Economic Recovery Package Would Give 3.8 Million Low- and Moderate-Income Students — Thousands in Every State —Access to Higher-Education Tax Credit

PDF of this report (4pp.)

By Arloc Sherman and Chye-Ching Huang

Revised February 26, 2009

The “Hope Credit,” which provides a tax subsidy for college tuition costs, was established in 1997.  Its goal, in part, was to enable students who could not otherwise afford to attend college to do so.  Yet until now, 3.8 million prospective college students — more than a fifth of all high-school-age children nationwide — could not expect to receive any help from this tax credit because their families’ incomes were too low to qualify for it.[1]

The recently-passed American Recovery and Reinvestment Act of 2009 addresses this issue.  It contains a measure to enlarge the Hope credit for students from middle-income families and to partially extend this tax credit for the first time to students from lower-income families.  The law renames the Hope Credit as the American Opportunity Tax Credit.  Currently the expansion is temporary, applying to 2009 and 2010, although the President's budget released February 26 proposes that the expanded credit be made permanent.

Credit Had Shut Out Families that Most Needed Help Affording College

Until now, the Hope Credit was not “refundable.”  This means that it could benefit only students from families with incomes high enough to owe federal income tax.  As a result, students from lower-income families could not qualify for it.  A student from a family of four with income of less than $26,000 in 2009 (more than twice full-time minimum wage earnings) was shut out of the credit entirely for this reason.  Moreover, a student from a four-person family could not qualify for the full Hope Credit of $1,800 unless his or her family had income of more than $43,567.[2]

In contrast, the newly expanded credit is “refundable,” meaning that low-income households that otherwise are eligible can qualify; they can receive a tax “refund” in the amount that the credit exceeds their income tax liability.  Based on Census data for 2004-2006, we estimate that about 3.8 million high-school-age children (ages 14-17) live in lower-income families that, as a result of the credit being made refundable, now have access to the Hope Credit if their children go to college.[3]  Table 1 shows the number of such students in each state; these are the numbers of students who, as a result of the policy change, no longer are automatically shut out of the credit.

Measure Would Expand Credit and Make It Partially Refundable

The recovery package increases the maximum Hope Credit from $1,800 to $2,500, and allows it to be claimed for a maximum of four years of qualifying education instead of the previous limit of two years.  The measure would make up to 40 percent of the credit refundable, enabling households with little or no federal income tax liability to receive a credit of up to $1,000.[4]  The 3.8 million low- and moderate-income students who previously could not expect to benefit from the credit can expect a partial tax credit if they go to college.[5]  This step is laudable for four reasons. 

  • It helps the credit fulfill its basic purpose of promoting college enrollment, by reaching the students for whom it would have the largest impact on college enrollment decisions.  Common sense suggests — and academic research corroborates — that subsidies for college costs are likely to have the largest impact on the college-enrollment decisions of students with low or moderate incomes.  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.”[6]
  • It makes college somewhat more affordable for students who now can barely afford it.  Some mistakenly believe that governmental and school-based aid is sufficient to insulate low-income students from high college costs and that these students consequently do not need the assistance that education tax benefits provide.  But the National Center for Education Statistics reports that the large majority of low- and moderate-income college undergraduates have significant unmet financial need even after taking into account all governmental and institutional grants, subsidized loans, work study, and other aid they may receive.[7]
  • It makes the credit more equitable: low- and moderate-income students ought to have access to subsidies for college costs that Congress provides to students from families with higher incomes.
  • This is particularly helpful during the current recession.  When the labor market is weak and many people are unable to find jobs, one of the best long-term investments the nation can make is to upgrade the skills of unemployed workers.  The more that otherwise unemployed Americans receive additional education and skills during the downturn, the more productive the American workforce will be — and the more competitive American firms will be — in the decades ahead.

TABLE 1:   
Students Helped by Making the Tax Credit Refundable

State

Number

Margin of Error

Alabama

70,000

±15,000

Alaska

7,000

±2,000

Arizona

75,000

±17,000

Arkansas

44,000

±9,600

California

522,000

±44,800

Colorado

36,000

±11,700

Connecticut

30,000

±9,100

Delaware

8,000

±2,400

D.C.

10,000

±2,300

Florida

195,000

±25,900

Georgia

120,000

±20,000

Hawaii

11,000

±3,100

Idaho

20,000

±4,700

Illinois

156,000

±23,300

Indiana

76,000

±16,000

Iowa

25,000

±7,800

Kansas

33,000

±8,600

Kentucky

72,000

±15,100

Louisiana

77,000

±15,800

Maine

17,000

±4,600

Maryland

53,000

±13,600

Massachusetts

71,000

±15,400

Michigan

121,000

±20,300

Minnesota

41,000

±11,800

Mississippi

63,000

±11,700

Missouri

74,000

±15,800

Montana

12,000

±3,000

Nebraska

17,000

±4,900

Nevada

32,000

±8,200

New Hampshire

9,000

±3,000

New Jersey

77,000

±16,400

New Mexico

36,000

±8,000

New York

295,000

±32,600

North Carolina

118,000

±20,200

North Dakota

6,000

±1,800

Ohio

128,000

±20,600

Oklahoma

53,000

±12,200

Oregon

41,000

±11,400

Pennsylvania

138,000

±21,700

Rhode Island

14,000

±3,600

South Carolina

58,000

±13,800

South Dakota

7,000

±2,000

Tennessee

87,000

±17,100

Texas

346,000

±37,200

Utah

24,000

±6,300

Vermont

5,000

±1,700

Virginia

71,000

±15,500

Washington

67,000

±15,600

West Virginia

27,000

±5,600

Wisconsin

63,000

±14,700

Wyoming

5,000

±1,500

United States

3,762,000

±107,900

Source:   CBPP estimates based on data from the 2005-2007 Annual Social and Economic Supplements to the Census Current Population Survey, which cover years 2004-2006.  Figures are averages for 2004-2006, based on 2009 tax law.

The estimates refer to numbers of high-school-age children, rather than those of college age, because Census data do not link college-age children living away from home with the incomes of their parents. 
We take the number of high-school-age students in families with too little tax liability to benefit from a non-refundable education tax credit as an indicator of what the number will be in four years when these same children reach college age.
The estimates shown here may be too conservative insofar as they do not take into account any other tax credits or deductions to which families may be entitled, and thus may understate the number of families with insufficient tax liability to benefit from the credit.  

End Notes:

[1]  The final recovery legislation adopts a Hope Credit provision originally passed by the House.  Click here to see the provision discussed in greater detail.

[2]  This figure assumes that the family does not qualify for other non-refundable credits such as the DCTC.

[3]  In practice, many more likely would not benefit because of the credit’s narrow definition of qualifying expenses.  See Chye-Ching Huang, Robert Greenstein, and Gillian Brunet, “House Recovery Package Would Improve Higher-Education Tax Credits, January 21, 2009, Center on Budget and Policy Priorities.

[4]  To receive a credit of $1,000, a low-income student would need to have at least $4,000 in qualifying education expenses. See http://www.cbpp.org/cms/index.cfm?fa=view&id=2271.    

[5]  http://www.cbpp.org/cms/index.cfm?fa=view&id=2271

[6]  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.

[7] http://www.cbpp.org/cms/index.cfm?fa=view&id=2271.  This paper also explains that, even with the additional Pell Grants proposed (and adopted) in the recovery package, large levels of unmet need will remain among many students from low-income families. 

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