on the
basis of NPSAS and other Departmental data collections, such as
Persistence and Attainment of Beginning Students with Pell
Grants.[Footnote 52] In our report, we describe NPSAS as a
comprehensive study examining how students and their families pay for
postsecondary education and note that we relied upon NPSAS data to
conduct our analysis. Further, we explain in our report that our
findings about the effectiveness of federal postsecondary assistance
are based upon studies that meet professional standards of econometric
analysis and contain acceptably identified statistical estimates of
program effects. We do not include publications that fail to meet these
standards. While the data collections cited by the Department provide
useful descriptive information concerning title IV programs, they do
not provide data sufficient to determine key program effects. In
particular, because these data collections do not contain information
about those who do not attend postsecondary institutions, they are of
limited use in establishing the effectiveness of title IV programs,
especially with respect to postsecondary attendance--a challenge we
note in our report. Consequently, publications based upon these data
share this limitation.
With respect to the study specifically cited by the Department--
Persistence and Attainment of Beginning Students with Pell Grants--it
does not contain acceptably identified estimates of Pell Grant effects
on persistence. In particular, the study does not implement a design
and include variables that can isolate the effect of Pell Grant receipt
on persistence from other factors that are associated both with
persistence and with Pell Grant receipt, including academic
preparation, changes in family income, and the net cost of education.
Thus the study's estimate of the effect of Pell Grants on persistence
may reflect not only the influence of the Pell Grant, but also the
influence of these other factors. Consequently, its results cannot be
used to reliably assess the impact of Pell Grant receipt on
persistence.[Footnote 53]
Although Education stated that our report presented an incomplete and
inaccurate assessment of its research, it nonetheless agreed that more
research should be done and that it is "committed to continuing to
increase its research associated with the effectiveness of the [its]
programs." The Department expressed a similar commitment in response to
our September 2002 report[Footnote 54] which found that Education had
undertaken little work identifying the impact of its grant and loan
programs and recommended that the Department sponsor research on the
impact of title IV programs on postsecondary education attendance and
choice, completion, and costs.
As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after its date. At that time, we will send copies of this report to The
Commissioner of Internal Revenue, The Secretary of Education, The
Secretary of the Treasury, and other interested parties. This report is
available at no charge on GAO's web site at [Hyperlink,
http://www.gao.gov].
If you or any of your staff have any questions, please contact Michael
Brostek at (202) 512-9110 or Cornelia Ashby at (202) 512-7215. You may
also reach us by e-mail at [Hyperlink, BrostekM@gao.gov] and
[Hyperlink, AshbyC@gao.gov]. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last
page of this report. Key contributors to this report were David Lewis,
Assistant Director, Jeff Appel, Assistant Director, Eric Mader, Thomas
Weko, John Mingus, Cynthia Decker, Jeffrey Weinstein, and Katherine
France.
Signed by:
Michael Brostek:
Director, Tax Issues:
Strategic Issues:
Signed by:
Cornelia M. Ashby:
Director, Education Workforce and Income Security:
[End of section]
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Our review focused on answering the following three questions: (1) How
does title IV grant and loan assistance compare with that provided
through the tax code? (2) To what extent are tax filers effectively
using the opportunities presented by postsecondary tax preferences? (3)
What is known about the effectiveness of federal assistance in
promoting college attendance, providing students with a wider range of
choices among postsecondary institutions, or encouraging students to
persist in their studies?
To compare title IV programs and tax preferences, we reviewed articles,
studies, and reports on federal assistance for postsecondary education
published by the Joint Committee on Taxation, the Internal Revenue
Service (IRS), the Department of Education's National Center for
Education Statistics and Office of Federal Student Aid, and other
sources. Programs or tax preferences that served more than 500,000
participants were judged to be, for the purpose of our review, major.
