Postsecondary Education: Multiple Tax Preferences and Title IV
Student Aid Programs Create a Complex Education Financing
Environment (05-DEC-06, GAO-07-262T).
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.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-07-262T
ACCNO: A63907
TITLE: Postsecondary Education: Multiple Tax Preferences and
Title IV Student Aid Programs Create a Complex Education
Financing Environment
DATE: 12/05/2006
SUBJECT: Aid for education
Financial analysis
Higher education
Student financial aid
Student loans
Students
Tax administration
Tax credit
Taxes
Dept. of Education Title IV Program
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GAO-07-262T
* [1]Background
* [2]Tax Preferences Differ from Title IV Assistance in Timing, D
* [3]Title IV and Tax Programs Differ in Benefit Timing
* [4]Beneficiaries of Title IV Programs and Tax Preferences Diffe
* [5]Students and Families Have More Responsibility for Obtaining
* [6]Some Tax Filers May Not Effectively Use Postsecondary Tax Pr
* [7]Some Tax Filers Appear to Make Suboptimal Choices
* [8]The Suboptimal Use of Postsecondary Tax Preferences May Resu
* [9]Research on Effectiveness of Federal Postsecondary Assistanc
* [10]Concluding Observations
* [11]Staff Contacts and Acknowledgments
* [12]Appendix I: Postsecondary Aid Programs
* [13]Federal Grant and Loan Assistance to Postsecondary Students
* [14]Tax Preferences
* [15]Appendix II: Comparison of Assistance by Timing of Benefit f
* [16]Appendix III: Effects of Tax Rules on Tax Preference Use
* [17]Appendix IV: Confidence Intervals
* [18]Order by Mail or Phone
Testimony
Before the Committee on Finance, U.S. Senate
United States Government Accountability Office
GAO
For Release on Delivery Expected at 10:00 a.m. EST
Tuesday, December 5, 2006
POSTSECONDARY EDUCATION
Multiple Tax Preferences and Title IV Student Aid Programs Create a
Complex Education Financing Environment
Statement of Michael Brostek
Director, Tax Issues
Strategic Issues Team
George A. Scott
Acting Director
Education, Workforce, and Income Security Issues
GAO-07-262T
Chairman Grassley, Senator Baucus, and Members of the Committee:
We are pleased to be here this morning to discuss the federal government's
efforts to financially support attendance at postsecondary education
institutions. American higher education has long been crucial to the
development of our nation's cultural, social, and economic capital. At the
dawn of the 21st Century, changing workforce demographics, a more
integrated global economy, and numerous technological advances are placing
new demands on our colleges and universities. For the United States to
remain competitive in the rising global knowledge economy, its citizens
will need both the ways and means to endow themselves with the tools
necessary for the task. However, rising tuition has become a
disconcertingly fixed feature of our higher education system, and in
recent months concerns about postsecondary access and affordability have
received notable attention through the findings of the Secretary of
Education's Commission on the Future of Higher Education and the
Comptroller General's recent forum on the Global Competitiveness of the
Nation's Higher Education System.
This hearing is an opportunity to consider whether any changes should be
made in the government's overall strategy and the individual programs and
tax provisions that provide financial assistance to students and families
saving or paying for postsecondary education or repaying student loans.
This opportunity to review the programs and tax provisions is important
for several reasons. The fact that we face large and growing structural
deficits in the future--primarily driven by demographics and rising health
care costs--emphasizes the need to consider how the government allocates
resources. In addition, GAO has noted that fundamental reexamination of
government programs, policies, and priorities is necessary to assure that
they match the needs of the 21st Century. GAO has identified the
coordination of student aid programs^1 and the effectiveness of those
programs^2 both as key topics needing congressional oversight.
My statement today will focus on three issues that emerged in our 2005
report on student grant and loan assistance made available under Title IV
of the Higher Education Act and postsecondary education tax preferences.^3
1GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, [19]GAO-05-325SP (Washington, D.C.: February 2005).
^2 GAO, Suggested Areas for Oversight for the 110th Congress,
[20]GAO-07-235R (Washington, D.C.: Nov. 17, 2006).
o Postsecondary student financial assistance provided through
programs authorized under title IV and the tax code differ in
three key ways. First, title IV grant and loan programs
traditionally provide aid to students and families while students
are in college, whereas tax preferences help both during the
college years as well as before and after college by assisting
with saving for or repaying college costs. Additionally, while
student aid programs and tax preferences serve students and
families across a wide range of income groups, some title IV
programs--particularly the Pell grant program--provide much of
their financial assistance to students and families whose incomes
are lower, on average, than students and families who receive
student loans, tax credits, and deductions, or who make use of
tax-exempt saving vehicles. Last, students and families have more
responsibility for appropriately using and thereby obtaining the
benefits of tax preferences than they do with title IV aid.
o Second, postsecondary tax preferences are difficult for families
to understand and use correctly. Perhaps due to the complexity of
the tax provisions, hundreds of thousands of taxpayers fail to
claim tax preferences to which they are entitled or do not claim
the tax preference that would be most advantageous to them.
o Finally, we found that Congress has received little evidence
concerning the effectiveness of assistance provided under title IV
or through tax preferences, including whether such assistance
increases attendance or choice.
Our statement today is drawn from previous GAO reports and
testimonies covering postsecondary title IV programs and tax
preferences, which were done in accordance with generally accepted
government auditing standards, as well as reviews of relevant
literature.
Background
Financial assistance to help students and families pay for
postsecondary education has been provided for many years through
student grant and loan programs authorized under title IV of the
Higher Education Act of 1965, as amended. Examples of these
programs include Pell Grants for low-income students, PLUS loans
to parents and graduate students, and Stafford loans.^4 Much of
this aid has been provided on the basis of the difference between
a student's cost of attendance and an estimate of the ability of
the student and the student's family to pay these costs, called
the expected family contribution (EFC). The EFC is calculated
based on information provided by students and parents on the Free
Application for Federal Student Aid (FAFSA). Statutory definitions
establish the criteria that students must meet to be considered
independent of their parents for the purpose of financial aid, and
statutory formulas establish the share of income and assets that
are expected to be available for the student's education.^5 In
fiscal year 2005, the Department of Education made approximately
$14 billion in grants, and title IV lending programs made
available another $57 billion in loan assistance. Title IV also
authorizes programs funded by the federal government and
administered by participating higher education institutions,
including the Supplemental Educational Opportunity Grant (SEOG),
Perkins loans, and federal work-study aid, collectively known as
campus-based aid. Table 1 provides brief descriptions of the title
IV programs that we reviewed in our 2005 report and includes two
programs--Academic Competitiveness Grants and National Science and
Mathematics Access to Retain Talent Grants--that were created
since that report was issued.^6
Background
^3See GAO, Student Aid and Postsecondary Tax Preferences: Limited Research
Exists on Effectiveness of Tools to Assist Students and Families through
Title IV Student Aid and Tax Preferences, [21]GAO-05-684 (Washington,
D.C.: July 29, 2005).
^4Consolidation loans are also authorized under title IV. These loans
allow borrowers to combine multiple student loans, possibly from different
lenders and from different loan programs, into a single new loan with
extended repayment periods. Because consolidation loans do not generally
result in an increase in loan principal, they are not addressed in this
testimony.
^5To be classified as an independent student for the purpose of receiving
title IV financial aid, students must meet one of the following criteria:
(1) be a veteran of the armed services, (2) be age 24 years or older by
December 31st of the award year, (3) be married, (4) be enrolled in a
graduate or professional education program, (5) have legal dependents
other than a spouse, or (6) be an orphan or ward of the court. Financial
aid administrators may also classify students as independent through the
exercise of their professional judgment.
^6 For greater detail on federal spending through title IV postsecondary
education assistance programs reviewed in our 2005 report, see app. I.
Table 1: Description of Federal Student Aid Programs Authorized under
Title IV of the Higher Education Act
Title IV student aid program Program description
Pell Grant Grants are awarded on the basis of the
difference between the EFC and the maximum
Pell award or the student's cost of
attendance, whichever is less. Grants are not
available for postgraduate study.
