How have they failed, why, and what are the viable alternatives?
Washington, DC (Jul 16, 2014)—Tax credits for higher education disproportionately benefit higher income families, have failed to stop the increase in student loan debt, and contribute to the rising cost of college tuition. This is according to the latest report from the nonpartisan Tax Foundation which argues that the tax code is not an effective tool for making higher education more affordable.
The report’s key findings include:
Education tax credits have grown from a $4.5 billion program claimed by 4.7 million taxpayers to a $17.4 billion program claimed by over 7 million taxpayers in 2011.
Despite the use of tax credits, in the last decade student loan debt rose from just over $400 billion to nearly $1 trillion in 2012, while the cost of college rose 70 percent.
Education tax credits are not well targeted toward low- and middle- income families; roughly 30 percent of the current benefits of education tax credits accrue to taxpayers earning over $100,000 and an additional 18 percent accrues to those earning over $75,000.
The overuse of tax credits by the federal government has turned the IRS into a spending agency, with refundable tax credits project to double to nearly $200 billion in the next five years, largely due to the Affordable Care Act.
Trading the elimination of education tax credits for lower marginal tax rates would grow the economy by $19 billion per year and create 121,000 jobs.
Congress should consider other solutions to lessen the burden of tuition costs, such as increasing saving opportunities in the tax code, expanding pre-paid tuition plans to keep cost down, or reinvigorating well-targeted programs like Pell Grants and direct loans.
“Instead of being a helping hand for students, tax credits have turned into a windfall for universities,” said Tax Foundation President Scott Hodge. “Because of the Free Application for Federal Student Aid (FAFSA), colleges have intimate knowledge of each student’s or family’s income and assets and therefore knows to what extent a student’s family can afford college and if they are eligible for tax credits, loans, or other financial aid. This information allows the college to simply adjust its financial aid package in order to capture the maximum value of the tax credit.”
We know the current system isn’t working, so what is the solution? Options consistent with tax reform should include: Simplifying the vehicles for saving within the tax code, perhaps through universal saving accounts, and encouraging new markets that will incentivize colleges to keep long-term costs down, such as pre-paid tuition plans. Finally, a better option to help low-income students is to shift resources out of “tax programs” and into established programs like Pell Grants.