To obtain information on participant numbers and other comparative
information, we used (1) fiscal year 2004 information from the
President's fiscal year 2006 budget request,[Footnote 55] (2) IRS's
2002 Statistics of Income (SOI) data set including IRS Form 1098-T
information for all tax filers in the 2002 SOI sample, (3) 2003-2004
school year data from the National Postsecondary Student Aid Study
(NPSAS),[Footnote 56] (4) data as of December 31, 2004, on the number
of accounts and amounts invested in section 529 Qualified Tuition
Programs from the College Savings Plans Network,[Footnote 57] and (5)
tax year 2002 data on the estimated number of contributions to
Coverdell Education Savings Accounts from IRS. We also reviewed studies
conducted by Congressional Research Service, the Congressional Budget
Office, GAO, the Department of the Treasury, the Urban Institute, and
the College Board. We also interviewed individuals from the
Congressional Research Service, Education, IRS, Treasury, and
universities.
The 2002 SOI data and 2003-2004 NPSAS data were the most recent data
available. The SOI individual tax return file is a stratified
probability sample of income tax returns filed with IRS. The SOI sample
of 175,000 returns represented the approximately 130 million tax
returns filed for 2002. NPSAS is a comprehensive study that examines
how students and their families pay for postsecondary education. It
includes nationally representative samples of 79,852 undergraduates,
9,611 graduate students, and 1,283 first-professional students enrolled
during the 2003-2004 academic year. The NPSAS data are based on student
interviews and administrative records, and NPSAS includes survey
results from both students who received financial aid and those who did
not. To assess the reliability of the SOI and NPSAS sample data, we
reviewed existing information about the samples and performed
electronic testing of the required data elements to detect obvious
problems in accuracy and completeness. We determined that SOI and NPSAS
data, as well as other data used to provide certain specific pieces of
information, were sufficiently reliable for this report.
Because estimates from the SOI and NPSAS data are based on samples,
they are subject to sampling errors. These sampling errors measure the
extent to which the point estimates may vary from the actual values in
the population of tax filers. Each of our estimates is surrounded by a
95 percent confidence interval: an interval that 95 times out of 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 tables in appendix II.
To examine the extent to which tax filers are effectively using
postsecondary education tax preferences, we used much of the same
information we obtained for the description and comparison of the
programs and tax preferences. In addition we estimated the number of
tax filers who were eligible for an education tax credit or tuition and
fees deduction but either did not claim one at all or appeared to make
a less-than-optimal choice among these tax preferences and the amounts
of tax benefits lost as a result. To do this analysis we used IRS's SOI
sample of individual tax returns for tax year 2002 and all Form 1098-T
information returns for tax filers in the sample. Postsecondary
institutions participating in Education's student aid programs are
required to issue Form 1098-Ts to all enrolled students. Form 1098-Ts
include the student's name, address, and social security number, and
the school's taxpayer identification number (TIN). Form 1098-Ts also
indicate if the student was a graduate student and if he or she was
enrolled at least half-time. Postsecondary institutions had the option
of providing information concerning students' educational expenses,
scholarships, and grants but were not required to do so. By combining
information on the Form 1098-Ts with information on the tax return, we
were able to identify the postsecondary student population in the SOI
sample and the choices that tax filers made concerning education-
related tax preferences.
To conduct the analysis, we had to exclude two types of tax returns
from consideration. Because a person cannot claim the tuition deduction
or the Hope or Lifetime Learning credits if he or she is claimed as a
dependent on someone else's tax return, we excluded dependent tax
returns in the SOI sample from our analysis. We also excluded the tax
returns of tax filers that received a Form 1098-T with no information
concerning students' educational expenses because we could not analyze
the tax returns without these data. This included the tax returns of
individuals who received an education tax credit or tuition deduction
but did not receive a Form 1098-T. These limitations excluded 87
percent of the returns in the sample.
We considered different explanations for why those tax filers with
education expenses did not claim an education tax credit or tuition
deduction. For example, we examined whether tax filers had (1) income
that exceeded the program thresholds for tax year 2002, (2) no taxable
income, (3) no tax liability after claiming other tax credits, or (4)
no net educational expenses after accounting for scholarships and
grants as reported on the Form 1098-T. We also examined whether tax
filers were married filing separately or filed a Form 1040EZ because
this would prevent tax filers from being able to claim the education
tax credits or tuition deduction.