Supplemental Educational Schools administer grant funds, which are
Opportunity Grant awarded to undergraduates with exceptional
financial need; priority is given to Pell
Grant recipients. Institutions must match a
portion (at least 25 percent) of the federal
funds allocated.
Academic Competitiveness Available to first- and second-year students
Grant who have completed a rigorous course of study
in high school. To be eligible, students must
also be eligible to receive a Pell Grant.
Second-year students must also maintain at
least a 3.0 grade-point average.
National Science and Available to third- and fourth-year students
Mathematics Access to Retain pursuing a major in mathematics, science, or
Talent (SMART) Grant a foreign language deemed critical to
national security. To be eligible, students
must also be eligible to receive a Pell Grant
and maintain at least a 3.0 grade-point
average in their major.
Federal Work-Study Schools administer funds, which are used to
provide part-time jobs for undergraduate and
graduate students with financial need.
Participating schools or nonprofit employers
generally contribute at least 25 percent of
student's earnings (50 percent in the case of
for-profit employers).
Federal Perkins Loan Schools administer funds, comprised of
federal capital contributions and school
matching funds (at least 1/3 of federal
contributions), to make low-interest (5
percent) loans for both undergraduate and
graduate students with exceptional financial
need. Borrower repayments are owed to the
school.
Subsidized Federal Family Loans made on the basis of financial need to
Education Loan (FFEL) or undergraduate and graduate students who are
Direct Stafford Loan enrolled at least half-time. The federal
government pays the interest costs on
subsidized loans while the student is in
school, for the first 6 months after the
student leaves school, and during a period of
deferment.
Unsubsidized FFEL or Direct Loans made to undergraduate and graduate
Stafford Loan students who are enrolled at least half-time.
Unlike subsidized loans, the federal
government does not pay the interest costs on
unsubsidized loans while the student is in
school, for the first 6 months after the
student leaves school, and during a period of
deferment. Otherwise, the terms and
conditions of unsubsidized loans are the same
as those for subsidized loans.
FFEL or Direct PLUS Loan Loans made to parents on behalf of dependent
undergraduate students enrolled at least
half-time. The Higher Education
Reconciliation Act of 2005 makes both
graduate and professional students eligible
for these loans as well. Borrowers are
subject to a credit check for adverse credit
history and may be denied a loan.
Source: GAO analysis of applicable laws and regulations.
Postsecondary assistance also has been provided through a range of tax
preferences,^7 including postsecondary tax credits, tax deductions, and
tax-exempt savings programs. For example, the Taxpayer Relief Act of 1997
allows eligible tax filers to reduce their tax liability by receiving, for
tax year 2006, up to a $1,650 Hope tax credit or up to a $2,000 Lifetime
Learning tax credit for tuition and course-related fees paid for a single
student. The fiscal year 2005 federal revenue loss estimate of the
postsecondary tax preferences that we reviewed was $9.15 billion dollars.
Tax preferences discussed as part of our 2005 report include the
following:^8
o Lifetime Learning Credit--income-based tax credit claimed by tax
filers on behalf of students enrolled in one or more postsecondary
education courses.
o Hope Credit--income-based tax credit claimed by tax filers on
behalf of students enrolled at least half-time in an eligible
program of study and who are in their first 2 years of
postsecondary education.
o Student Loan Interest Deduction--income-based tax deduction
claimed by tax filers on behalf of students who took out qualified
student loans while enrolled at least half-time.
o Tuition and Fees Deduction--income-based tax deduction claimed
by tax filers on behalf of students who are enrolled in one or
more postsecondary education courses and have either a high school
diploma or a General Educational Development (GED) credential.^9
o Section 529 Qualified Tuition Programs--College Savings Programs
and Prepaid Tuition Programs--non-income-based programs that
provide favorable tax treatment to investments and distributions
used to pay the expenses of future or current postsecondary
students.
o Coverdell Education Savings Accounts--income-based savings
program providing favorable tax treatment to investments and
distributions used to pay the expenses of future or current
elementary, secondary, or postsecondary students.
As figure 1 demonstrates, the use of tax preferences has increased
since 1997, both in absolute terms and relative to the use of
title IV aid.
Figure 1: Recipients of Title IV Assistance and Tax Filers
Claiming an Education Tax Credit or Tuition Deduction, 1997-2004
Note: See app. IV for confidence intervals associated with these
estimates.
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.
Title IV and Tax Programs Differ in Benefit Timing
Title IV programs and education-related tax preferences differ
significantly in when eligibility is established and in the timing
of the assistance they provide. Title IV programs generally
provide benefits to students while they are in school.
Education-related tax preferences, on the other hand, (1)
encourage saving for college through tax-exempt saving, (2) assist
enrolled students and their families in meeting the current costs
of postsecondary education through credits and tuition deductions,
and (3) assist students and families repaying the costs of past
postsecondary education through a tax deduction for student loan
interest paid.^10
Beneficiaries of Title IV Programs and Tax Preferences Differ
While title IV programs and tax preferences assist many students
and families, program and tax rules affect eligibility for such
assistance. These rules also affect the distribution of title IV
aid and the assistance provided through tax preferences. As a
result, the beneficiaries of title IV programs and tax preferences
differ.
Title IV programs generally have rules for calculating grant and
loan assistance that give different consideration to family
income, assets, and college costs in the award of financial
aid.^11 For example, Pell Grant awards are calculated by
subtracting the student's EFC from the maximum Pell Grant award
($4,050 in academic year 2006-2007), or the student's cost of
attendance, whichever is less. Because the EFC is closely linked
to family income and circumstances (such as the size of the family
and the number of dependents in school), and modest EFCs are
required for Pell eligibility, Pell awards are made primarily to
families with modest incomes. In contrast, the maximum
unsubsidized Stafford loan amount is calculated without direct
consideration of financial need: students may borrow up to their
cost of attendance, minus the estimated financial assistance they
will receive.^12 As table 2 shows, 92 percent of Pell financial
support in 2003-2004 was provided to dependent students whose
family incomes were $40,000 or below, and the 38 percent of Pell
recipients in the lowest income category ($20,000 or below)
received a higher share (48 percent) of Pell financial support.
^7Tax preferences--also known as tax expenditures--are reductions in 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.
^8 For expanded descriptions of postsecondary education-related tax
preferences, see app. I.
^9 The Tuition and Fees Deduction expired on December 31, 2005.
Legislation has been introduced to reinstate the deduction.
^10 Additional details on the differences in timing are available in app.
II.
^11 Campus-based aid programs authorized under title IV differ from these
programs in funding and eligibility: institutions provide matching funding
for federal spending, and participating institutions distribute aid using
institution-specific criteria consistent with federal program
requirements. Because they have institution-specific criteria, the
relationship between program rules and the distribution of benefits is
more complex and was excluded from the analysis of our 2005 report.
^12Additionally, loan amounts for both subsidized and unsubsidized loans
are subject to statutory limits on annual and cumulative borrowing.
Table 2: Percentage of Aid Recipients and Dollars of Aid by Income
Category for Dependent Students Served by Selected Title IV Programs,
2003-2004
More
Dependent than
Program students $0-20,000 $20,001-40,000 $40,001-60,000 $60,001-80,000 $80,001-100,000 $100,000
Pell Grant Recipients 38 47 14 2 0 0
Dollars 48 44 8 1 0 0
Stafford Recipients 16 28 23 17 9 7
Subsidized
Loan Dollars 16 28 24 17 9 6
Stafford Recipients 7 14 14 19 18 28
Unsubsidized
Loan Dollars 7 12 12 18 19 32
Source: GAO analysis of 2003-2004 NPSAS data.
Note: See app. IV for confidence intervals associated with these
estimates. Numbers in rows may not add to 100 percent because of rounding.
Because independent students generally have lower incomes and accumulated
savings than dependent students and their families, patterns of program
participation and dollar distribution differ. Participation of independent
students in Pell, subsidized Stafford, and unsubsidized Stafford loan
programs is heavily concentrated among those with incomes of $40,000 or
less: from 74 percent (unsubsidized Stafford) to 95 percent (Pell) of
program participants have incomes below this level. As shown in table 3,
the distribution of award dollars follows a nearly identical pattern.
