Today, too many families fail to claim higher education tax benefits for which they are eligible. For example, a Government Accountability Office (GAO) study found that one in seven taxpayers—or 1.5 million tax filers—who were eligible for either the Tuition and Fees Deduction or the Lifetime Learning Credit (LLC) in 2009 failed to claim those benefits. Another 237,000 of these filers made a “suboptimal choice,” choosing a tax break that did not “maximize their potential benefits.”
Additionally, the Tax Policy Center estimates that one in four filers who are eligible for the AOTC—an annual income tax credit of up to $2,500 available to help students cover tuition, fees, and course materials for their first four years of college—don’t actually receive the credit. While 75 percent may seem to be a relatively high take-up rate, it likely masks a much lower take-up rate for low-income households who may not know the credit exists and who may not earn enough to pay federal income taxes.
One major obstacle that financially-needy students and their parents face with tax credits, unlike with other federal financial aid programs, is that they can’t rely on colleges to help them claim the credits. Most financial aid offices share (at most) general information about the tax credits with students, and few, if any, provide individualized advice or assistance. As a result, students are largely on their own to learn about the tax credits and how to claim them. As the GAO has written, this is no easy task: “Unlike Title IV (federal student aid) programs, users must understand the rules, identify applicable tax preferences, understand how these tax preferences interact with one another and with federal student aid, keep records sufficient to support their tax filing, and correctly claim the credit or deduction on their return."
The federal government certainly doesn’t make it easy for low-income students and their families to navigate the process. The applicable guidelines are embedded in a nearly 90-page IRS publication on higher education tax benefits. The whole process is confusing and unduly complex for many students and families who are not well-versed in the tax code.
Moreover, the lowest-income taxpayers are not required to file a tax return and may not realize that only by filing one can they access a refundable higher education tax credit. These students risk losing out on a benefit available to help them cover the cost of college.
A concerted effort will be needed to make low-income families aware of and help them claim the partially refundable AOTC. In Building an AOTC Movement: Strengthening Outreach for a Reformed American Opportunity Tax Credit, New America’s Education Policy Program looks at what can be learned from the vigorous outreach movement for the Earned Income Tax Credit (EITC), another refundable tax credit aimed at low- and moderate-income families. They then explore how an AOTC outreach effort should involve higher education institutions, the Departments of Education and Treasury, college outreach programs like TRIO and GEAR UP, and benefit access programs at community colleges. Given their constituencies, these are natural partners in getting the word out about higher education tax benefits. Commercial tax preparers such as Intuit and H & R Block should also be involved in outreach efforts, but with consumer protections in place to ensure that students receive the benefit to which they are entitled.
At a time when college tuition is on the rise but family income is stagnating, financially-needy students shouldn’t miss out on a benefit they are eligible for simply because they don’t know about it.
This issue brief was prepared by New America’s Education Policy Program as part of its participation in the Consortium for Higher Education Tax Reform. The Consortium is a partnership funded by the Bill & Melinda Gates Foundation as part of its Reimagining Aid Design and Delivery (RADD) initiative. In addition to New America, Consortium partners are the Center for Postsecondary and Economic Success (C-PES) at CLASP, the Education Trust, and Young Invincibles. Through its policy recommendations in Higher Education Tax Reform: A Shared Agenda for Increasing College Affordability, Access, and Success and through issue briefs such as this one, the Consortium is identifying problems with federal higher education tax policy and providing recommendations for redesign and reform.