GAO

United States Government Accountability Office

A

Report to the Committee on Finance, 

U.S. Senate

July 2005 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

This report was amended on November 17, 2005 to remove 

estimated median income data for households with Section 529 

Qualified Tuition Program accounts or Coverdell Education 

Savings Accounts, due to a sample selection bias in the private 

sector research report that was our source. Median income 

estimates were removed from Table 2 and the text on page 18.

GAO-05-684
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

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www.gao.gov/cgi-bin/getrpt?GAO-05-684.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Michael 

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Highlights of GAO-05-684, a report to the 

Committee on Finance, U.S. Senate 

July 2005

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 

Title IV student aid and tax preferences provide assistance to a wide range of

students and families in different ways. While both help students meet 

current expenses, tax preferences also assist students and families with 

saving for and repaying postsecondary costs. While both serve students and 

families with a range of incomes, some forms of title IV aid—grant aid, in 

particular—provide assistance to those whose incomes are lower, on 

average, than is the case with tax preferences. While both require students 

and families to fill out forms, tax preferences require more responsibility on 

the part of students and families because they must identify applicable tax 

preferences, understand complex rules concerning their use, and correctly 

calculate and claim credits or deductions. While the tax preferences are a 

newer policy tool, the number of tax filers using them has grown quickly, 

surpassing the number of students aided under title IV in 2002. 

Recipients of Title IV Assistance and Tax Filers Claiming an Education Tax Credit or Tuition 

Deduction, 1997-2002 

Some tax filers do not appear to make optimal education-related tax 

decisions. For example, among the limited number of tax returns available 

for our analysis, 27 percent of eligible tax filers did not claim either the 

tuition deduction or a tax credit. In so doing, these tax filers failed to reduce 

their tax liability by $169, on average, and 10 percent of these filers could 

have reduced their tax liability by over $500. One explanation for these 

taxpayers’ choices may be the complexity of postsecondary tax provisions, 

which experts have commonly identified as difficult for tax filers to use. 

Little is known about the effectiveness of title IV aid or tax preferences in 

promoting, for example, postsecondary attendance or choice, in part 

because of research data and methodological challenges. As a result, 

policymakers do not have information that would allow them to make the 

most efficient use of limited federal resources to help students and families.

Federal assistance helps students 

and families pay for postsecondary 

education through several policy 

tools—grant and loan programs 

authorized by title IV of the Higher 

Education Act of 1965 and more 

recently enacted tax preferences. 

In fiscal year 2004, about $14 

billion in grants and $56 billion in 

loans were made under title IV 

while estimated outlay equivalents 

for postsecondary tax preferences 

amounted to $10 billion. In light of 

the relative newness and financial 

significance of tax preferences, this 

report examines (1) how title IV 

assistance compares to that 

provided through the tax code, (2) 

the extent to which tax filers 

effectively use postsecondary tax 

preferences, and (3) what is known 

about the effectiveness of federal 

assistance. 

What GAO Recommends

GAO does not make new 

recommendations in this report. In 

2002, GAO recommended, among 

other things, that Education 

sponsor research into key aspects 

of effectiveness of title IV 

programs. Little progress has been 

made by Education; however, 

according to the Department, it is 

in the process of establishing a 

postsecondary research center that 

will sponsor such research. 