We calculated tax filers' optimal choice among the Hope and Lifetime
Learning credits, and the tuition deduction on the basis of program
eligibility criteria for tax year 2002. Tax filers are limited to
claiming either a tuition deduction or an education tax credit for the
same student. Eligibility is restricted by modified adjusted gross
income and, in the case of the Hope tax credit, whether or not students
are enrolled at least half-time.
We shared our methodology for this analysis with tax policy researchers
outside of GAO and incorporated their comments into our analysis.
To identify available academic research on the effectiveness of major
federal financial aid programs, we reviewed studies that examined
whether the programs or tax preferences affect college attendance,
persistence, and choice. We looked for these measures 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 we found through searches
in EconLit, Digital Dissertations from ProQuest, and the National
Bureau of Economic Research web site. These online sources are
nationally recognized repositories of research results. In addition, we
also examined relevant studies cited in studies found from our
searches. 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. We
assessed studies that provided an original empirical analysis according
to professional standards of econometric analysis for their
methodological rigor. The results of the studies that we judged to
contain acceptably identified statistical estimates formed the basis
for our findings about the availability of information concerning the
relative effectiveness of major federal financial aid programs.
We conducted our review from May 2004 through June 2005 in accordance
with generally accepted government auditing standards.
[End of section]
Appendix II: Confidence Intervals:
We used two data sets in this review: Education's 2003-2004 National
Postsecondary Student Aid Study and the Internal Revenue Service's 2002
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 report. For figures drawn from these
data, we provide both point estimates and confidence intervals.
Table 7: Description of Federal Student Aid Programs Authorized under
Title IV of the Higher Education Act:
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 8: Selected Postsecondary Education Tax Preferences:
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 9: 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.
Upper bound;
1998: 4,827,719;
1999: 6,639,576;
2000: 7,024,049;
2001: 7,428,088;
2002: 9,809,833.
Source: GAO analysis of Statistics of Income data for 2002.
[End of table]
Table 10: Percentage of Aid Recipients and Dollars of Aid by Income
Category for Dependent Students Served by Selected Title IV Programs:
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
[End of table]
Source: GAO analysis of 2003-2004 National Postsecondary Student Aid
Study data.
Table 11: Percentage of Aid Recipients and Dollars of Aid by Income
Category for Independent Students Served by Selected Title IV Programs:
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 12: Percentage of Tax Filers Claiming Hope and Lifetime Learning
Credits and Tuition Deduction and Tax Preference Dollars by Income
Category, Tax Year 2002:
Type of Aid: Hope Credit;
Tax filers;
Lower bound;
$0-20,000: 16.63;
$20,001-40,000: 30.43;
$40,001-60,000: 18.06;
$60,001-80,000: 16.2;
$80,001-100,000: 9.45;
More than $100,000: 0.1.
Upper bound;
$0-20,000: 20.29;
$20,001-40,000: 34.75;
$40,001-60,000: 21.67;
$60,001-80,000: 19.7;
$80,001-100,000: 12.27;
More than $100,000: 0.62.
Type of Aid: Dollars;
Lower bound;
$0-20,000: 9.14;
$20,001-40,000: 30.19;
$40,001-60,000: 20.37;
$60,001-80,000: 21.75;
$80,001-100,000: 8.66;
More than $100,000: 0.
Upper bound;
$0-20,000: 11.82;
$20,001-40,000: 35.06;
$40,001-60,000: 24.77;
$60,001-80,000: 26.52;
$80,001-100,000: 11.7;
More than $100,000: 0.03.
Type of Aid: Lifetime Learning Credit;
Tax filers;
Lower bound;
$0-20,000: 14.59;
$20,001-40,000: 32.04;
$40,001-60,000: 23.06;
$60,001-80,000: 14.74;
$80,001-100,000: 6.73;
More than $100,000: 0.14.
