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 Studentsï¿½ and Familiesï¿½ 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 [email protected] or George
           Scott at (202) 512-7215 or [email protected]. 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.

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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
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