Table 3: Percentage of Aid Recipients and Dollars of Aid by Income
Category for Independent Students Served by Selected Title IV Programs,
2003-2004
More
Independent than
Program students $0-20,000 $20,001-40,000 $40,001-60,000 $60,001-80,000 $80,001-100,000 $100,000
Pell Grant Recipients 67 28 5 0 0 0
Dollars 73 25 3 0 0 0
Stafford Recipients 51 29 12 5 2 1
Subsidized
Loan
Dollars 52 28 12 5 2 2
Stafford Recipients 46 28 14 6 3 3
Unsubsidized
Loan
Dollars 46 24 13 7 3 5
Source: GAO analysis of 2003-2004 NPSAS data.
Notes: See app. IV for confidence intervals associated with these
estimates.
Numbers in rows may not add to 100 percent because of rounding.
Many education-related tax preferences have both de facto lower limits
created by the need to have a positive tax liability to obtain their
benefit and income ceilings on who may use them. For example, the Hope and
Lifetime Learning tax credits require that tax filers have a positive tax
liability to use them and income-related phase-out provisions in 2005 that
began at $45,000 and $90,000 for single and joint filers, respectively.
Furthermore, tax-exempt savings are more advantageous to families with
higher incomes and tax liabilities because, among other reasons, these
families hold greater assets to invest in these tax preferences and have a
higher marginal tax rate, and thus benefit the most from the use of these
tax preferences. Table 4 shows the income categories of tax filers
claiming the three tax preferences available to current students and/or
their families along with the reduced tax liabilities from those
preferences in 2004.
Table 4: Percentage of Tax Filers Claiming Hope and Lifetime Learning
Credits and Tuition Deduction and Tax Preference Dollars by Income
Category, Tax Year 2004
More
Type of than
aid $0-20,000 $20,001-40,000 $40,001-60,000 $60,001-80,000 $80,001-100,000 $100,000
Hope Tax 18 34 19 16 12 2
Credit filers
Dollars 16 33 20 16 12 2
Lifetime Tax 17 32 20 19 10 2
Learning filers
Credit Dollars 15 30 20 20 13 2
Tuition Tax 24 13 15 10 13 25
Deduction filers
Dollars 11 7 18 12 15 37
Source: GAO analysis of 2004 SOI data.
Notes: See app. IV for confidence intervals associated with these
estimates.
Numbers in rows may not add to 100 percent because of rounding.
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. To obtain
federal student aid, applicants must first complete the FAFSA, a form
which required students to complete up to 100 fields in 2006-2007.
Submitting a completed FAFSA to the Department of Education largely
concludes students' and families' responsibility in obtaining aid. The
Department of Education is responsible for calculating students' and
families' EFC on the basis of the FAFSA, and students' educational
institutions are responsible for determining aid eligibility and the
amounts and packaging of awards.
In contrast, higher education tax preferences require students and
families to take more responsibility. Although postsecondary institutions
provide students and IRS with information about higher education
attendance, they have no other responsibilities for higher education tax
credits, deductions, or tax-preferred savings. The federal government's
primary role with respect to higher education tax preferences is the
promulgation of rules; the provision of guidance to tax filers; and the
processing of tax returns, including some checks on the accuracy of items
reported on those tax returns. The responsibility for selecting among and
properly using tax preferences rests with tax filers. 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.^13 The apparent
suboptimal use of postsecondary tax preferences may arise, in part, from
the complexity of these provisions.
Some Tax Filers Appear to Make Suboptimal Choices
Making poor choices among tax preferences for postsecondary education may
be costly to tax filers. For example, families may strand assets in a
tax-exempt savings vehicle and incur tax penalties on their distribution
if their child chooses not to go to college. They may also fail to
minimize their federal income tax liability by claiming a tax credit or
deduction that yields less of a reduction in taxes than a different tax
preference or by failing to claim any of their available tax preferences.
For example, if a married couple filing jointly with one dependent in
his/her first 2 years of college had an adjusted gross income of $50,000,
qualified expenses of $10,000 in 2006, and tax liability greater than
$2,000, their tax liability would be reduced by $2,000 if they claimed the
Lifetime Learning credit but only $1,650 if they claimed the Hope credit.
^13 Due to time constraints, we were unable to update these analyses for
this testimony.
In our 2005 report, we found that some people who appear to be eligible
for tax credits and/or the tuition deduction did not claim them. The files
of about 77 percent of the tax year 2002 tax returns that we were able to
review were apparently eligible to claim one or more of the three tax
preferences. 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.^14
Suboptimal choices were not limited to tax filers who prepared their own
tax returns. A possible indicator of the difficulty people face in
understanding education-related tax preferences is how often the
suboptimal choices we identified were found on tax returns prepared by
paid tax preparers. We estimate that about 50 percent of the returns we
found that appear to have failed to optimally reduce the tax filer's tax
liability were prepared by paid tax preparers. Generalized to the
population of tax returns we were able to review, returns prepared by paid
tax preparers represent about 223,000 of the approximately 447,000
suboptimal choices we found. Our April 2006 study of paid tax preparers
corroborated the problem of confusion over which of the tax preferences to
claim.^15 Of the 9 undercover investigation visits we made to paid
preparers with a taxpayer with a dependent college student, 3 preparers
did not claim the credit most advantageous to the taxpayer and thereby
cost these taxpayers hundreds of dollars in refunds. In our investigative
scenario, the expenses and the year in school made the Hope education
credit far more advantageous to the taxpayer than either the tuition and
fees deduction or the Lifetime Learning credit.
The Suboptimal Use of Postsecondary Tax Preferences May Result from Their
Complexity
The apparently suboptimal use of postsecondary tax preferences may arise,
in part, because of the complexity of using these provisions. 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. They suggest that this
complexity arises from multiple postsecondary tax preferences with similar
purposes, from key definitions that vary across these provisions, and from
rules that coordinate the use of multiple tax provisions. Twelve tax
preferences are outlined in the IRS publication, Tax Benefits for
Education, for use in preparing 2005 returns (the most recent publication
available). The publication includes 4 different tax preferences for
educational saving. Three of these preferences--Coverdell Education
Savings Accounts, Qualified Tuition Programs, and U.S. education savings
bonds--differ across more than a dozen dimensions, including the tax
penalty that occurs when account balances are not used for qualified
higher education expenses, who may be an eligible beneficiary, annual
contribution limits, and other features.
^14 Confidence intervals for all estimates in this section are included in
appendix IV.
^15GAO, Paid Tax Return Preparers: In a Limited Study, Chain Preparers
Made Serious Errors, [22]GAO-06-563T (Washington, D.C.: Apr. 4, 2006).
In addition to learning about, comparing, and selecting tax preferences,
filers who wish to make optimal use of multiple tax preferences must
understand how the use of one tax preference affects the use of others.
The use of multiple education-related tax preferences is coordinated
through rules that prohibit the application of the same qualified higher
education expenses for the same student to more than one education-related
tax preference, sometimes referred to as "anti-double-dipping rules."
These rules are important because they prevent tax filers from
underreporting their tax liability. 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.^16
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). Many federal aid programs and tax
preferences have not been studied, and for those that have been studied,
important aspects of their effectiveness remain unexamined. In our 2005
report, we found no research on any aspect of effectiveness for several
major title IV federal postsecondary programs and tax preferences. For
example, no research had examined the effects of federal postsecondary
education tax credits on students' persistence in their studies or on the
type of postsecondary institution they choose to attend. Gaps in the
research-based evidence of federal postsecondary program effectiveness may
be due, in part, to data and methodological challenges that have proven
difficult to overcome. The relative newness of most of the tax preferences
also presents challenges because relevant data are just now becoming
available.
^16For an example of this phenomenon, please see app. III.
In 2002, we recommended that Education sponsor research into key aspects
of effectiveness of title IV programs, that Education and the Department
of the Treasury collaborate on such research into the relative
effectiveness of title IV programs and tax preferences, and that the
Secretaries of Education and Treasury collaborate in studying the combined
effects of tax preferences and title IV aid.^17 In April 2006, Education's
Institute for Education Sciences (IES) issued a Request for Applications
to conduct research on, among other things, "evaluating the efficacy of
programs, practices, or policies that are intended to improve access to,
persistence in, or completion of postsecondary education." Multiyear
projects funded under this subtopic are expected to begin in July 2007.