Upper bound;
$0-20,000: 17.89;
$20,001-40,000: 36.25;
$40,001-60,000: 26.85;
$60,001-80,000: 18.03;
$80,001-100,000: 9.14;
More than $100,000: 0.67.
Type of Aid: Dollars;
Lower bound;
$0-20,000: 10.73;
$20,001-40,000: 31.78;
$40,001-60,000: 22.56;
$60,001-80,000: 18.58;
$80,001-100,000: 5.98;
More than $100,000: 0.
Upper bound;
$0-20,000: 13.97;
$20,001-40,000: 37.02;
$40,001-60,000: 27.24;
$60,001-80,000: 23.32;
$80,001-100,000: 8.79;
More than $100,000: 0.02.
Type of Aid: Tuition Deduction;
Tax filers;
Lower bound;
$0-20,000: 18.38;
$20,001-40,000: 16.56;
$40,001-60,000: 14.81;
$60,001-80,000: 11.03;
$80,001-100,000: 14.08;
More than $100,000: 15.23.
Upper bound;
$0-20,000: 21.91;
$20,001-40,000: 20.04;
$40,001-60,000: 18.14;
$60,001-80,000: 14.01;
$80,001-100,000: 17.33;
More than $100,000: 18.49.
Type of Aid: Dollars;
Lower bound;
$0-20,000: 9.41;
$20,001-40,000: 8.83;
$40,001-60,000: 11.55;
$60,001-80,000: 11.53;
$80,001-100,000: 20.79;
More than $100,000: 26.16.
Upper bound;
$0-20,000: 11.93;
$20,001-40,000: 11.63;
$40,001-60,000: 15.1;
$60,001-80,000: 15.52;
$80,001-100,000: 25.91;
More than $100,000: 31.65.
Source: GAO analysis of Statistics of Income data for 2002.
[End of table]
Table 13: 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 14: 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 15: 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 16: 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 17: 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 18: 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 19: Amounts by Which Apparently Eligible Taxpayers Failed to
Reduce Their Tax Liability: 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 20: Amounts by Which Apparently Eligible Taxpayers Failed to
Reduce Their Tax Liability: 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 21: 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 22: 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 23: 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.
[End of table]
Source: GAO analysis of Statistics of Income data for 2002.
Table 24: 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 25: 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 26: 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 27: 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 28: 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 29: 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 30: 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 31: Percentage of Suboptimal Choices Made by Paid Tax Preparers:
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 32: Percentage of Suboptimal Choices Made by Paid Tax Preparers:
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]
[End of section]
Appendix III: Postsecondary-Education-Related Tax Preferences:
We analyzed the following postsecondary-education-related tax
preferences in detail in this review.
Lifetime Learning Credit: Income-based tax credit claimed by tax filer
on behalf of students enrolled in one or more postsecondary education
courses.
Hope Credit: Income-based tax credit claimed by tax filer 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 filer 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
filer on behalf of students who are enrolled in one or more
postsecondary education course and have either a high school diploma or
a General Educational Development (GED) credential.
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.
The following postsecondary-education-related tax preferences were not
included in this review.
Scholarships, Fellowships, Grants, and Tuition Reductions Income
Exclusion: Scholarships and fellowships paid directly to degree-
candidate students or to their educational institutions for tuition and
fees are not taxed as income. However, scholarships and fellowships
covering room and board or transportation or paid in return for
services, such as teaching, are taxable. Also, tuition reductions, for
example discounts given to employees of an educational institution or
their children, are not counted as income for tax purposes.
Employer-Provided Education Benefits Exclusion: Financial assistance
provided by employers to employees up to $5,250 in 2004 to pay for
employee educational expenses is not counted as income for tax
purposes. Only funds used to pay for tuition, fees, books, equipment,
and similar expenses qualify. Funds from an employer and used to pay
for meals, lodging, or transportation count as income for tax
purposes.[Footnote 58]
Student Loan Forgiveness Exclusion: Student loan repayment assistance
or cancellation provided in exchange for working for a period of time
in certain professions for any of a broad class of employers is not
treated is taxable income.
