Tax Credits Have Changed Higher Ed Funding, but Who Benefits?

The late-1990’s advent of the Hope and Lifetime Learning tax credit programs has significantly changed how higher education financial aid is provided to individuals. According to a recent study by Harvard’s Bridget Long, the program’s 1998 cost was $3.4 billion. In 2000 it was $4.9 billion—about 150% the cost of Pell grants.

Who benefits? State treasuries, not students, says Long. Apparently unintended, this consequence results from states calculating that the credits allow them to raise tuitions. One California analyst cited by Long says the credits will “create opportunities to increase the effective federal subsidy of California’s higher education programs.” The analyst estimates that tax credit-facilitated tuition increases would increase annual community college funding by $100 million without impacting the state budget.

The study reports other unintended program consequences, including:

• Individuals eligible for the tax credits were no more likely to enroll in post-secondary schools than were others, even though “tax credits were promoted as a means to increase college access.”
• Reasons for failure to increase college access may include lack of knowledge about the credits and the fact that the benefit accrues only the year after tuition costs are expensed.
• Evidence that public, two-year colleges experienced reductions in state support for higher education in response to their ability to raise tuition.
• Lower-income people don’t qualify for the credits because they owe little in taxes or may already receive other types of tax credits, deductions, or aid.
• Higher-income families don’t qualify because of income ceilings on the credits.

The study concludes that, “these results document the importance of considering how a federal program affects the behavior of states and institutions in ways that might undermine the original policy.”

Long, Bridget T. "The Impact of Higher Education Tax Credits for Higher Education Expenses", Working Paper 9553, National Bureau of Economic Research, March 2003. The full report can be purchased online at: http://www.nber.org/papers/w9553.

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