As we noted in our 2002 report, research into the effectiveness of
different forms of postsecondary education assistance is important.^18
Without such information federal policymakers cannot make fact-based
decisions about how to build on successful programs and make necessary
changes to improve less effective programs. The budget deficit and other
major fiscal challenges facing the nation necessitate rethinking the base
of existing federal spending and tax programs, policies, and activities by
reviewing their results and testing their continued relevance and relative
priority for a changing society.^19
Concluding Observations
In light of the long-term fiscal challenge this nation faces and the need
to make hard decisions about how the federal government allocates
resources, this hearing provides an opportunity to continue a discussion
about how the federal government can best help students and their families
pay for postsecondary education. Some questions that Congress should
consider during this dialog include:
^17GAO, Student Aid and Tax Benefits: Better Research and Guidance Will
Facilitate Comparison of Effectiveness and Student Use, [23]GAO-02-751
(Washington, D.C.: Sept. 13, 2002).
^18 [24]GAO-02-751 .
^19 [25]GAO-05-325SP .
o Should the federal government consolidate postsecondary
education tax provisions to make them easier for the public to use
and understand?
o Given its limited resources, should the government further
target title IV programs and tax provisions based on need or other
factors?
o How can Congress best evaluate the effectiveness and efficiency
of postsecondary education aid provided through the tax code?
o Can tax preferences and title IV programs be better coordinated
to maximize their effectiveness?
Mr. Chairman and Members of the Committee, this concludes our
statement. We welcome any questions you have at this time.
Staff Contacts and Acknowledgments
For further information regarding this testimony, please contact
Michael Brostek at (202) 512-9039 or brostekm@gao.gov or George
Scott at (202) 512-7215 or scottg@gao.gov. Individuals making
contributions to this testimony include David Lewis, Assistant
Director; Jeff Appel, Assistant Director; Shirley Jones, Sheila
McCoy, John Mingus, Jeff Procak, Carlo Salerno, Andrew Stephens,
and Michael Volpe.
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.
Federal Grant and Loan Assistance to Postsecondary Students
Assistance provided under title IV programs include Pell Grants
for low-income students, the newly established Academic
Competitiveness and National Science and Mathematics Access to
Retain Talent Grants, PLUS loans, which parents as well as
graduate and professional students may apply for, and Stafford
loans.^1 While each of the three grant types reduces the price
paid by the student, student loans help to finance the remaining
costs and are to be repaid according to varying terms. Stafford
loans may be either subsidized or unsubsidized. The federal
government pays the interest cost on subsidized loans while the
student is in school, and during a 6-month period known as the
grace period, after the student leaves school. For unsubsidized
loans, students are responsible for all interest costs.^2 Stafford
and PLUS loans are provided to students through both the FFEL
program and the William D. Ford Direct Loan Program (FDLP). The
federal government's role in financing and administering these two
loan programs differs significantly. Under the FFEL program,
private lenders, such as banks, provide loan capital and make
loans, and the federal government guarantees FFEL lenders a
minimum yield on the loans they make and repayment if borrowers
default. Under FDLP, federal funds are used as loan capital and
loans are provided through participating schools. The Department
of Education and its private-sector contractors jointly administer
the program. Title IV also authorizes programs funded by the
federal government and administered by participating higher
education institutions, including the Supplemental Educational
Opportunity Grant (SEOG), Perkins loans, and federal work-study
aid, collectively known as campus-based aid.
To receive title IV aid, students (along with parents, in the case
of dependent students) must complete a Free Application for
Federal Student Aid form. Information from the FAFSA, particularly
income and asset information, is used to determine the amount of
money--called the expected family contribution--that the student
and/or family is expected to contribute to the student's
education. Statutory definitions establish the criteria that
students must meet to be considered independent of their parents
for the purpose of financial aid, and statutory formulas establish
the share of income and assets that are expected to be available
for the student's education. Once the EFC is established, it is
compared with the cost of attendance at the institution chosen by
the student. The cost of attendance comprises tuition and fees;
room and board; books and supplies; transportation; miscellaneous
personal expenses; and, for some students, additional expenses.^3
If the EFC is greater than the cost of attendance, the student is
not considered to have financial need, according to the federal
aid methodology. If the cost of attendance is greater than the
EFC, then the student is considered to have financial need. Title
IV assistance that is made on the basis of the calculated need of
aid applicants is called need-based aid. Key characteristics of
title IV programs are summarized in table 5 below.
^1Consolidation loans are also authorized under title IV. These loans
allow borrowers to combine multiple student loans, possibly from different
lenders and from different loan programs, into a single new loan with
extended repayment periods. Because consolidation loans do not generally
result in an increase in loan principal, consolidation loans are not
addressed in this review. However, the federal government can incur
significant costs in providing borrowers with these loans. See GAO,
Student Loan Programs: As Federal Costs of Loan Consolidation Rise, Other
Options Should Be Examined, [26]GAO-04-101 (Washington, D.C.: Oct. 31,
2003) and Student Loan Programs: Lower Interest Rates and Higher Loan
Volume Have Increased Federal Consolidation Loan Costs, [27]GAO-04-568T
(Washington, D.C.: Mar. 17, 2004).
^2While called "unsubsidized," the federal government can still incur
costs on such loans, including the costs associated with borrowers who
default on their loans and, under the Federal Family Education Loan
Program, the costs of making payments to lenders to ensure them a minimum
federally guaranteed yield.
^3These may include child care expenses for parents of young dependent
children or supportive services for disabled students.
Table 5: Description of Federal Student Aid Programs Authorized under
Title IV of the Higher Education Act
Number and
Title IV student Annual award characteristics
aid program Program details amounts of beneficiaries
Pell Grant Grants are awarded $400 to $4,050 for Dependent
on the basis of the school year students: About
difference between 2006-2007. 2.1 million
the EFC and the grants were
maximum Pell award awarded in school
or the student's year 2003-2004,
cost of attendance, totaling $5.3
whichever is less. billion. The
Grants are not average grant
available for award was $2,573;
postgraduate study. the median income
of recipients was
$24,576.
Independent
students: About 3
million grants
were awarded in
school year
2003-2004,
totaling $7.4
billion. The
average grant
award was $2,436;
the median income
of recipients was
$12,925.
Supplemental Schools administer $100 to $4,000. Dependent
Educational grant funds, which students: About
Opportunity Grant are awarded to 554,000 grants
undergraduates with were awarded in
exceptional school year
financial need; 2003-2004,
priority is given totaling $494.2
to Pell Grant million. The
recipients. average grant
Institutions must award was $892;
match a portion (at the median income
least 25 percent) of recipients was
of the federal $22,827.
funds allocated.
Independent
students: About
715,000 grants
were awarded in
school year
2003-2004,
totaling $391.9
million. The
average grant
award was $548;
the median income
of recipients was
$11,040.
Academic Available to first- $750 for Students: About
Competitiveness and second-year first-year 310,000
Grant students who have students and first-year grants
completed a $1,300 for second and 110,000
rigorous course of year students. second-year
study in high grants are
school. To be expected to be
eligible, students awarded in school
must also be year 2006-2007,
eligible to receive totaling an
a Pell Grant. estimated $340.0
Second-year million. The
students must also average grant
maintain at least a award is
3.0 grade-point estimated to be
average. $657 and $1,245
respectively.
National Science Available to third- $4,000. Students: About
and Mathematics and fourth-year 40,000 third-year
Access to Retain students pursuing a grants and 40,000
Talent (SMART) major in fourth-year
Grant mathematics, grants are
science, or a expected to be
foreign language awarded in school
deemed critical to year 2006-2007,
national security. totaling an
To be eligible, estimated $310.0
students must also million. The
be eligible to average grant
receive a Pell award is
Grant and maintain estimated to be
at least a 3.0 $3,718 and $3,875
grade-point average respectively.
in their major.
Federal Schools administer Up to $300 more Dependent
Work-Study funds, which are than the student's students: About
used to provide determined 1.1 million
part-time jobs for financial need; if awards were
undergraduate and employment awarded in school
graduate students continues past year 2003-2004,
with financial this point, totaling $2
need. Participating federal funds may billion. The
schools or not be used to average award was
nonprofit employers subsidize the $1,901; the
generally employment. median income of
contribute at least recipients was
25 percent of $46,441.
student's earnings
(50 percent in the Independent
case of for-profit students: About
employers). 438,000 awards
were awarded in
school year
2003-2004,
totaling $1
billion. The
average award was
$2,303; the
median income of
recipients was
$10,561.
