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 IRS data on the use of Hope and Lifetime tax  credits and the tuition deduction in our 2005 report, some tax filers appear  to make less-than-optimal choices among them. However, about 27 percent of those returns, representing  about 374,000 tax filers, failed to use the any of them. The amount by  which these tax filers failed to reduce their tax averaged $169; 10 percent  of this group could have reduced their tax liabilities by over $500. Tax  policy analysts have frequently identified postsecondary tax preferences  as a set of tax provisions that demand a particularly large investment of  knowledge and skill on the part of students and families or expert  assistance purchased by those with the means to do so. 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). Given its limited resources, should the government further target title IV  programs and tax provisions based on need or other factors? 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,  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.
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 and updates our 2005 report on (1) how title IV assistance compares to that provided through the tax code (2) the extent to which tax filers effectively use postsecondary tax preferences, and (3) what is known about the effectiveness of federal assistance. This hearing is an opportunity to consider whether any 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 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, among the limited number of 2002 tax returns available for our analysis, 27 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 $169, 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. 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.