Education Savings Bonds: Interest earned on U.S. savings bonds is not
taxed if the bond holder is paying postsecondary education tuition and
fees or making contributions to a 529 qualified tuition program or a
Coverdell education savings account. The exclusion is available to tax
filers with modified adjusted gross incomes below $74,850 ($119,750 if
married filing jointly or qualified widow(er)).
Business Expense Deduction of Work-Related Education: Tax filers may
deduct the cost of work-related education if the education is required
by their employer or the law to maintain the tax filer's present
salary, status, or job and maintains or improves skills needed in the
tax filer's present work. Education to meet the minimum educational
requirements of the tax filer's present trade or business or education
towards a new trade or business does not qualify. The tax filer must
itemize deductions on form 1040 Schedule A, C, or F. The amount of the
deduction is the total of work-related education expenses plus other
job and certain miscellaneous expenses that is in excess of 2 percent
of adjusted gross income.
Uniform Transfers to Minors: Money paid directly to an educational
institution for another person's tuition are not subject to gift
taxes.[Footnote 59]
Early Withdrawals From Individual Retirement Accounts: The 10 percent
additional tax that applies to withdrawal of funds from an Individual
Retirement Account does not apply if the funds are used to pay for the
postsecondary education expenses of the account holder or his or her
dependent.
Parental Personal Exemption for Dependent Students: The tax code
definition of "dependent" for tax filing purposes involves 5 tests,
including whether the dependent is (1) a member of your household or
related to you, (2) a U.S. citizen or resident, (3) filing a joint tax
return, (4) earning less than $3,100, and (5) receiving more than half
of their support from the taxpayer claiming the dependent. In 2004,
someone over age 18, earning more than $3,100, and not living with the
tax filer throughout the year would likely not qualify as a dependent.
However, the tax code makes exceptions to these rules for students
under age 24, thus postsecondary education students are still
dependents for tax purposes while they are in school.[Footnote 60]
[End of section]
Appendix IV: Comments from the Department of Education:
UNITED STATES DEPARTMENT OF EDUCATION:
OFFICE OF POSTSECONDARY EDUCATION:
THE ASSISTANT SECRETARY:
Cornelia M. Ashby:
Director, Education, Workforce, and Income Security Issues:
United States Government Accountability Office:
Washington, DC 20548:
JUL 12 2005
Dear Ms. Ashby:
Thank you for the opportunity to review and comment on your draft
report, Student Aid and Postsecondary Tax Preferences: Limited Research
Exists on the Effectiveness of Tools to Assist Students and Families
Through Title IV Student Aid and Tax Preferences (GAO-05-684).
While we agree with your assessment that more research should be done
on various Federal programs that assist students enrolled in
postsecondary education, we disagree with your conclusions that the
Title IV programs, in particular, have not been adequately studied.
The report ignores the fact that the Government Accountability Office's
(GAO) analysis of the Federal Student Aid (FSA) program could not have
been conducted if the U.S. Department of Education's (Department)
National Center for Education Statistics (LACES) had not recently
completed the 6T National Postsecondary Student Aid Study (NPSAS). It
also fails to mention the nearly 60 reports and other publications
LACES prepared using data from NPSAS, the Survey of Beginning
Postsecondary Students Longitudinal Study, and the Baccalaureate and
Beyond Student Survey, each repeated 4 times. The LACES prepared the
publications based on these vital data sources about the FSA programs.
One LACES report not considered, Persistence and Attainment of
Beginning Students with Pell Grants (LACES Number 2002169, Released May
7, 2002), concludes that, among all low-and middle-income beginning
students who were enrolled at four-year institutions in 1995-96, no
differences in three-year persistence rates were detected between Pell
Grant recipients and non-recipients. The GAO draft report fails to cite
this study.
As indicated in the draft report, the Department is committed to
continuing to increase its research associated with the effectiveness
of our programs. However, GAO's failure to acknowledge such an
extensive body of research presents an incomplete and inaccurate
assessment.
Sincerely,
Signed by:
Sally L. Stroup:
[End of section]
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FOOTNOTES
[1] 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.
