As Hillary Clinton’s presidential campaign gets underway, let’s hope she does not make the mistake that other Democratic contenders have made in the past and propose to increase spending on student aid that is delivered through the tax code. Tuition tax credit programs, like President Obama’s American Opportunity Tax Credit (AOTC), just don’t work. As recent research shows, there isn’t any evidence to suggest that the availability of these tax breaks has changed students’ college-going behavior.
In 2014, the federal government spent $23 billion on two tuition tax break programs. The largest is the AOTC, which Congress put in place temporarily as part of the federal stimulus plan in 2009 and, more recently, extended through 2017. Championed by the Obama administration, the AOTC is a $2,500 partially refundable income tax credit that individuals earning up to $90,000 a year, and families with annual earnings of up to $180,000, can claim for up to four years of college.
The government also offers the Lifetime Learning Credit, a $2,000 nonrefundable tax break that is available to students who take at least one postsecondary education course in a given year.
Unfortunately, providing tens of billions of dollars in financial aid through the tax code each year is ineffective and wasteful for the following reasons:
- The tuition tax break programs are not well targeted, with a substantial share of the benefits going to affluent families who would send their children to college without the help. According to the College Board, about a quarter of the benefits from higher-education tax credits in 2012 went to families with incomes of $100,000 or more. In comparison, about three-quarters of all Pell Grant recipients have family incomes of $30,000 or less.
- The tax breaks arrive at least 9-10 months after students and their families pay their tuition bills. The timing of the benefits is not only impractical but also obscures their purpose. A 2011 study by Suzanne Mettler of Cornell University found that nearly 60 percent of tuition tax credit recipients didn’t realize they had received help from the government to pay for college.
- These programs are complicated and confusing. Because of the complexity of navigating the tax code, many families do not appear to know whether they qualify for these benefits. The U.S. Government Accountability Office reported in 2012 that 1.5 million filers who were eligible for tuition tax breaks in 2009 failed to claim them, leaving a total of $726 million on the table.
There are two reasons for the Democrats’ affection for these programs. The first is that procedurally it is far easier to provide financial assistance to students and their families through the tax code than through the annual budget process. That’s because federal lawmakers must decide each year how much they want to spend on the Pell Grant program. In doing so, they must balance competing priorities for a limited amount of available funding. In contrast, there are no such limits on how much can be spent on the tuition tax credit programs. The program’s costs depend solely on the number of people who claim them.
The second reason is not about policy. It’s about politics, pure and simple. For politicians, proposing tuition tax credits on the stump is a no-brainer, considering that the tax breaks poll phenomenally well with families worried about ever-rising college prices.
A 2009 memo from the Democratic group the Third Way lays out the political calculus very clearly. The memo urged progressive groups to get behind President Obama’s proposal to create the AOTC. Citing a poll it commissioned showing overwhelming support among parents (and other demographic groups) for tuition tax cuts, the organization said that championing the AOTC could pay huge dividends for Democrats for years to come—by sending “an important signal that progressives understand middle-class priorities and the value Americans place on getting their kids through college.”
“The progressive hold on the middle class is tenuous, and securing their long-term loyalty and attention requires that progressives understand and respond to middle-class concerns and needs,” the memo states. “…A generous college tuition tax cut—by speaking effectively to both middle-class aspirations and anxieties—can help cement the bond between progressives and the middle class.”
What’s ironic is that Democrats once opposed these types of tax breaks. For the first three decades after the introduction of the Higher Education Act in 1965, the federal law that created federal financial aid, Democratic champions of the government’s financial aid programs successfully warded off several efforts by lawmakers and the Reagan administration to start providing student aid through the tax code. In fighting these proposals, they argued that the federal government should focus its resources on helping those who would not be able to attend college without the help.
In the 1960s and the early 1970s, a Democratic-led Congress rejected proposals to create tuition tax credits. Instead, to open the doors of college to low-income students, they created Pell Grants. For less needy students, they launched a government-backed student loan system, aimed primarily at helping middle-income students afford costlier colleges.
But critics of the government’s student aid programs were not satisfied. They argued that the system was unfair to middle-income families, who did not qualify for grant aid.
The fight came to a head in the late 1970s when a bipartisan group of lawmakers called for eliminating federal student aid programs and replacing them with tuition tax breaks. President Jimmy Carter strongly opposed these efforts, arguing that a system of grants for low-income students and loans for middle-income students was more equitable than one that would leave those who most needed the government’s help in the lurch because their families generally didn’t earn enough to pay taxes. Congress was divided. Only in the waning hours of the 1978 Congressional session did the proponents of the existing system quash the tax plans.
Instead of expanding the tuition tax breaks, Congress should end them and use the savings to significantly increase spending on need-based aid for those who wouldn’t be able to afford college without it.
On the stump, Hillary Clinton could show real leadership by acknowledging that these tax breaks, which her husband championed, were a mistake, and lead the effort to eliminate them in favor of more funding for federal financial aid. But first, she’ll need the courage to tell her pollsters to take a hike."