Higher Education Denied
Congress helps students pay for the costs of college by giving them, or their parents, tuition tax credits that reduce their taxes.
Question 8. Ask the Candidate:
Would you reform the tax credits for college tuition to help households who don’t owe income taxes but often need the assistance most?
"The tax which will be paid for education is not more than the thousandth part of what will be paid if we leave the people in ignorance."
—Thomas Jefferson
"By nature all men are alike, but by education widely different."
—Chinese Proverb
No one doubts the odds: An investment in college is likely to pay off handsomely. Consider these figures from the College Board:
Within each demographic group, median annual earnings for year-round, full-time workers with bachelor's degrees are about 60% higher than earnings for those with only a high school diploma.... Over a lifetime, the gap in earnings between those with a high school diploma and those with a B.A. or higher exceeds $1,000,000.[1]
This gap is likely to leave more and more Americans coming up short. Whether you're looking at community colleges or snazzy Ivy League schools, the costs are growing more formidable even for middle-income families.
Consider what has happened at two-year and four-year public institutions, which educate 80% of our college students. According to the College Board, the average tuition and fees for the five years ending in June 2007 rose 23% for two-year public colleges and 35% for four-year public colleges, after adjusting for inflation.[2]
While hikes in tuition and fees have moderated in the last few years, the earlier history has driven the costs to levels that many households cannot afford. For example, the average budget--tuition and fees, books and supplies, rent, transportation, and other expenses--for a commuter student at a four-year public institution for the academic year that ended in June 2007, was about $17,000.[3]
As if rising tuitions and fees weren't bad enough, the value of Pell Grants has declined dramatically over the years. Pell Grants, distributed by the U.S. Department of Education, focus on students with high levels of financial need and are the principal federal college subsidies for most low- and moderate-income students. Twenty years ago, the maximum Pell grant covered 60% of a student's cost of attendance at a four-year public institution. Last year, with a maximum grant of $4,050, it covered little more than 25%.[4] (The maximum Pell grant is to rise in July 2008 to $4,731.) As could be predicted, the combination of state fiscal problems and limited Pell Grants has led many state colleges and universities to accept fewer Pell students and more out-of-state applicants who pay higher tuitions.
An Idea Not Good Enough: Hope Scholarship and Lifetime Learning Credits
In 1997, Congress responded to widespread concerns about escalating costs of higher education by enacting the Hope Scholarship credit and the Lifetime Learning credit.
For 2008, any taxpayer whose income is no more than $48,000, or, in the case of joint filers, $96,000, may claim either the full Hope or Lifetime credit (but not both).[5]
The focus of each credit is somewhat different. The Hope Scholarship credit allows a household to reduce its taxes by up to $1,800 for each member who is attending his first two years of college. This is particularly useful for students at community colleges or for families with several members attending college at the same time.
The Lifetime Learning credit allows a family to reduce its taxes by up to $2,000 for one family member who attends college during the year, but it is available for all years of college, not just for the first two years. As with the Hope credit, only parents may claim the credit for a student who qualifies as a dependent on their tax return; a student who is not a dependent may claim the credit for herself.
These credits have helped millions of students. But because the credits only reduce a family's income taxes, they have no value to the millions of households who don't owe taxes. In 2008, for example, a young woman supporting herself would have to earn over $10,540 before she owed any tax; and if she wanted to attend college, she more likely would work only part time. (A full-time minimum wage job as of July of this year will pay about $12,300.) A single mom who borrowed enough money so that her only child could attend a community college won't owe any tax until her income exceeds at least $26,000. And the figures are higher for two working parents with one or two dependent children.[6]
Many Americans know they desperately need more education to break out of the income cycles in which their families are trapped. During the 2003-2004 academic year alone, according to the College Board, 250,000 students who were eligible to attend college declined to do so because they could not afford it. Most of these people set their hopes on two-year community colleges, where the average cost for tuition and fees today is about $2,300 per year, or four-year public colleges, where these costs run about $5,900 per year. Those figures are tantalizingly within reach for students who get Hope or Lifetime credits--but because of the structure of the tax law, the poorest of them can't get any portion.
The problem is even worse than it looks. Basic economic theory teaches us that the credits are likely to have produced higher tuitions and fees because institutions realize that the government will cover part of the costs. This means that students who don't benefit from the credits actually are worse off than they would be if the credits didn't exist in the first place.
What Congress Should Do
The simplest and most efficient way to help needy students afford higher education is through the direct budget process. If Congress proceeded this way, it would eliminate the tax credits and substantially increase Pell Grants and favorable loans for low- and moderate-income students.
Until that happens, the credits ought to be made "refundable." That means that the IRS would treat all families as if they had paid taxes in advance equal to at least the amount of the credit they would be eligible to receive. If they didn't owe any tax, the IRS would send them a check "refunding" their theoretical tax payment, up to the amount of the credit; if they owed some tax but less than the amount of the credit, the IRS would send them a check for the difference.
The additional money would make it possible for large numbers of qualified students to attend a public college. The student still would have to pay the significant costs of housing, transportation, books, and supplies. But the refunded tax credit, when added to grants or loans that might be available to her, could make her attendance feasible.
The Hope Scholarship and Lifetime Learning credits will save students and their families about $4.4 billion in 2008. Adding refundable credits would not be inexpensive. For example, assisting 250,000 additional low-income students with the Hope credit would approximately double government outlays for the credits. But nearly 40% of that $4.4 billion cost of the credits this year will assist households with $75,000 or more of income.[7] Which candidate wants to argue that the credits should be denied to the poorest of families while they're made fully available to the middle class?
Making college more accessible for lower-income Americans is one investment that will pay off not just for the students. How often have we heard politicians say that a better-educated workforce would make our businesses more profitable and more competitive in this global economy? Yes, we all realize that this is the right, and smart, thing to do. Now let's hear it from the candidates.
Assuming they agree, we also need their answer to a second question: How do they propose to pay for it? We don't want more empty campaign promises.
[1] The College Board, Trends in College Pricing, 2003, www.collegeboard.com.
[2] The College Board, Trends in College Pricing, 2006, www.collegeboard.com.
[3] Ibid.
[4] Pell Grant-Wikipedia. http://en.wikipedia.org/wiki/Pell_Grant.
[5] In 2008, the credits are reduced for joint taxpayers whose income exceeds $96,000 and are eliminated altogether once their income exceeds $116,000; for other taxpayers, the credits are reduced once their income exceeds $48,000 and are eliminated once it exceeds $58,000.
[6] Assume the single mom earns $26,000. She will deduct $7,000 for two personal exemptions and $8,000 as a standard deduction, for a total of $15,000. This leaves her with $11,000 of taxable income, all subject to the 10% tax rate, on which she will owe $1,100. But she is entitled to an earned income credit equal to $1,153, which eliminates her tax. Two working parents who earn the minimum wage and have one dependent child will not be taxed on up to $30,000 of wages because of a combination of personal exemptions, a standard deduction, and an earned income credit.
[7] Joint Committee on Taxation. Estimates of Federal Tax Expenditures for Fiscal Years 2007-2011. JCS-3-07. Washington, D.C.: GPO, 2007, 42. The 40% figure is based upon JCT's estimates for 2006, which have been roughly consistent over the years.