Death to Tuition Tax Breaks?

This post first appeared on HigherEdJobs as part of their iFocus feature.

By 2018, nearly two-thirds of American jobs will require a postsecondary credential.While our economic success as a nation depends on getting millions more people to and through college, college has never been so expensive. As prices go up and state support dwindles, students are forced to bear a larger share of college costs. Instead of shoring up the resources meant to help low-income students, the federal government is pouring more money into financial aid programs that disproportionately help middle- and upper-income students who would have gone to college anyway. 

The success of low- and moderate-income students often hinges on their ability to receive financial aid, especially grant aid like the Pell Grant. If we don't overhaul our federal financial aid programs to make them sustainable and better targeted toward low- and moderate-income students, we risk never being able to fulfill our nation's labor market needs. And when it comes to finding the resources needed to revamp the federal financial aid program, the lowest hanging fruit, ripe for the picking, are the higher education tax credits and deductions. 

The main problem with higher education tax benefits, like the American Opportunity Tax Credit (AOTC) and the Student Loan Interest Deduction, is that they are not effectively directed toward the students who most need them. According to a recent report by Education Sector, tax filers earning more than $75,000 were two-and-a-half times more likely to receive AOTC benefits than those earning less than $25,000. In addition, millions of tax filers lack the financial literacy required to figure out if they are eligible for one of the higher education tax credits and how to best maximize their benefit. 

In 2009 alone, the federal government spent $14.7 billion on these tax credits that overly benefit upper- and middle-income families. Since higher education is not only a private good, this is both a bad education and economic policy. Federal financial aid programs were developed in part to make a college degree attainable for lower- and moderate-income students since the return on investment to the nation is high. A college education leads to higher earnings resulting in more tax revenues. The magnitude of this effect is astonishing - a four-year-equivalent degree gives the government $471,000 more in income, payroll, property, and sales tax revenue. 

The government could roll back the thresholds of these tax benefits to ensure they are better targeted to low- and middle-income families, but that would do nothing to reduce the complexity that prevents millions of these families - usually the least savvy and most needy - from claiming them. Instead, the government needs to get rid of them - the American Opportunity, Lifetime Learning, and Hope tax credits, plus both the Tuition and Fees, and Student Loan Interest deductions. With the savings, we could better target students who need the most financial aid help by restructuring and rethinking federal aid programs. 

This will be an uphill battle since the tax credits poll well. But in an age of shrinking resources, increasing college costs, and an urgent need to get more students to and through college, we have to put aside popular but poorly-targeted policies in order to help those who wouldn't otherwise attend college, go and succeed.