Use of higher education tax credits has skyrocketed, but a new study shows they’ve fallen short of their mission to make college more accessible and affordable.
Rising tuition costs, student debt, and access to low- and middle-income families are significant concerns in the higher education arena nationally and in Iowa, and the Washington, D.C.-based Tax Foundation is reporting the tax code is not the best tool to address those issues.
Kyle Pomerleau, an economist with the Tax Foundation, cited several reasons, including that families have to know about the tax credits and take action to receive them — something more common among middle- to high-income families. And, Pomerleau said, because the U.S. system taxes those who make more money at a higher rate, top earners can receive more tax credits.
“So (high-income families) know more about it, and it’s to their benefit to take it,” he said.
Pomerleau also said middle- to upper-class families more often send their children to college — another reason they are more likely to apply for and receive higher education tax credits.
“Tax credits, or spending through the tax code, are not well targeted,” he said. “Just because the law says ‘X’ people should benefit from the money, it doesn’t always turn out that way.”
In fact, the independent tax policy research group discovered that about 30 percent of the benefits of education tax credits accrue to taxpayers making more than $100,000. An additional 18 percent benefits taxpayers making more than $75,000, according to the Tax Foundation report.
When looking broadly at higher education tax credits, the group found they’ve grown from a $4.5 billion program claimed by 4.7 million taxpayers to a $17.4 billion program claimed by more than 7 million people in 2011, the most recent data available.
Despite that surge, student loan debt in the past decade has increased from about $400 billion to nearly $1 trillion in 2012, and the cost of college has risen about 70 percent.
According to the foundation, the application process involved in getting federal student aid has given colleges “intimate knowledge” of each family’s income and eligibility for tax credits. That has allowed the schools to adjust financial aid “to capture the maximum value of the tax credit,” according to Tax Foundation President Scott Hodge.
“Instead of being a helping hand for students, tax credits have turned into a windfall for universities,” Hodge said in a news release.
Iowa State University Director of Student Financial Aid Roberta Johnson said some of the Tax Foundation’s findings ring true, but she disputes the assertion that universities — at least ISU — use information about tax credit eligibility to adjust financial aid offerings.
“To make it sound as if financial aid offices are out there intentionally looking for people who have claimed tax credits and then making the decision that those people have enough money to reduce the aid we are going to give them is definitely false at our institution,” she said. “And I have not heard of any other institutions that are doing that.”
Johnson said some of the report’s findings do corroborate her experiences in the financial aid field — such as those that show higher education tax credits are not well targeted.
“The poorest of the poor either are not filing or they don’t get tax benefits,” she said.
Right now, according to Johnson, a “huge” percentage of the credits are going to people with income over $100,000.
“There are arguments that the dollars going toward tax credits could be better spent by investing them in financial aid programs” for low-income students, Johnson said.
The Tax Foundation, in its report, suggests Congress improve the system by considering other ways to address rising tuition costs, student debt, and access. Alternatives could include increasing saving opportunities in the tax code, expanding prepaid tuition plans to keep costs down and reviving “well-targeted programs,” such as Pell Grants and direct loans.
“I don’t discount that paying for a college education is a challenge for any family, but it’s really challenging for those making $50,000 a year or less,” Johnson said. “So making those dollars available through other programs makes a lot more sense, particularly when the federal budget is stretched already.”
According to the Tax Foundation, eliminating education tax credits in exchange for lower marginal tax rates would grow the economy by $19 billion a year and create 121,000 jobs.
“To the extent that this potentially increases the economy by means of having more money in the treasury, that could be a good thing,” Johnson said.
Some legislators have plans to review the issue, according to Johnson, but she doesn’t expect change to come easy.
“I don’t expect it will go down without a fight,” she said.
l Comments: (319) 339-3106; firstname.lastname@example.org