June 1, 2007
A
SIGNIFICANT NUMBER OF STUDENTS IN EVERY STATE ARE SHUT OUT OF FEDERAL HIGHER
EDUCATION TAX CREDITS
Senate Finance Committee Will Soon Consider Whether to Address This Issue
By Aviva Aron-Dine and Arloc Sherman
As early as next week, the Senate Finance
Committee is expected to vote on legislation restructuring the higher education
tax credits. The federal tax code includes two tax credits that offset tuition
costs for students enrolled in higher education: the Hope Credit, worth up to
$1,650, and the Lifetime Learning Credit, worth up to $2,000.[1]
While a key rationale for these tax benefits is to enable students to attend
college who could not otherwise afford to do so, nearly 4
million prospective college students — or more than a fifth of all
high-school-age children nationwide — cannot expect to receive any help from the
credits because their families’ incomes are too low.
The higher education tax credits are
“nonrefundable,” which means they can only benefit those with incomes high
enough to generate sufficient federal income tax liability. As a result,
students from low-income families generally do not qualify for them. This year,
a family of four with income of less than $24,000 (more than twice full-time
minimum wage earnings) would receive no benefit from the tax credits.
And the family would need an income of over $40,000 to qualify for the full
benefits of either of the two credits.
In contrast, if a tax credit is “refundable,”
taxpayers can receive a tax refund for the amount by which the credit exceeds
their income tax liability. Put another way, only refundable tax credits
provide the same benefits to taxpayers at all income levels, rather than
shutting out those with low incomes.
Based on Census data for 2003-2005, we
estimate that about 3.9 million high-school-age (14-17 year-old) children
nationwide live in families that could not expect to benefit at all from the tax
credits if the children went on to college, simply because the credits are not
refundable.[2]
Table 1 provides figures for the number of such students in each state.
Impact of
Tax Credits Likely Greatest for Low-Income Students
Studies have found that financial
assistance can significantly influence college enrollment decisions. A number
of studies have estimated that a $1,000 reduction in the cost of college can
increase enrollment by 3 to 4 percentage points. (If the percentage of high
school graduates who enrolled in college immediately following graduation
increased by 3 to 4 percentage points, this would be an increase of almost
100,000 students annually.)
Yet a major study of the Hope Credit and the
Lifetime Learning Credit found no evidence that they had increased
college enrollment.[3]
One important factor behind these disappointing results is the credits’
unavailability to low-income students.
Common sense suggests — and careful academic
research corroborates — that subsidies are likely to have the largest impact on
the college enrollment decisions of low- and moderate-income students.
- In 2004, only about 50 percent of
high-school graduates from families in the bottom fifth of the income scale went
directly from high school to college, compared with more than 60 percent of
those in the middle three-fifths of the income scale and about 80 percent of
those in the top fifth.[4]
This suggests that low- and moderate-income students are more likely than
middle- or upper-income students to be deterred by the costs of going to
college.
- According to the Congressional
Research Service, studies consistently find that “lower-income students [are]
more sensitive to changes in tuition and aid than students from middle- and
upper-income families.”[5]
Nevertheless, for millions of low- and moderate-income high school students, the
federal tax credits provide no incentive for college enrollment because
their families cannot expect to benefit from these credits.
Low- and Moderate-Income Students Have Substantial Unmet
Financial Need
Some mistakenly
believe that governmental and school-based aid sufficiently insulates low-income
students from high college costs and that these students do not need the
assistance provided by the education tax benefits. This, however, is not the
case. The National Center for Education Statistics reports that the large
majority of low- and moderate-income undergraduates have significant unmet
financial need even after taking into account governmental and
institutional grants, subsidized loans, work study, and other aid.[6]
Among students from families with incomes under
$20,000 who were attending community colleges in 2003-2004, for instance, 87
percent had unmet financial need, averaging $4,500 per student. Among
students from such families who were attending four-year public institutions, 80
percent had unmet need, averaging $6,000 per student. Middle- and
upper-income students were much less likely to have unmet need.
Conclusion
Making federal tax credits for higher
education available to low- and moderate-income students is critical to
achieving the credits’ fundamental goal of promoting college enrollment. It is
also a matter of equity: low- and moderate-income students face significant
college expenses even after taking into account governmental and
school-based aid, and they should have access to the subsidies for college
expenses that Congress has provided through the tax code to students whose
families have higher incomes. Making the tax credits available to low-income
students would require — at a minimum — making them refundable, so that those
with incomes too low to owe federal income taxes could still benefit.