[2] Tax filers may claim only one of the tax preferences above for a
single student. Families with more than one student with eligible
expenses may claim more than one of these tax preferences.
[3] Both data sets report 2002 adjusted gross income. In this report,
dependent student income equals 2002 parental adjusted gross income,
while independent student income equals the student's 2002 adjusted
gross income (and, if married, the spouse's adjusted gross income).
[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, 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).
[5] 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.
[6] 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.
[7] These may include child care expenses for parents of young
dependent children or supportive services for disabled students.
[8] Certain aspects of the tax-favored treatment of section 529
programs that were enacted in the Economic Growth and Tax Relief Act of
2001 are subject to expire on December 31, 2010, if not extended.
[9] For example, scholarships covering tuition and fees and tuition
reductions for the children of employees of an educational institution
are not counted as income for income tax purposes. Similarly, student
loans forgiven when a graduate goes into certain professions are also
not subject to federal income taxes.
[10] 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.
[11] The 8.4 million title IV aid recipient figure is an unduplicated
count of students, i.e., a student receiving both a grant and a loan is
counted only once. Each of the 9.6 million tax filers represents at
least one student and in some cases more than one student. A tax filer
with more than one dependent with qualified educational expenses, or
with qualified expenses of his or her own along with those of a
dependent, may claim more than one tax preference on his or her tax
return as long as other eligibility criteria are met.
[12] 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 excluded from our analysis.
[13] Estimated financial assistance includes the Pell Grant and most
other sources of state, federal, private, and institutional aid.
[14] Additionally, loan amounts for both subsidized and unsubsidized
loans are subject to statutory limits on annual and cumulative
borrowing.
[15] The earnings portion of a withdrawal from a Coverdell Education
Savings Account is taxed at the student's marginal rate, rather than
the rate of the parents. For parents with more than $100,000 in
household income, nonqualified withdrawals from such an account, even
with a 10 percent tax penalty, are taxed at a lower rate than
withdrawals from a nonadvantaged account. See Susan Dynarski, High
Income Families Benefit Most from New Education Savings Incentives, Tax
Policy Issues and Options, No. 9 (February 2005).
[16] Advisory Committee on Student Financial Assistance, The Student
Aid Gauntlet, Final Report of the Special Study of Simplification of
Need Analysis and Application for Title IV Aid, (January 2005). Kane
(1995) suggests that providing better information about financial aid
and streamlining the process of applying for aid could increase
enrollment.
[17] See, for example, U.S. Congress, Joint Committee on Taxation,
Study of the Overall State of the Federal Tax System, vol. II (April
2001); U.S. Congress, Joint Committee on Taxation, Present Law and
Analysis Relating to Tax Benefits for Higher Education (July 21, 2004);
Nina E. Olson (National Taxpayer Advocate), "Complexity, Compliance,
and Communication: Why Should Tax Filers Comply in a Complex and
Changing Tax Environment?" (presentation before the President's
Advisory Panel on Federal Tax Reform, Mar. 3, 2005).
[18] We examined whether tax filers had (1) tax liability after
claiming other tax credits, (2) net educational expenses after
accounting for scholarships and grants as reported on the Form 1098-T,
and (3) taxable income under program thresholds for tax year 2002. We
also examined whether tax filers were married filing separately or
filed a Form 1040EZ because this would prevent tax filers from being
able to claim the education tax credits or tuition deduction. We were
unable to consider other possible explanations, including whether tax
filers did not meet certain qualification requirements, such as, in the
case of the Hope tax credit, whether the student was in his or her
first 2 years of postsecondary education. Eligibility for more than one
tax preference for the same student does not mean that a tax filer may
claim more than one--the tax filer must choose just one of the three
tax preferences we discuss here per student.
[19] Our analysis considered the difference between (1) the 2002
maximum allowable Lifetime Learning credit, calculated from 20 percent
of each tax filer's reported qualified educational expenses of up to
$5,000 and (2) the amount of possible deduction from income for
qualified educational expenses of up to $3,000 in combination with the
tax filer's 2002 marginal tax rate.
