	Background

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. In fiscal year 2004, Education made approximately $14 billion in  grants and provided another $56 billion in loan assistance (face value)  through the title IV programs. 1.) Additionally, although student aid programs and  tax preferences assist students and families across a wide range of income  levels, some title IV programs, such as the Pell Grant and subsidized  Stafford student loan programs, provide much of their financial assistance  to students and families whose incomes are lower, on average, than  students who receive unsubsidized Stafford loans, tax deductions, or make  use of tax-exempt saving vehicles. 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. Higher education tax preferences, in contrast to federal grants and student  loans, require more responsibility on the part of students and families. In contrast, the primary responsibility for selecting among and  properly using tax preferences rests with tax filers:  they must understand  the rules in light of their own situation, 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, some tax filers appear to make less-than- optimal choices among 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. Concluding Observations

Congress has adopted a range of tools to help students and families pay for  postsecondary education, including grants, loans, and tax preferences. Many title IV financial aid programs have a long history, while most of the  tax preferences do not. Also, although millions of tax filers  are receiving billions of dollars in assistance with postsecondary costs  through both title IV programs and tax preferences, little is known about  the effectiveness of any of these forms of assistance in part because of data  and methodological issues. (3) What is  known about the effectiveness of federal assistance in promoting college  attendance, providing students with a wider range of choices among  postsecondary institutions, or encouraging students to persist in their  studies? We considered different explanations for why those tax filers with  education expenses did not claim an education tax credit or tuition  deduction.
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. In fiscal year 2004, about $14 billion in grants and $56 billion in loans were made under title IV while estimated outlay equivalents for postsecondary tax preferences amounted to $10 billion. In light of the relative newness and financial significance of tax preferences, this report examines (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.

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. While both serve students and families with a range of incomes, 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. While both require students and families to fill out forms, tax preferences require more responsibility on the part of students and families because they 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 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 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.