Federal Perkins Schools administer $4,000 maximum for Dependent
Loan funds, comprised of undergraduate students: About
federal capital students and 495,000 loans
contributions and $6,000 for were made in
school matching graduate students; school year
funds (at least 1/3 no minimum award 2003-2004,
of federal amount. (Aggregate totaling $956
contributions), to limits: $8,000 for million. The
make low-interest undergraduates who average loan
(5 percent) loans have not completed amount was
for both 2 academic years; $1,932; the
undergraduate and $20,000 for median income of
graduate students undergraduates who recipients was
with exceptional have completed 2 $39,175.
financial need. years; and,
Borrower repayments $40,000 for Independent
are owed to the graduate students, students: About
school. including loans 329,000 loans
borrowed as an were made in
undergraduate.) school year
2003-2004,
totaling $905.3
million. The
average loan
amount was
$2,752; the
median income of
recipients was
$10,277.
Subsidized FFEL Loans made on the $2,625 to $8,500 Dependent
or Direct basis of financial depending upon students: About
Stafford Loan^a need to year of schooling. 2.6 million loans
undergraduate and Aggregate limits were made in
graduate students are $23,000 for school year
who are enrolled at undergraduates and 2003-2004,
least half-time. $65,500 for totaling $8.1
The federal graduate students. billion. The
government pays the average loan
interest costs on amount was
subsidized loans $3,188; the
while the student median income of
is in school, for recipients was
the first 6 months $44,678.
after the student
leaves school, and Independent
during a period of students: About
deferment. 3.8 million loans
were made in
school year
2003-2004,
totaling $16.3
billion. The
average loan
amount was
$4,340; the
median income of
recipients was
$19,430.
Unsubsidized FFEL Loans made to $2,625 to $18,500 Dependent
or Direct undergraduate and depending on year students: About
Stafford Loan^a graduate students of schooling 1.6 million loans
who are enrolled at (including any were made in
least half-time. subsidized loan school year
Unlike subsidized amounts received 2003-2004,
loans, the federal for the same totaling $5.3
government does not period). Aggregate billion. The
pay the interest limits are $23,000 average loan
costs on for dependent amount was
unsubsidized loans undergraduates, $3,293; the
while the student $46,000 for median income of
is in school, for independent recipients was
the first 6 months undergraduates, $75,835.
after the student and $138,500 for
leaves school, and graduate students. Independent
during a period of students: About
deferment. 3.3 million loans
Otherwise, the were made in
terms and school year
conditions of 2003-2004,
unsubsidized loans totaling $18.5
are the same as billion. The
those for average loan
subsidized loans. amount was
$5,671; the
median income of
recipients was
$22,108.
FFEL or Direct Loans made to Maximum loan About 634,000
PLUS Loan parents on behalf amounts are loans were made
of dependent limited to cost of in school year
undergraduate attendance less 2003-2004,
students enrolled other federal, totaling $5.7
at least half-time. state, private, billion. The
The Higher and institutional average loan
Education aid received for amount was
Reconciliation Act the period of $9,019; the
of 2005 makes both enrollment. median income of
graduate and recipients was
professional $71,397.
students eligible
for these loans as
well. Borrowers are
subject to a credit
check for adverse
credit history and
may be denied a
loan.
Source: GAO analysis of applicable laws and regulations and school year
2003-2004 NPSAS data.
aNew slightly higher limits for these loans will take effect on July 1,
2007.
Tax Preferences
Prior to the 1990s, virtually all major federal initiatives to assist
students with the costs of postsecondary education were provided through
grant and loan programs authorized under title IV of the Higher Education
Act. Since the 1990s, however, federal initiatives to assist families and
students in paying for postsecondary education have largely been
implemented through the federal tax code. 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. These tax preferences include credits and deductions, both of
which allow tax filers to use qualified higher education expenses to
reduce their federal income tax liability. The tax credits reduce the tax
filers' income tax liability on a dollar-for-dollar basis but are not
refundable. Tax deductions permit qualified higher education expenses to
be subtracted from income that would otherwise be taxable. To benefit from
a higher education tax credit or tuition deduction, a tax filer must use
tax form 1040 or 1040A, have an adjusted gross income below the
provisions' statutorily specified income limits, and have a positive tax
liability after other deductions and credits are calculated, among other
requirements.
Tax preferences also include tax-exempt savings vehicles. Section 529 of
the tax code makes tax free the investment income from qualified tuition
programs. There are two types of qualified tuition programs: savings
programs established by states and prepaid tuition programs established
either by states or by one or more eligible educational institutions.
Another tax-exempt savings vehicle is the Coverdell Education Savings
Account. Tax penalties apply to both 529 programs and Coverdell savings
accounts if the funds are not used for allowable education expenses. Key
features of these and other education-related tax preferences are
described below, in table 6.
Table 6: Selected Postsecondary Education Tax Preferences
Preference details
Income ranges for Number and
phasing out Eligible Tax benefit characteristics
Tax preference Eligibility benefits (2006)a expenses (2006) of beneficiaries
Hope Credit Tax filer on Single filer: Tuition and Maximum In tax year 2002,
behalf of fees at credit: $1,650 3.3 million tax
self, spouse, $45,000-$55,000 institutions per student. filers claimed
or dependent eligible to Credit rate is $3.2 billion in
who is Joint return: participate 100 percent on Hope credits; the
working in title IV first $1,100 average credit
toward a $90,000-$110,000.b programs. of qualified claimed was $991,
degree or higher and the median
certificate education income of filers
at least expenses, 50 claiming the
half-time in percent on credit was
the first 2 next $1,100.d $39,203.
years of
postsecondary Nonrefundable:
enrollment. if filer has
no tax
liability due
to offsetting
deductions,
exemptions, or
competing tax
credits, filer
cannot receive
credit.
Lifetime Learning Tax filer on Single filer: Tuition and Maximum In tax year 2002,
Credit behalf of fees at credit: $2,000 3.5 million tax
self, spouse, $45,000-$55,000 institutions per tax filer. filers claimed
or dependent eligible to (20 percent of $1.7 billion in
who is Joint return: participate qualified Lifetime Learning
enrolled in in title IV higher credits; the
undergraduate $90,000-$110,000.b programs. education average credit
or graduate expenses up to claimed was $477,
courses, or $10,000).d and the median
any course income of filers
that aids in Nonrefundable: claiming the
learning new if filer has credit was
or improving no tax $39,706.
existing job liability due
skills, for to offsetting
as many years deductions,
as the exemptions, or
student is competing tax
enrolled. credits, filer
cannot receive
credit.
Student Loan Tax filer, on Single filer: Eligible Maximum In tax year 2002,
Interest behalf of loans are deduction: 6.6 million tax
Deduction self, spouse, $50,000-$65,000 those used $2,500 filers deducted
or dependent, to pay for $892.6 million of
available Joint return: tuition, interest paid student loan
even to those fees, room on eligible interest; the
who do not $105,000-$135,000.c and board, education average deduction
itemize and related loans is was $134, and the
interest expenses and deductible. median income of
paid. Student include, for filers deducting
must have example, student loan
been enrolled student interest was
at least loans $43,544.
half-time in provided
a degree under title
program. IV.
Section 529 Specifics No phase-out. Tuition, No tax is due Section 529
qualified tuition depend on fees, books, on a qualified tuition
programs--prepaid particular supplies, distribution programs--prepaid
tuition programs program. and from an tuition programs
and Normally a equipment account unless and
state-sponsored prepaid required for the amount state-sponsored
college savings program is attendance. distributed is college savings
programs open for Room and greater than programs
contributions board if the
only on enrolled beneficiary's
behalf of half-time or adjusted
young more. qualified
children and education
accounts must expenses.
be closed
within some
number of
years after
the
beneficiary
reaches
college age.
Generally,
savings
programs do
not have age
restrictions.