[20] Department of Treasury, IRS Publication 970, Tax Benefits for
Education (2004).
[21] The 12 programs and 2 others not listed in the Publication are
listed in appendix III.
[22] Albert J. Davis, Choice Complexity in Tax Benefits for Higher
Education, National Tax Journal, Vol. LV, No. 3 (September 2002).
[23] See, for example, U.S. Congress, Joint Committee on Taxation,
Present Law and Analysis Relating to Tax Benefits for Higher Education
(July 21, 2004); U.S. Congress, Joint Committee on Taxation, Study of
the Overall State of the Federal Tax System, vol. II (April 2001).
[24] Credit eligibility depends, in part, upon the academic year in
which the student is enrolled, the number of credits taken by the
student, the student's status with respect to a degree or certificate
program, and the adjusted gross income of the parents.
[25] Fees and expenses are qualified only if they must be paid to the
institution as a condition of enrollment or attendance.
[26] Study of the Overall State of the Federal Tax System, vol. II, 125-
6.
[27] The new nontaxable distribution figure is calculated $1,200 x
($1,500/$3,600) = $500. The taxable portion then becomes $1,200 -$500
= $700.
[28] The Higher Education Act stipulates that the Hope and Lifetime
Learning tax credits may not be considered either as estimated
financial assistance in the assessment of aid eligibility, or as income
or assets in the calculation of the expected family contribution.
[29] See Dynarski (2004). These calculations include school need-based
grants and need-based federal aid (grant aid, work-study, and the
Perkins and Stafford subsidized federal loans).
[30] 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).
[31] Department of Education, "Treatment of Coverdell Accounts and 529
Tuition Plans," Dear Colleague Letter, DCL ID: GEN-04-02 (posted Jan.
22, 2004).
[32] Dr. Susan Dynarski, testimony on "The Role of Higher Education
Financing in Strengthening U.S. Competitiveness in a Global Economy"
before the U.S. Congress, Senate Committee on Finance (July 22, 2004).
[33] We looked for studies addressing a program or tax preference's
affect on rates of postsecondary attendance, persistence, and choice
because these measures have been the focus of congressional concern as
expressed in committee reports, statutorily established study
commissions, and requests for our work from Congress.
[34] GAO-02-751.
[35] Hansen (1983), Kane (1995), and Kitmitto (2004) found that Pell
Grants had little or no impact on attendance, while Seftor and Turner
(2002) found they increased attendance for students of from 22 to 35
years of age.
[36] See Li (1999), Bettinger (2004), and Kitmitto (2004) for research
on the impact of Pell Grants on persistence. Angrist (1993) and Bound
and Turner (2002) found that the G.I. Bill and other veteran's benefits
increased the amount of college completed. Dynarski (2003) found that
the Social Security Student Benefit Program increased college
completion as well. Dynarski (2004) found that merit aid increased
college completion.
[37] See Reyes (1995), Dynarski (2002), and Long (2004), which focuses
on low-income students.
[38] Likewise, because the composition of financial aid has changed--
the frequency and levels of borrowing have increased--an equivalent
(real) change in loan amounts may elicit a different response. In
particular, some students, especially lower-income students, may
already have large loan levels and be less willing to increase their
loan debt than they were in 1977.
[39] See Reyes (1995) for estimates on how loans affect persistence and
Dynarski (2002) for information on how loans affect college choice.
[40] See Long (2003b), which does not separately examine the Hope and
the Lifetime Learning tax credits. A few additional papers have
simulated the effect of the Hope tax credit on college attendance,
including Cronin (1997) and Cameron and Heckman (1999). These
estimates, however, are based on the findings of how students respond
to other financial aid policies, which may be different from the
response to these tax credits. In addition, Cronin (1997) bases her
analysis on a proposed version of the tax credit as opposed to the
enacted tax credit.
[41] Bershadker and Cronin (2004).
