Tax Provisions

In recent years Congress has enacted eight higher education tax provisions that are specifically designed to help individuals and families save for, repay, or meet the current costs of higher education, and accomplish this by permitting tax filers to use their qualified educational expenses to reduce their federal income tax liability (see table 1). Hope and Lifetime Learning Credits Provide Benefits for a Substantial Portion of Undergraduate Students

In the 1999-2000 academic year, more than 4 in 10 undergraduate students received a higher education tax credit, according to our estimate. Figure 6 compares the estimated HOPE credit to the total tuition and fees charged to dependent students, and to the net tuition and fees they paid. For Title IV Recipients, Higher Education Tax Credits Equaled a Varying Share of Their Aid

Approximately 14 percent of undergraduate students received both title IV aid and a higher education tax credit in 1999-2000; for these students, the HOPE and Lifetime Learning tax credits equaled a varying share of the face value of the title IV aid they received. Available Policy and Instructions Provide Clear Guidance about the Impact of Several, but Not All, Tax Provisions on Eligibility for Title IV Aid

Available policy and instructions provide clear guidance about the impact of several higher education tax provisions on eligibility for title IV aid, but in a few instances they do not. Education has not established a policy on how the income that students and parents report as part of the expected family contribution is affected by the tax-free earnings of state savings plans, prepaid tuition plans, and Coverdell accounts. For many of the higher education tax provisions that we reviewed, the HEA or Education’s guidance make clear how their use affects aid eligibility. After January 2002, in accordance with the Economic Growth and Tax Relief Reconciliation Act, the earnings of these plans were no longer subject to federal taxation. Little Information Is Available to Congress on the Relative Effectiveness of Title IV Grants, Loans, and Hope and Lifetime Learning Tax Credits

Little information is available to Congress on the relative effectiveness of title IV grants and loans and the HOPE and Lifetime Learning tax credits in promoting postsecondary attendance, choice, and completion, or their impact on college costs. Treasury has studied the impact of some tax provisions, but has not yet done so for the HOPE or Lifetime Learning tax credits. Some of these studies explicitly estimated the effects of federal aid programs.
Why GAO Did This Study

Title IV of the Higher Education Act (HEA), as first adopted in 1965, authorizes federal grant and loan programs, providing a total of $53 billion in assistance to 8.1 million students in fiscal year 1999. The Taxpayer Relief Act of 1997 allowed eligible taxpayers to reduce their tax liability by receiving up to $1,500 HOPE or $1,000 Lifetime Learning tax credit for tuition and course-related fees paid. The 2001 Economic Growth and Tax Relief Reconciliation Act created a new tax deduction for tuition expenses and expanded many existing higher education tax provisions. The federal investment in providing student assistance through the tax code has risen sharply from $.0056 billion in 1996 to $7.6 billion in 2002--more than 80 percent of which is comprised of HOPE and Lifetime Learning tax expenditures. GAO reviewed title IV aid programs and higher education tax provisions designed to assist students and families, to help Congress prepare for the reauthorization of HEA.

What GAO Found

GAO found that, in the 1999-2000 academic year, the Lifetime Learning and HOPE tax credits provided an estimated 4 in 10 undergraduate students with benefits that equaled a varying share of tuition and fees charged and title IV aid received. Some students did not receive the credits on the basis of their income; while others received the credits, but obtained less than the credits' maximum value because their educational expenses were too small to make full use of the credits. Available policy and instructions provide clear guidance about the impact that several, but not all, tax provisions have on title IV aid eligibility. For several higher education tax provisions, the HEA or Education's policies and instructions make clear how the use of tax provisions affects aid eligibility. For some tax provisions, however, Education has not established a policy on how their use affects aid eligibility, or it has established a policy but not communicated it clearly to aid applicants. Little information is available to Congress on the relative effectiveness of title IV grants, loans, and the HOPE and Lifetime Learning tax credits in promoting postsecondary attendance, choice, and completion or on the impact of these programs on college costs. This is due, in part, to the data and methodological challenges intrinsic to conducting studies examining their effects. Moreover, Education has conducted few evaluations of the title IV aid programs, and Treasury has not yet examined the effects of higher education tax credits.