Coverdell Distributions For contributions, Tuition, No tax is due Coverdell
Education Savings can be used $95,000-$110,000 fees, books, on a Education Savings
Accounts for students for single filers supplies, distribution Accounts
enrolled on and and from an
full-time, $190,000-$220,000 equipment account unless
half- time, for joint returns. required for the amount
or less than attendance. distributed is
half-time greater than
basis. Room and the
board if beneficiary's
Account must enrolled adjusted
be closed half-time or qualified
within 30 more. education
days after expenses.
beneficiary
reaches age Annual
30. contribution
limit is
$2,000 per
year per
student
(through age
17).
Tuition Deduction Same as Single filer: Tuition and Maximum Tuition Deduction
(expired Dec. 31, Lifetime fees at deduction: (expired Dec. 31,
2005)e Learning $65,000-80,000 institutions $4,000 per 2005)e
credit. eligible to return for
Joint Return: participate individual
$130,000-160,000. in title IV filers whose
programs. modified
adjusted gross
income is less
than $65,000
($130,000 for
joint filers);
$2,000 per
return for
individuals
whose modified
adjusted gross
income is more
than $65,000
($130,000) but
less than
$80,000
($160,000).
Sources: IRS, Investment Company Institute, and College Savings Plan
Network documents; GAO analysis of IRS Statistics of Income data for tax
year 2002.
a Modified adjusted gross income amounts are provided.
b Under the Taxpayer Relief Act of 1997, the income phase-out amounts are
indexed to inflation according to a formula specified in law for this
purpose, which may or may not result in a yearly increase.
c Under the 26 U.S.C. S 221(f), the income phase-out amounts are indexed
to inflation according to a formula specified in law for this purpose,
which may or may not result in a yearly increase.
d For students attending otherwise eligible educational institutions
located within the Gulf Opportunity Zone, the maximum Hope tax credit and
maximum Lifetime Learning tax credit are doubled for taxable years 2005
and 2006. Gulf Opportunity Zone Act, Pub. L. No. 109-135, S 102, 119 Stat.
2577, 2594 (2005).
e Although the tuition deduction has expired, H.R. 5970, 109th Cong. S 201
(2006), among other bills, would renew the deduction for tuition expenses
through December 31, 2007. H.R. 5970 passed in the House on July 29, 2006,
but had not yet passed the Senate.
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. For
example, qualified scholarships covering tuition and fees and qualified
tuition reductions from eligible educational institutions are not included
in gross income for income tax purposes. Similarly, student loans forgiven
when a graduate goes into certain professions for a certain period of time
are also not subject to federal income taxes. We also did not include
special provisions in the tax code that also extend existing tax
preferences when tax filers support a postsecondary education student. For
example, tax filers may claim postsecondary education students as
dependents after age 18, even if the student has his or her own income
over the limit that would otherwise apply. Also, gift taxes do not apply
to funds used for certain postsecondary educational expenses, even for
amounts in excess of the usual $11,000 limit on gifts. In addition, funds
withdrawn early from an Individual Retirement Account are not subject to
the usual 10 percent penalty when used for either a tax filer's or his or
her dependent's postsecondary educational expenses.
Appendix II: Comparison of Assistance by Timing of Benefit for Selected
Programs and Tax Preferences
Table 7: Comparison of Assistance by Timing of Benefit for Selected
Programs and Tax Preferences
Type of Save for future Repay
assistance expenses Pay current expenses expenses
Grant programs Pell Grants
Supplemental
Educational
Opportunity Grants
Academic
Competitiveness
Grants
SMART Grants
Loan programs Subsidized and
Unsubsidized
Stafford Loans
Federal Perkins Loans
Federal PLUS Loans
Tax preferences Coverdell Educational Hope Credit Student Loan
Savings Accounts and Interest
Section 529 Qualified Lifetime Learning
Tuition Credit Deduction
Programs Tuition Deduction
Work-Study Federal Work Study
program
Source: GAO.
Appendix III: Effects of Tax Rules on Tax Preference Use
For an example of how the use of college savings programs and the tuition
deduction is affected by "anti-double-dipping" rules, consider the
following: To calculate whether a distribution from a college savings
program is taxable, tax filers must determine if the total distributions
for the tax year are more or less than the total qualified educational
expenses reduced by any tax-free educational assistance, i.e., their
adjusted qualified education expenses (AQEE). After subtracting tax-free
assistance from qualified educational expenses to arrive at the AQEE, tax
filers multiply total distributed earnings by the fraction (AQEE / total
amount distributed during the year). If parents of a dependent student
paid $6,500 in qualified education expenses from a $3,000 tax-free
scholarship and a $3,600 distribution from a tuition savings program, they
would have $3,500 in AQEE. If $1,200 of the distribution consisted of
earnings, then $1,200 x ($3,500 AQEE / $3,600 distribution) would result
in $1,167 of the earnings being tax free, while $33 would be taxable.
However, if the same tax filer had also claimed a tuition deduction,
anti-double-dipping rules would require the tax filer to subtract the
expenses taken into account in figuring the tuition deduction from AQEE.
If $2,000 in expenses had been used toward the tuition deduction, then the
taxable distribution from the section 529 savings program would rise to
$700.^1 For families such as these, anti-double-dipping rules increase the
computational complexity they face and may result in unanticipated tax
liabilities associated with the use of section 529 savings programs.
^1The new nontaxable distribution figure is calculated $1,200 x
($1,500/$3,600) = $500. The taxable portion then becomes $1,200 - $500 =
$700.
Appendix IV: Confidence Intervals
We used two data sets for this testimony: Education's 2003-2004 National
Postsecondary Student Aid Study and the Internal Revenue Service's 2002
and 2004 Statistics of Income. Estimates from both data sets are subject
to sampling errors and the estimates we report are surrounded by a 95
percent confidence interval. The following tables provide the lower and
upper bounds of the 95 percent confidence interval for all estimate
figures in the tables in this testimony. For figures drawn from these
data, we provide both point estimates and confidence intervals.
Table 8: Federal Student Aid Programs Authorized under Title IV of the
Higher Education Act, Academic Year 2003-2004
Number of Average
recipients Total award award Median income
Type of Lower Upper Lower Upper Lower Upper
assistance bound bound Lower bound Upper bound bound bound bound bound
Dependent
students
Pell Grant 2,026,011 2,115,312 5,201,091,600 5,452,845,564 2,543 2,573 24,165 24,999
Supplemental 530,408 577,316 466,079,305 522,325,472 857 892 22,022 23,484
Educational
Opportunity
Grant
Federal 1,023,755 1,089,687 1,927,247,135 2,090,819,033 1,856 1,901 45,000 48,231
Work- Study
Federal 472,640 517,207 907,800,538 1,004,290,295 1,887 1,932 37,623 40,814
Perkins Loan
Subsidized 2,505,118 2,604,668 7,962,531,788 8,329,729,995 3,155 3,188 43,834 45,446
FFEL or
Direct
Stafford
Loan
Unsubsidized 1,578,160 1,664,757 5,173,481,648 5,505,576,910 3,244 3,293 74,263 77,439
FFEL or
Direct
Stafford
Loan
FFEL or 609,125 659,071 5,458,550,634 5,979,275,038 8,787 9,019 69,547 73,439
Direct PLUS
Loan
Independent
students
Pell Grant 2,967,340 3,087,638 7,212,123,299 7,540,282,035 2,409 2,436 12,614 13,262
Supplemental 684,528 745,839 368,492,546 415,343,758 526 548 10,425 11,626
Educational
Opportunity
Grant
Federal 676,216 766,317 933,916,755 1,084,530,206 2,192 2,303 9,808 11,525
Work- Study
Federal 522,918 595,499 839,749,704 970,851,318 2,648 2,752 9,181 11,628
Perkins Loan
Subsidized 3,658,692 3,869,237 15,604,880,694 17,068,144,196 4,244 4,340 18,754 20,148
FFEL or
Direct
Stafford
Loan
Unsubsidized 3,154,948 3,359,231 17,728,962,613 19,212,909,259 5,531 5,671 21,190 23,095
FFEL or
Direct
Stafford
Loan
FFEL or 0 0 0 0 0 0 0 0
Direct PLUS
Loan
Source: GAO analysis of 2003-2004 National Postsecondary Student Aid Study
data.
