The federal government provides many tax benefits to help students and families pay for higher education. Although well-intended, these credits and deductions can often be confusing and may not interact well with other forms of federal grant aid. That’s why there are frequent calls for reforming these benefits, including bipartisan efforts on Capitol Hill.
Unfortunately, the House Republican tax reform bill unveiled November 2 does not lay out a serious vision for improving higher education assistance through the tax code. Instead, it uses misleading claims that it is simplifying benefits. In reality, this “simplification” cuts tens of billions of dollars in assistance for students and families, with the savings going to fund tax breaks for millionaires, billionaires, and corporations.
The bill’s proposed changes to higher education tax benefits are just a small part of a larger agenda, but it is particularly important to understand the bait-and-switch going on because the same tactics are likely to be used when the Higher Education Act is reauthorized, as soon as next year.
The tax code currently has three main types of benefits related to higher education that go to students and their families. One is tax credits, which taxpayers can deduct from their final tax bill, reducing what they owe or increasing their refund. Another is deductions, which are subtracted from a filer’s income, thereby lowering the total amount of money on which taxes are computed. The third is exclusions. This allows certain benefits to not be counted as taxable income. The total size of these tax benefits is quite large—about $23 billion per year, or about the same size as the federal Pell Grant for low-income students.
The House majority’s tax legislation proposes to eliminate the Lifetime Learning Credit. (The bill also calls for eliminating the Hope Scholarship Tax Credit, which was already replaced by the American Opportunity Tax Credit and cannot be claimed anymore.) It also wants to end deductions for student loan interest and end exclusions for training paid for by employers, as well as tuition discounts offered by institutions to their employees.
The total federal revenue saved from eliminating these tax benefits is substantial—about $65 billion over 10 years.
But you wouldn’t know it from reading the press materials. Instead of owning up to the elimination of these tax benefits, the bill summary says it “[s]treamlines higher education benefits to help families save for and better afford college tuition and other education expenses.”
It’s true that this plan would streamline the process of claiming education tax benefits. But that’s because many people will no longer have any benefits from which to choose. None of the increased revenue from taking away these tax benefits is put back into helping families afford college, participate in career training, or alleviate the burden of their student loans. Instead, the money goes overwhelmingly to tax cuts for corporations and the wealthy.
Tax credits
The changes to the tax credits provide a perfect example of how so-called streamlining is mostly just a cover for cutting benefits. Right now there are two major types of tax credits. The American Opportunity Tax Credit (AOTC), worth up to $2,500, can be claimed during the first four years of postsecondary education to support someone who is attending school at least half-time in a degree or certificate program. It’s also refundable, meaning that someone who does not have any tax liability can receive $1,000. The other is the Lifetime Learning Credit, which allows up to $2,000 per year, with no limits on the number of years it can be claimed, making it easier for graduate students to use. The Lifetime Learning Credit can go to people not in a degree program, as well as to those who attend less than half-time.
The tax bill proposes to eliminate the Lifetime Learning Credit. In exchange, it would make the AOTC available for five years, with that final year providing only half the credit’s value—$1,250. On net, students and their families lose: The proposal increases federal revenue by more than $17 billion over a decade.
The AOTC is by far the more popular credit, claimed by 10.5 million people per year to the tune of $20 billion. The 2.8 million returns that claimed nearly $2 billion in benefits from Lifetime Learning in 2011 used that credit almost certainly because they cannot benefit from the AOTC. They may be graduate students or among the large number of people who do not finish their undergraduate education in the four years that the AOTC covers. (The average bachelor’s degree recipient takes more than five years to finish.) They might not be taking enough credits to qualify. Or they are workers taking a few classes at their local community colleges to gain new skills.
Few of these individuals would benefit much from this new proposal. Students who are less than half-time or not in a degree program are completely shut out. Graduate students and those who take more than four years to finish their undergraduate education would trade their $2,000 credit for $1,250—a 38 percent cut—for one year and then lose out afterward.
This approach is a far cry from prior simplification efforts. Last year, the Obama administration also proposed consolidating the Lifetime Learning Credit into the AOTC. But it plowed the savings from that switch into better targeting the AOTC. It would have made students attending less than half-time eligible for the credit and increased the refundable amount. It also would have made the credit available for a fifth year at the same amount as the first four. The system would have been simpler but for the benefit of students, not corporations and millionaires.
Deductions and exclusions
The deduction and exclusion story is simpler—but costly for students and their families. The bill proposes to eliminate three main higher education benefits. The first allows student loan borrowers to get a deduction of up to $2,500 for interest payments made on their student loans, including private or state loans. The second is the employer-provided educational assistance exclusion. This excludes from a filer’s income up to $5,250 in education benefits paid for by an employer. This allows employees to get help pursuing more undergraduate or graduate education. The third excludes income reductions in tuition offered by institutions to employees and their families. This benefit is particularly important for doctoral students, who often receive tuition waivers in exchange for serving as teaching assistants.
These deductions and exclusions plus the elimination of a few smaller benefits are worth a lot of money—$47.5 billion over a decade. The student loan interest deduction is the larger of the two, at about $2 billion per year for roughly 12.4 million filers. The employer assistance exclusion is about $850 million per year. Unfortunately, public materials do not break out the cost of the tuition reduction exclusion.
To be fair, the higher education tax benefits are not perfect. The terms of the Lifetime Learning Credit means it likely helps more graduate students pay for college, which may not be as high a public policy priority as getting more students to earn undergraduate credentials. The student loan interest deduction is worth more to higher-income filers than middle-income filers, and it is not as well-targeted as is federal grant aid for college. We could improve these provisions. Instead, the House majority bill simply eliminates them to fund tax cuts that benefit corporations and the top 1 percent.
It’s a shame that the tax bill writers had no interest in talking about reforming higher education tax benefits because there are plenty of opportunities available. There are good solutions available to better target tax benefits, including awarding the AOTC when students pay their tuition bills, ending confusing interplay between Pell Grants and tax credits, or making the refundable part of the AOTC larger.
Worrisome lessons for Higher Education Act reauthorization
Unfortunately, this same tactic of touting simplification to drive an agenda of cuts is likely to emerge again in conversations about reauthorizing the Higher Education Act. One common refrain in those discussions is the idea of moving to one grant, one loan because the current number of options is too confusing. Again, the rhetoric sounds great. But the key question is: What happens to the money previously spent on that “streamlined” grant or loan?
The Trump budget released earlier this year gave us an answer—it gets eliminated, with zero savings going to students. For example, the budget proposed cutting $732 million in grant aid and $27 billion over 10 years in loans that do not accumulate interest while a student is in school. It put none of the savings back into other programs that serve students.
The federal government offers many programs to help students access and afford college. Some work great, while others need improvement. But simply axing these benefits and giving the savings to big business, millionaires, and billionaires will do nothing to improve our pressing postsecondary challenges. The amounts of money involved in some of the programs targeted for elimination could be transformative in boosting state spending or improving aid for low-income students, driving down student loan debt and making it easier to handle student loans in the process.
No one likes complexity. But when it comes to this tax bill, it’s a better deal for students and families to keep their benefits, imperfect as they might be, than to accept the empty press release promises of simplification.
Ben Miller is the senior director for Postsecondary Education at the Center for American Progress.