[42] There is also research on the effects of financial aid policy, in
general, on choice. Linsenmeier, Rosen, and Rouse (2002) and Van Der
Klaauw (2002) found that financial aid policy at specific schools
positively affected the likelihood of whether accepted students chose
to attend those schools. Avery and Hoxby (2003), focusing on high
aptitude students, found that larger amount of grants, loans, and work-
study made from all sources--federal, state, and institutions--were
associated with students who were more likely to attend that school.
Although it is unlike any existing federal program, Dynarski (2000)
found that the Georgia Hope program shifted some would-be 2-year school
students to 4-year schools and caused some students to choose to stay
within state for college.
[43] See Leslie and Brinkman (1988), McPherson and Shapiro (1991),
Rouse (1994), Kane (1995) and (1999), and Cameron and Heckman (1999) on
the effects of tuition changes. See studies of the Georgia Hope
Scholarship by Dynarski (2000) and Cornwell, Mustard, and Sridhar
(2004) as well as those conducted by Bound and Turner (2002) on the
G.I. Bill, by Dynarski (2003) on the Social Security Benefit Program,
and by Kane (2003) on the Cal Grant Program.
[44] Kane (2002).
[45] For studies of the effect on tuition, see Li (1999) for Pell
Grants, Long (2003b) for tax credits, and Acosta (2001) for federal
grant and federal loan aid. The Georgia Hope Scholarship has also been
found to increase college costs by Long (2003a).
[46] GAO, Student Aid and Tax Benefits: Better Research and Guidance
Will Facilitate Comparison of Effectiveness and Student Use, GAO-02-751
(Washington, D.C.: September 13, 2002).
[47] GAO, 21ST Century Challenges: Reexamining the Base of the Federal
Government, GAO-05-325SP (Washington, D.C.: February 2005).
[48] GAO, Performance Budgeting: Observations on the Use of OMB's
Program Assessment Rating Tool for the Fiscal Year 2004 Budget, GAO-04-
174 (Washington, D.C.: January 30, 2004).
[49] OMB describes the PART as a diagnostic tool meant to provide a
consistent approach to evaluating federal programs as part of the
executive budget formulation process. It applies 25 questions under
four broad topics: (1) program purpose and design, (2) strategic
planning, (3) program management, and (4) program results. It also uses
additional questions specific to the mechanism or approach used to
deliver the program, such as grants or credit programs (e.g. student
loans). OMB has not systematically applied the PART to tax preferences.
[50] 21ST Century Challenges: Performance Budgeting Could Help Promote
Necessary Reexamination, GAO-05-709T (Washington D.C.: June 14, 2005).
[51] GAO-02-751.
[52] Wei, C.C., and Horn, L., Persistence and Attainment of Beginning
Students with Pell Grants, NCES 2002-169, U.S. Department of Education,
National Center for Education Statistics (Washington, D.C.: May 2002).
[53] A similar conclusion is reached in Review of NCES Research on
Financial Aid and College Participation and Omitted Variables and
Sample Selection Issues in the NCES Research on Financial Aid and
College Participation, Reports Prepared for the Advisory Committee on
Student Financial Assistance by Donald E. Heller and William E. Becker
(September 2003).
[54] 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).
[55] Office of Management and Budget, Appendix, Budget of the United
States Government, Fiscal Year 2006 (Washington, D.C.: Feb 7, 2005).
[56] The NPSAS school year begins July 1 and ends on June 30 of the
following year.
[57] The College Savings Plan Network collects information from the
states about the numbers of 529 accounts. The data are voluntarily
provided by the states. On the basis of our interview with College
Savings Plan Network staff, we determined that these data were
sufficiently reliable for our use in this study.
[58] Under the Working Condition Fringe Benefit Exclusion, employer-
provided educational assistance that exceeds $5,250 may still not be
counted as income, provided it is used to pay for any educational
expenses that are required by the employer or the law to maintain the
tax filer's present salary, status, or job and maintain or improve
skills needed in the tax filer's present work.
[59] This tax preference is not listed in the 2004 IRS Publication 970.
[60] Ibid.
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