Table 9: Selected Postsecondary Education Tax Preferences, Tax Year 2002
Average
Number of returns Total benefits benefit Median income
Type of Lower Upper Lower Upper Lower Upper
assistance bound bound Lower bound Upper bound bound bound bound bound
Hope 3,115,595 3,414,023 3,064,601,005 3,399,426,275 965 1,016 37,506 41,004
Credit
Lifetime 3,307,354 3,612,179 1,560,825,683 1,740,857,453 462 493 38,060 41,001
Learning
Credit
Student 6,432,399 6,849,170 848,115,632 937,085,664 129 140 42,378 44,657
Loan
Interest
Deduction
Tuition 3,295,741 3,599,012 1,226,452,349 1,370,953,823 364 391 51,808 56,842
Deduction
Source: GAO analysis of Statistics of Income data for 2002.
Table 10: Tax Filers Claiming an Education Tax Credit or Tuition Deduction
1998 1999 2000 2001 2002 2003 2004
Hope Lower bound 4,482,106 6,233,732 6,606,583 6,997,019 9,319,692 10,370,110 11,360,283
Credit,
Lifetime
Learning
Credit, Upper 4,827,719 6,639,576 7,024,049 7,428,088 9,809,833 10,882,359 11,892,067
and bound
Tuition
Deduction
Source: GAO analysis of Statistics of Income data.
Table 11: Percentage of Aid Recipients and Dollars of Aid by Income
Category for Dependent Students Served by Selected Title IV Programs,
School Year 2003-2004
More
Dependent $0- than
Program students 20,000 $20,001-40,000 $40,001-60,000 $60,001-80,000 $80,001-100,000 $100,000
Pell Grant Recipients Lower 36.66 45.41 13.17 1.41 0 0
bound
Upper 38.89 47.72 14.76 2.02 0 0
bound
Dollars Lower 46.29 42.41 7.38 0.65 0 0
bound
Upper 48.82 44.89 8.5 1.04 0 0
bound
Stafford Recipients Lower 15.41 26.79 22.45 16.1 8.38 6.23
Subsidized bound
Loan Upper 16.94 28.73 24.3 17.72 9.61 7.33
bound
Dollars Lower 15.32 27.14 22.83 15.68 7.92 5.87
bound
Upper 17.07 29.35 24.94 17.51 9.3 7.08
bound
Stafford Recipients Lower 6.51 12.83 13.15 17.69 16.68 27
Unsubsidized bound
Loan Upper 7.88 14.76 15.21 19.94 18.84 29.5
bound
Dollars Lower 6.22 11.05 11.31 16.69 17.55 30.3
bound
Upper 7.75 12.99 13.41 19.2 20.15 33.37
bound
Source: GAO analysis of 2003-2004 National Postsecondary Student Aid Study
data.
Table 12: Percentage of Aid Recipients and Dollars of Aid by Income
Category for Independent Students Served by Selected Title IV Programs,
Academic Year 2003-2004
More
$0- than
Program 20,000 $20,001-40,000 $40,001-60,000 $60,001-80,000 $80,001-100,000 $100,000
Pell Grant Recipients Lower 66.28 26.59 4.59 0 0 0
bound
Upper 68.35 28.57 5.62 0 0 0
bound
Dollars Lower 71.68 23.62 2.32 0 0 0
bound
Upper 73.77 25.65 2.96 0 0 0
bound
Stafford Recipients Lower 49.67 27.54 10.78 4.04 1.3 0.86
Subsidized bound
Loan Upper 52.62 30.38 13.48 5.36 1.98 2.38
bound
Dollars Lower 49.93 25.26 10.05 3.87 1.2 0.46
bound
Upper 54.61 29.79 14.73 5.4 2.05 2.65
bound
Stafford Recipients Lower 44.65 26.59 12.09 5.48 2.31 2.26
Unsubsidized bound
Loan Upper 47.82 29.75 15.18 6.87 3.18 4.08
bound
Dollars Lower 44.28 22.51 11.96 6.22 2.86 3.42
bound
Upper 48.37 26 14.78 8.49 4.12 6.99
bound
Source: GAO analysis of 2003-2004 National Postsecondary Student Aid Study
data.
Table 13 Percentage of Tax Filers Claiming Hope and Lifetime Learning
Credits and Tuition Deduction and Tax Preference Dollars by Income
Category, Tax Year 2004
More
Type of than
aid $0-20,000 $20,001-40,000 $40,001-60,000 $60,001-80,000 $80,001-100,000 $100,000
Hope Tax Lower bound 16.5 31.4 17 14.3 10.4 1.2
Credit filers Upper bound 20.1 35.7 20.4 17.6 13.3 2
Dollars Lower bound 14.7 30.6 18.1 14.6 10.7 1.4
Upper bound 18.2 35.2 22.1 18.2 13.9 2.3
Lifetime Tax Lower bound 15.5 30.3 18.7 17.5 8.3 1.4
Learning filers Upper bound 18.6 34.1 21.9 20.7 10.7 2.2
Credit Dollars Lower bound 13.2 28 17.5 17.4 11.1 1.7
Upper bound 16.9 32.9 21.7 21.7 14.8 3
Tuition Tax Lower bound 21.9 11.4 13.6 9.3 11.9 23.6
Deduction filers Upper bound 25.1 13.9 16.3 11.7 14.5 26.7
Dollars Lower bound 10 5.8 16.2 9.9 13.5 34.5
Upper bound 12.1 7.6 20.4 13.4 17.2 39.5
Source: GAO analysis of Statistics of Income data for 2004.
Table 14: Percentage of Form 1098-Ts with Postsecondary Expense
Information in 2002: Point Estimates
Number of returns Percent of returns
1098Ts with expense information 1,795,180 13
1098Ts without expense information 12,356,444 87
Source: GAO analysis of Statistics of Income data for 2002.
Table 15: Percentage of Form 1098-Ts with Postsecondary Expense
Information in 2002: Confidence Intervals
Number of Number of Percent of Percent of
returns: Lower returns: Upper returns: returns:
bound bound Lower bound Upper bound
1098Ts with expense 1,687,744.88 1,902,614.62 11.97 13.4
information
1098Ts without 12,087,410.46 12,625,476.86 86.6 88.03
expense information
Source: GAO analysis of Statistics of Income data for 2002.
Table 16: Percentage of Taxpayers Apparently Eligible to Claim an
Education Tax Credit or Tuition Deduction in 2002: Point Estimates
Number of returns Percent of returns
Total 1,795,180 100
Potentially eligible 1,386,659 77
All other 408,521 23
Source: GAO analysis of Statistics of Income data for 2002.
Table 17: Percentage of Taxpayers Apparently Eligible to Claim an
Education Tax Credit or Tuition Deduction in 2002: Confidence Intervals
Number of Number of Percent of
returns: Lower returns: Upper Percent of returns: returns:
bound bound Lower bound Upper bound
Total 1,795,176.75 1,795,179.75 100 100
Potentially 1,290,394.34 1,482,923.26 74.83 79.66
eligible
All other 360,292.26 456,749.64 20.34 25.17
Source: GAO analysis of Statistics of Income data for 2002.
Table 18: Percentage of Apparently Eligible Taxpayers to Claim an
Education Tax Credit or Tuition Deduction That Failed to Do So in 2002:
Point Estimates
Number of returns Percent of returns
Failed to claim 373,595 27
Source: GAO analysis of Statistics of Income data for 2002.
Table 19: Percentage of Apparently Eligible Taxpayers to Claim an
Education Tax Credit or Tuition Deduction That Failed to Do So in 2002:
Confidence Intervals
Number of Number of Percent of
returns: Lower returns: Upper Percent of returns: returns: Upper
bound bound Lower bound bound
Failed to 323,504.26 423,686.08 23.85 30.04
claim
Source: GAO analysis of Statistics of Income data for 2002.
Table 20: Amounts by Which Apparently Eligible Taxpayers Failed to Reduce
Their Tax Liability in 2002: Point Estimates
Inaction led to increased tax liability
Median 52.45
Mean 168.66
10th percentile 4.34
25th percentile 10.94
75th percentile 207.2
90th percentile 532.96
Maximum value 1,116
Source: GAO analysis of Statistics of Income data for 2002.
