Tax Preferences Differ from Title IV Assistance in Timing, Distribution, and Students’ and Families’ Responsibility for Obtaining Benefits

Postsecondary student financial assistance provided through programs  authorized under Title IV of the Higher Education Act and the tax code  differ in timing of assistance, the populations that receive assistance, and  the responsibility of students and families to obtain and use the assistance. Students and Families Have More Responsibility for Obtaining Benefits of Tax Preferences in Comparison to Title IV Aid

The federal government and postsecondary institutions have significant  responsibilities in assisting students and families in obtaining assistance  provided under Title IV programs but only minor roles with respect to tax  filers’ use of education-related tax preferences. Unlike Title IV 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. Some Tax Filers May Not Effectively Use Postsecondary Tax Preferences, Possibly Due to Complexity

According to our analysis of 2005 IRS data on the use of Hope and Lifetime  Learning Credits and the tuition deduction, some tax filers appear to make  less-than-optimal choices among them. Regarding those  making a poor choice among the provisions, for example, 27 percent of tax  filers that claimed the tuition deduction could have further reduced their  tax liability by an average of $220 by instead claiming the Lifetime  Learning Credit; 10 percent of this group could have reduced their tax  liabilities by over $630. Nonetheless, anti-double-dipping rules  are potentially difficult for tax filers to understand and apply, and  misunderstanding them may have consequences for a filer’s tax liability. In this  case, reducing the number of choices students and their families have to  make would likely reduce tax filers’ confusion and mistakes. To date, we have not undertaken any studies of how current Title IV  student aid programs or tax preferences could be simplified and, as a  result, have not developed any such models or proposals. Research on Effectiveness of Federal Postsecondary Assistance Is Incomplete

Little is known about the effectiveness of federal grant and loan programs  and education-related tax preferences in promoting attendance, choice,  and the likelihood that students either earn a degree or continue their  education (referred to as persistence). Appendix I: Postsecondary Aid Programs

The federal government helps students and families save, pay for, and  repay the costs of postsecondary education through grant and loan  programs authorized under Title IV of the Higher Education Act of 1965, as  amended, and through tax preferences—reductions in federal tax  liabilities that result from preferential provisions in the tax code, such as  exemptions and exclusions from taxation, deductions, credits, deferrals,  and preferential tax rates. The federal tax code now  contains a range of tax preferences that may be used to assist students and  families in saving for, paying, or repaying the costs of postsecondary  education. Our review of tax preferences did not include exclusions from income,  which permit certain types of education-related income to be excluded  from the calculation of adjusted gross income on which taxes are based.
Why GAO Did This Study

Federal assistance helps students and families pay for postsecondary education through several policy tools--grant and loan programs authorized by Title IV of the Higher Education Act of 1965 and more recently enacted tax preferences. This testimony summarizes our 2005 report and provides updates on (1) how Title IV assistance compares to that provided through the tax code (2) the extent to which tax filers effectively use education tax preferences, (3) potential benefits and costs of simplifying federal student aid, and (4) what is known about the effectiveness of federal assistance. This hearing is an opportunity to consider whether changes should be made in the government's overall strategy for providing such assistance or to the individual programs and tax provisions that provide the assistance. This statement is based on updates to previously published GAO work and reviews of relevant literature.

What GAO Found

Title IV student aid and tax preferences provide assistance to a wide range of students and families in different ways. While both help students meet current expenses, tax preferences also assist students and families with saving for and repaying postsecondary costs. Both serve students and families with a range of incomes, but some forms of Title IV aid--grant aid, in particular--provide assistance to those whose incomes are lower, on average, than is the case with tax preferences. Tax preferences require more responsibility on the part of students and families than Title IV aid because taxpayers must identify applicable tax preferences, understand complex rules concerning their use, and correctly calculate and claim credits or deductions. While the tax preferences are a newer policy tool, the number of tax filers using them has grown quickly, surpassing the number of students aided under Title IV in 2002. Some tax filers do not appear to make optimal education-related tax decisions. For example, our analysis of a limited number of 2005 tax returns indicated that 41 percent of eligible tax filers did not claim either the tuition deduction or a tax credit. In so doing, these tax filers failed to reduce their tax liability by $219, on average, and 10 percent of these filers could have reduced their tax liability by over $500. One explanation for these taxpayers' choices may be the complexity of postsecondary tax provisions, which experts have commonly identified as difficult for tax filers to use. Simplifying the grants, loans, and tax preferences may reduce complexities in higher education financing, including reducing the number of eligible tax filers that do not claim tax preferences, but more research would be necessary to understand the full benefits and costs of any such changes. Little is known about the effectiveness of Title IV aid or tax preferences in promoting, for example, postsecondary attendance or school choice, in part because of research data and methodological challenges. As a result, policymakers do not have information that would allow them to make the most efficient use of limited federal resources to help students and families.