College & Workforce Readiness

Tax Credit Fails to Help Needy Reach College, Report Says

By Sean Cavanagh — October 22, 2003 3 min read
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Six years ago, President Clinton joined members of Congress on the south lawn of the White House, where he signed into law a bipartisan series of tax credits he predicted would open the doors of college to “a new generation.”

Yet a new study argues that the federal Hope tax credit and a companion tax break have failed to increase college enrollment, despite the expectations voiced by elected officials at the time.

The study, “The Impact of Federal Tax Credits for Higher Education Expenses,” is available from the Harvard Graduate School of Education. (Requires Adobe’s Acrobat Reader.)

The report by a researcher at Harvard University concludes that eligibility requirements for the tax credits, which took effect in 1998, prevent many students from low-income families from qualifying for them. The result is a program that essentially is a benefit for middle-class families, it contends.

“The rhetoric of this policy was that it would make college accessible to students from all families,” said Bridget Terry Long, an assistant professor in Harvard’s graduate school of education and the report’s author. “But if you look at the people who are on the margin of going to college, it has not helped them.”

Her Oct. 9 report, “The Impact of Federal Tax Credits for Higher Education Expenses,” echoes previous criticism by some other higher education advocates that the Hope program is a politically popular tax break with few benefits for the neediest families.

The Harvard report focuses on both the Hope tax credit and the Lifetime Learning tax credit, two pieces of the Taxpayer Relief Act of 1997. The Hope credit was bestowed with the same title as the HOPE Scholarship, an immensely popular college-payment plan for students in Georgia, which has since been copied by several states. (“Georgia Eyes HOPE Scholarship Changes,” Oct. 15, 2003.)

The federal Hope program allows families to claim tax credits on tuition and required fees of up to $1,500 for each eligible student who is pursuing an undergraduate education or other recognized degree. The program provides a $1 credit for every dollar of the first $1,000 spent on tuition and fees, and 50 cents on the rest. It is limited to a student’s first two years of college.

Unlike a deduction, which reduces the amount of income subject to tax, a credit directly slashes the amount owed by the taxpayer. The amount of the Hope credit varies according to parents’ modified gross adjusted income, and cannot be claimed on incomes of more than $51,000, or $102,000 for joint returns. It provides a credit of up to 20 percent of the first $10,000 in tuition expenses, with a maximum credit of $2,000.

Influencing Tuition?

The Harvard study, which analyzed three years of Internal Revenue Service data, found that many low-income families simply didn’t pay enough in taxes to qualify to receive the Hope and Lifetime Learning credits. Both credits are also nonrefundable, meaning the federal government is not obligated to pay individuals if they don’t owe any tax.

The report also concludes that many public two- and four-year institutions appear to have raised their prices as a result of the tax credits. Schools with tuition below $1,000 had the strongest incentive to hike prices because campus officials knew that the tax credits could cover virtually all student costs, the report says.

But the study’s attempt to link the tax credits with rising tuition was strongly disputed by David Baime, the vice president for government relations for the American Association of Community Colleges, based in Washington.

He called that conclusion “fatuous,” and said that cuts in state aid were a more likely cause of higher prices. “Clearly, there are many more important factors that have entered into the decisions of community colleges,” he said.

The impact of the tax credits has been significant, the report contends. In 1997, taxpayers took advantage of an estimated $9.7 billion in benefits from the credits, Ms. Long found. That approaches the $11 billion Congress devoted to Pell Grants to low-income students in fiscal 2003.

Student tax credits also are reduced if they receive money through Pell Grants, or the federal Supplemental Education Opportunity Grants. A bill introduced this month in Congress would repeal that provision, allowing students to benefit from both the credits and the federal grant programs. The bill would also make the credits refundable.

Don Heller, an associate professor at Pennsylvania State University who has studied college affordability, agreed with many of the study’s findings. But he did not think Congress would likely make substantive changes to the tax credits to help low-income students anytime soon.

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