In November, the Consortium for Higher Education Tax Reform offered a set of proposals aimed at making tax-based student aid more generous for low- and moderate-income students. Along with simplifying and better targeting higher education tax benefits to families and institutions, the Consortium recommended preserving the American Opportunity Tax Credit (AOTC) as the primary vehicle for tax-based student aid, making it 100 percent refundable, and evaluating early delivery of the credit at the time college expenses are incurred.
These reforms would ensure that tax-based student aid goes to the students who struggle most with college costs, rather than to higher-income individuals who are already very likely to attend college without a tax incentive. But the changes will only be beneficial to these students if they are aware that the AOTC exists and know how to claim it.
Today, New America's Education Policy Progam is releasing a report, entitled Building an AOTC Movement: Strengthening Outreach for a Reformed American Opportunity Tax Credit, that proposes actions that can be taken to alert financially-needy students and their families about the availability of the AOTC—an annual, partially-refundable income tax credit of up to $2,500 available to help students cover tuition, fees, and course materials.
Currently 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 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 their 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 know 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 ninety-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 refundable AOTC. In our new paper, we look 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. We 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 should not miss out on a benefit they are eligible for simply because they don’t know about it. A fully-refundable AOTC that is better targeted to low- and moderate-income students and that is delivered at the time college expenses are incurred could make the difference between whether or not a low-income student attends college"