TABLE 1:
Number of
High-School Age (14-17 Year Old) Children Whose Families Cannot Expect to
Benefit From the Federal Higher Education
Tax Credits
|
State |
Number |
Margin of Error |
Alabama |
61,000 |
±14,000 |
Alaska |
7,000 |
±2,000 |
Arizona |
81,000 |
±17,000 |
Arkansas |
43,000 |
±9,000 |
California |
575,000 |
±45,000 |
Colorado |
43,000 |
±12,000 |
Connecticut |
36,000 |
±9,000 |
Delaware |
8,000 |
±2,000 |
D.C. |
10,000 |
±2,000 |
Florida |
210,000 |
±26,000 |
Georgia |
128,000 |
±20,000 |
Hawaii |
11,000 |
±3,000 |
Idaho |
19,000 |
±4,000 |
Illinois |
159,000 |
±23,000 |
Indiana |
79,000 |
±16,000 |
Iowa |
25,000 |
±7,000 |
Kansas |
29,000 |
±8,000 |
Kentucky |
72,000 |
±15,000 |
Louisiana |
81,000 |
±16,000 |
Maine |
18,000 |
±4,000 |
Maryland |
52,000 |
±13,000 |
Massachusetts |
60,000 |
±13,000 |
Michigan |
132,000 |
±20,000 |
Minnesota |
43,000 |
±11,000 |
Mississippi |
62,000 |
±11,000 |
Missouri |
74,000 |
±15,000 |
Montana |
13,000 |
±3,000 |
Nebraska |
14,000 |
±4,000 |
Nevada |
32,000 |
±8,000 |
New Hampshire |
7,000 |
±3,000 |
New Jersey |
71,000 |
±15,000 |
New Mexico |
35,000 |
±8,000 |
New York |
292,000 |
±31,000 |
North Carolina |
126,000 |
±20,000 |
North Dakota |
5,000 |
±2,000 |
Ohio |
120,000 |
±19,000 |
Oklahoma |
42,000 |
±10,000 |
Oregon |
43,000 |
±11,000 |
Pennsylvania |
148,000 |
±22,000 |
Rhode Island |
17,000 |
±4,000 |
South Carolina |
62,000 |
±14,000 |
South Dakota |
8,000 |
±2,000 |
Tennessee |
88,000 |
±16,000 |
Texas |
378,000 |
±37,000 |
Utah |
24,000 |
±6,000 |
Vermont |
6,000 |
±2,000 |
Virginia |
71,000 |
±15,000 |
Washington |
68,000 |
±15,000 |
West Virginia |
28,000 |
±6,000 |
Wisconsin |
64,000 |
±14,000 |
Wyoming |
5,000 |
±2,000 |
United States |
3,882,000 |
±101,000 |
Source: CBPP estimates based on data from the 2004-2006
Annual Social and Economic Supplements to the Census Current Population
Survey, which cover years 2003-2005. Figures are averages for 2003-2005,
based on 2008 tax law. The estimates likely understate the number of
students in families that cannot expect to benefit from the credits
because their incomes are too low. They take into account only the child
tax credit and Earned Income Tax Credit and not any other tax credits or
deductions to which families may be entitled. They thus overestimate
families’ tax liability, and, as a result, the number of families that
have sufficient tax liability to benefit from non-refundable tax credits. |
End Notes:
In addition,
taxpayers may claim deductions for tuition costs and student loan interest
and may save for college in tax-preferred savings accounts. These tax
benefits go almost entirely to middle- and upper-income students.
In practice,
many more likely would not benefit because of the credits’ narrow definition
of qualifying expenses. See Aviva Aron-Dine, “Making Higher Education Tax
Credits More Available to Low- and Moderate-Income Students: How and Why,”
Center on Budget and Policy Priorities, May 10, 2007,
https://www.cbpp.org/5-10-07tax.htm.
Bridget Terry
Long, “The Impact of Federal Tax Credits for Higher Education Expenses,”
National Bureau of Economic Research Working Paper No. 9553, March 2003.
National Center
for Education Statistics, “The Condition of Education 2006,” U.S. Department
of Education, June 2006,
http://www.nces.ed.gov/pubs2006/2006071.pdf.
Pamela J.
Jackson, “Higher Education Tax Credits: An Economic Analysis,”
Congressional Research Service, updated February 20, 2007,
http://opencrs.cdt.org/rpts/RL32507_20070220.pdf.
Data are from
the 2003-2004 National Postsecondary Student Aid Study. Figures here are
for undergraduate students who are dependents of their parents (and are
classified into income groups based on their parents’ incomes), but the
figures for low-income independent students (generally students who are over
age 24, are married, or have dependents, or are enrolled in a graduate or
professional program) are similar. See National Center for Education
Statistics, “Student Financing of Undergraduate Education: 2003-2004,” U.S.
Department of Education, August 2006,
http://nces.gov/pubs 2006/2006186.pdf. |