Table 21: Amounts by Which Apparently Eligible Taxpayers Failed to Reduce
Their Tax Liability in 2002: Confidence Intervals
Inaction led to increased tax liability
Median: Lower bound 34.69
Median: Upper bound 73.57
Mean: Lower bound 136.57
Mean: Upper bound 200.76
10th percentile: Lower bound 3.01
10th percentile: Upper bound 6.57
25th percentile: Lower bound 8.66
25th percentile: Upper bound 16.72
75th percentile: Lower bound 137.73
75th percentile: Upper bound 312.14
90th percentile: Lower bound 429.22
90th percentile: Upper bound 729.58
Source: GAO analysis of Statistics of Income data for 2002.
Table 22: Percentage of Apparently Eligible Taxpayers That Claimed the
Tuition Deduction but Would Have Been Better off Claiming the Lifetime
Learning Credit in 2002: Point Estimates
Number of returns Percent of returns
Would have been better off claiming 50,908 21
Lifetime Learning Credit
Source: GAO analysis of Statistics of Income data for 2002.
Table 23: Percentage of Apparently Eligible Taxpayers That Claimed the
Tuition Deduction but Would Have Been Better off Claiming the Lifetime
Learning Credit in 2002: Confidence Intervals
Number of Number of Percent of Percent of
returns: Lower returns: Upper returns: returns:
bound bound Lower bound Upper bound
Would have been 34,819.89 70,274.77 14.53 29.33
better off claiming
Lifetime Learning
Credit
Source: GAO analysis of Statistics of Income data for 2002.
Table 24: Amounts by Which Apparently Eligible Taxpayers Could Have
Reduced Their Tax Liability in 2002: Point Estimates
Lifetime Learning Credit produced larger reduction
Median 50.67
Mean 83.22
10th percentile 7.35
25th percentile 26.23
75th percentile 119.6
90th percentile 157.91
Maximum value 556
Source: GAO analysis of Statistics of Income data for 2002.
Table 25: Amounts by Which Apparently Eligible Taxpayers Could Have
Reduced Their Tax Liability in 2002: Confidence Intervals
Lifetime Learning Credit produced larger
reduction
Median: Lower bound 32.89
Median: Upper bound 84.27
Mean: Lower bound 49.76
Mean: Upper bound 116.68
10th percentile: Lower bound .
10th percentile: Upper bound 27.14
25th percentile: Lower bound 10.7
25th percentile: Upper bound 47.56
75th percentile: Lower bound 62.07
75th percentile: Upper bound 148.53
90th percentile: Lower bound 106.35
90th percentile: Upper bound .
Source: GAO analysis of Statistics of Income data for 2002.
Table 26: Percentage of Apparently Eligible Taxpayers That Claimed the
Lifetime Learning Credit but Would Have Been Better off Claiming the
Tuition Deduction in 2002: Point Estimates
Number of returns Percent of returns
Would have been better off claiming 22,469 8
the Tuition Deduction
Source: GAO analysis of Statistics of Income data for 2002.
Table 27: Percentage of Apparently Eligible Taxpayers That Claimed the
Lifetime Learning Credit but Would Have Been Better off Claiming the
Tuition Deduction in 2002: Confidence Intervals
Number of Number of Percent of Percent of
returns: Lower returns: returns: returns:
bound Upper bound Lower bound Upper bound
Would have been better 12,228.08 37,165.3 4.48 13.61
off claiming the
Tuition Deduction
Source: GAO analysis of Statistics of Income data for 2002.
Table 28: Amounts by Which Apparently Eligible Taxpayers Could Have
Reduced Their Tax Liability in 2002: Point Estimates
Tuition deduction produced larger reduction
Median 108.05
Mean 137.68
10th percentile 17.3
25th percentile 36.42
75th percentile 191.55
90th percentile 237.42
Maximum value 456
Source: GAO analysis of Statistics of Income data for 2002.
Table 29: Amounts by Which Apparently Eligible Taxpayers Could Have
Reduced Their Tax Liability in 2002: Confidence Intervals
Deduction produced larger reduction
Median: Lower bound 37.39
Median: Upper bound 190.77
Mean: Lower bound 77.08
Mean: Upper bound 198.28
10th percentile: Lower bound 4.36
10th percentile: Upper bound 41.46
25th percentile: Lower bound 20.16
25th percentile: Upper bound 108.84
75th percentile: Lower bound 107.3
75th percentile: Upper bound 244.85
90th percentile: Lower bound 154.73
90th percentile: Upper bound 350.13
Source: GAO analysis of Statistics of Income data for 2002.
Table 30: Percentage of Apparently Eligible Taxpayers That Claimed a Hope
Credit but Would Have Been Better off Claiming a Lifetime Learning Credit
in 2002: Point Estimates
Number of returns Percent of returns
Total 271,494 100
Would have been better off claiming 0 0
Lifetime Learning Credit
All other 271,494 100
Source: GAO analysis of Statistics of Income data for 2002.
Table 31: Percentage of Apparently Eligible Taxpayers That Claimed a Hope
Credit but Would Have Been Better off Claiming a Lifetime Learning Credit
in 2002: Confidence Intervals
Number of Number of Percent of Percent of
returns: Lower returns: Upper returns: returns:
bound bound Lower bound Upper bound
Total 271,491.04 271,494.04 100 100
Would have been 0 0 0 0
better off claiming
Lifetime Learning
Credit
All other 271,491.04 271,494.04 100 100
Source: GAO analysis of Statistics of Income data for 2002.
Table 32: Percentage of Suboptimal Choices Made by Paid Tax Preparers in
2002: Point Estimates
Taxpayers making suboptimal
choice
Number of returns Percent
Total 446,972 100
No preparer 219,139 49.03
Paid preparer 223,011 49.89
IRS prepared/reviewed 0 0
VITA/self help/outreach/elderly 4,822 1.08
assistance
Source: GAO analysis of Statistics of Income data for 2002.
Table 33: Percentage of Suboptimal Choices Made by Paid Tax Preparers in
2002: Confidence Intervals
Taxpayers making suboptimal choice
Number of Number of Percent: Percent:
returns: returns: Lower Lower
Lower bound Upper bound bound bound
Total 392,039 501,905 99.72 100
No preparer 179,777 258,500 42.87 55.19
Paid preparer 184,952 261,070 43.74 56.05
IRS prepared/reviewed 0 0 0 0.28
VITA/self help/outreach/elderly 1,131 9,328 0.26 2.91
assistance
Source: GAO analysis of Statistics of Income data for 2002.
(450556)
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Highlights of [29]GAO-07-262T , testimony before the Committee on Finance,
U.S. Senate
December 2006
POSTSECONDARY EDUCATION
Multiple Tax Preferences and Title IV Student Aid Programs Create a
Complex Education Financing Environment
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.
[30]What GAO Recommends
GAO does not make new recommendations in this testimony. In 2002, GAO
recommended, among other things, that the Department of Education sponsor
research into key aspects of effectiveness of title IV programs. In April
2006, Education announced it would make multiyear grants available
starting in 2007 to conduct research on topics addressed in this
statement.
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.
Recipients of Title IV Assistance and Tax Filers Claiming an Education Tax
Credit or Tuition Deduction, 1997-2004
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.
References
Visible links
19. http://www.gao.gov/cgi-bin/getrpt?GAO-05-325sp
20. http://www.gao.gov/cgi-bin/getrpt?GAO-07-235R
21. http://www.gao.gov/cgi-bin/getrpt?GAO-05-684
22. http://www.gao.gov/cgi-bin/getrpt?GAO-06-563T
23. http://www.gao.gov/cgi-bin/getrpt?GAO-02-751
24. http://www.gao.gov/cgi-bin/getrpt?GAO-02-751
25. http://www.gao.gov/cgi-bin/getrpt?GAO-05-325sp
26. http://www.gao.gov/cgi-bin/getrpt?GAO-04-101
27. http://www.gao.gov/cgi-bin/getrpt?GAO-04-568T
28. http://www.gao.gov/cgi-bin/getrpt?GAO-07-262T
29. http://www.gao.gov/cgi-bin/getrpt?GAO-07-262T
*** End of document. ***