A New Look at Tuition Tax Benefits

National Survey Data Reveal The Surprising and Not-So-Surprising Effects of Policy Changes
Policy Paper
Nov. 3, 2015

Today, New America’s Education Policy Program released A New Look at Tuition Tax Benefits: National Survey Data Reveal the Surprising and Not-So-Surprising Effects of Policy Changes, a brief that estimates the optimal tax benefits that undergraduates were eligible to claim for college tuition using data from the National Postsecondary Student Aid Study (NPSAS).

The brief looks at how eligibility for tax benefits is distributed among all undergraduates and how that has changed since 1999; the characteristics of students and families who cannot claim benefits; how eligibility and benefit amounts differ based on the type of school a student attends; and how tax benefits interact with other forms of financial aid. It also compares how tax benefit eligibility would have changed if the $2,500 American Opportunity Tax Credit (AOTC) had expired by the 2011-12 school year.

Some of the key findings included:

  • Nearly 40 percent of undergraduates in the 2011-2012 school year were ineligible for tuition tax benefits. Most of those families could not claim a tax benefit because they did not incur tuition expenses in excess of the grants and scholarships they received.

  • Surprisingly, the share of undergraduates eligible for a tax benefit would be almost unchanged had AOTC not existed in 2011–12. About one percent of the undergraduate population gains eligibility due to AOTCs refundable benefit, while an additional one percent gains eligibility due to the higher income limits.

  • Over 55 percent of the aid that the refundable feature of the AOTC provides is available to students attending for-profit schools.

  • Families with the highest incomes are eligible for the largest benefits. Those earning over $106,000 were eligible for an average benefit of $1,900, while families earning less than $30,000 were eligible for nearly $800 less, on average.

  • Pell Grants offset tax benefit eligibility nearly dollar for dollar for certain families. Pell Grants generally phase out for families earning $30,000 to $60,000. On average, for each $1 reduction in these families’ Pell Grant eligibility, they are able to claim more than $1 in additional tax benefits.

“Our new analysis brings to light some hidden effects of the tuition tax benefits,” said report co-author Jason Delisle, Director of New America’s Federal Education Budget Project.

“The results show the AOTC is a boon to students attending for-profit schools and does little for students attending community colleges, which is likely the opposite effect its supporters intended,” said Kim Dancy, New America Education Policy Analyst and co-author of the report.

The full report can be accessed here.