Although Education disagreed with 

our conclusion about the extent to 

which title IV programs have been 

adequately studied, it agreed, as it 

did when we issued our 2002 

report, that more research was 

warranted. 
Page i GAO-05-684 Federal Student Aid Programs

Contents

Letter 1

Results in Brief 3

Background 5

Tax Preferences Differ from Title IV Assistance in Timing, 

Distribution, and Students’ and Families’ Responsibility for 

Obtaining Benefits 14

Some Tax Filers May Not Effectively Use Postsecondary Tax 

Preferences, Possibly Due to Complexity 20

Research on Effectiveness of Federal Postsecondary Assistance Is 

Incomplete 27

Concluding Observations 34

Agency Comments and Our Evaluation 34

Appendixes

Appendix I: Objectives, Scope, and Methodology 37

Appendix II: Confidence Intervals 41

Appendix III: Postsecondary-Education-Related Tax Preferences 51

Appendix IV: Comments from the Department of Education 54

Bibliography 55

Tables Table 1: Description of Federal Student Aid Programs Authorized 

under Title IV of the Higher Education Act 7

Table 2: Selected Postsecondary Education Tax Preferences 10

Table 3: Comparison of Assistance by Timing of Benefit for 

Selected Programs and Tax Preferences 15

Table 4: Percentage of Aid Recipients and Dollars of Aid by Income 

Category for Dependent Students Served by Selected Title 

IV Programs 16

Table 5: Percentage of Aid Recipients and Dollars of Aid by Income 

Category for Independent Students Served by Selected 

Title IV Programs 17

Table 6: Percentage of Tax Filers Claiming Hope and Lifetime 

Learning Credits and Tuition Deduction and Tax 

Preference Dollars by Income Category, Tax Year 2002 18

Table 7: Description of Federal Student Aid Programs Authorized 

under Title IV of the Higher Education Act 41

Table 8: Selected Postsecondary Education Tax Preferences 42
Contents

Page ii GAO-05-684 Federal Student Aid Programs

Table 9: Tax Filers Claiming an Education Tax Credit or Tuition 

Deduction 42

Table 10: Percentage of Aid Recipients and Dollars of Aid by Income 

Category for Dependent Students Served by Selected Title 

IV Programs 42

Table 11: Percentage of Aid Recipients and Dollars of Aid by Income 

Category for Independent Students Served by Selected 

Title IV Programs 43

Table 12: Percentage of Tax Filers Claiming Hope and Lifetime 

Learning Credits and Tuition Deduction and Tax 

Preference Dollars by Income Category, Tax Year 2002 43

Table 13: Percentage of Form 1098-Ts with Postsecondary Expense 

Information in 2002: Point Estimates 44

Table 14: Percentage of Form 1098-Ts with Postsecondary Expense 

Information in 2002: Confidence Intervals 44

Table 15: Percentage of Taxpayers Apparently Eligible to Claim an 

Education Tax Credit or Tuition Deduction in 2002: Point 

Estimates 44

Table 16: Percentage of Taxpayers Apparently Eligible to Claim an 

Education Tax Credit or Tuition Deduction in 2002: 

Confidence Intervals 44

Table 17: Percentage of Apparently Eligible Taxpayers to Claim an 

Education Tax Credit or Tuition Deduction That Failed to 

Do So in 2002: Point Estimates 45

Table 18: Percentage of Apparently Eligible Taxpayers to Claim an 

Education Tax Credit or Tuition Deduction That Failed to 

Do So in 2002: Confidence Intervals 45

Table 19: Amounts by Which Apparently Eligible Taxpayers Failed to 

Reduce Their Tax Liability: Point Estimates 45

Table 20: Amounts by Which Apparently Eligible Taxpayers Failed to 

Reduce Their Tax Liability: Confidence Intervals 46

Table 21: 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 46

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: Confidence 

Intervals 46

Table 23: Amounts by Which Apparently Eligible Taxpayers Could 

Have Reduced Their Tax Liability in 2002: Point 

Estimates 47
Contents

Page iii GAO-05-684 Federal Student Aid Programs

Table 24: Amounts by Which Apparently Eligible Taxpayers Could 

Have Reduced Their Tax Liability in 2002: Confidence 

Intervals 47

Table 25: 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 48

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: Confidence 

Intervals 48

Table 27: Amounts by Which Apparently Eligible Taxpayers Could 

Have Reduced Their Tax Liability in 2002: Point 

Estimates 48

Table 28: Amounts by Which Apparently Eligible Taxpayers Could 

Have Reduced Their Tax Liability in 2002: Confidence 

Intervals 49

Table 29: 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 49

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: Confidence Intervals 50

Table 31: Percentage of Suboptimal Choices Made by Paid Tax 

Preparers: Point Estimates 50

Table 32: Percentage of Suboptimal Choices Made by Paid Tax 

Preparers: Confidence Intervals 50

Figure Figure 1: Recipients of Title IV Assistance and Tax Filers Claiming 

an Education Tax Credit or Tuition Deduction, 

1997-2002 13
Contents

Page iv GAO-05-684 Federal Student Aid Programs

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Abbreviations

AQEE adjusted qualified education expenses

EFC expected family contribution

ESA Educational Savings Accounts

FAFSA Free Application for Federal Student Aid

FDL Federal Direct Loan 

FFEL Federal Family Educational Loan 

FWS Federal Work-Study

GAO Government Accountability Office

GED General Educational Development

IRS Internal Revenue Service

NPSAS National Postsecondary Student Aid Study

PART Program Assessment Rating Tool

PLUS Parent Loans for Undergraduate Students

SEOG Supplemental Educational Opportunity Grant

SOI Statistics of Income

TIN taxpayer identification number
Page 1 GAO-05-684 Federal Student Aid Programs

United States Government Accountability Office

Washington, D.C. 20548

A

July 29, 2005 Letr

The Honorable Charles E. Grassley

Chairman

The Honorable Max Baucus

Ranking Minority Member

Committee on Finance

United States Senate

In recent decades, Congress has provided billions of dollars in assistance 

each year to help the nation’s students and families meet the costs of 

postsecondary education. In the past, this assistance has primarily been 

provided through student grant and loan programs authorized under title IV 

of the Higher Education Act of 1965, as amended. Much of this aid, called 

need-based 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. More recently, however, postsecondary assistance has also 

been provided through a range of tax preferences,1

 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 2005, up to a 

$1,500 Hope tax credit and/or a $2,000 Lifetime Learning tax credit for 

tuition and course-related fees paid. Furthermore, the 2001 Economic 

Growth and Tax Relief Reconciliation Act created a new tax deduction for 

tuition expenses, which eligible tax filers may use to deduct, in tax year 

2005, up to $4,000 from their taxable income for tuition and course-related 

fees paid.2

Providing federal financial assistance in these varied ways presents 

students and their families with an array of tools that may help them pay 

postsecondary education expenses. There is concern, however, that the 

postsecondary tax preferences create opportunities that are difficult for 

families to understand and use correctly. Additionally, Congress has been 

1

 Tax 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.

2

 Tax filers may claim only one of the tax preferences above for a single student. Families 

with more than one student with eligible expenses may claim more than one of these tax 

preferences. 
Page 2 GAO-05-684 Federal Student Aid Programs

provided with little evidence concerning the effectiveness of assistance 

provided under title IV or through tax preferences, such as whether student 

assistance increases the rate at which students enroll in postsecondary 

education or whether assistance increases the likelihood that students will 

either earn a degree or continue their education (often referred to as 

persistence). 

You asked us to explain how the federal government assists students and 

families in meeting the costs of postsecondary education, and to examine 

the opportunities and challenges associated with these policies. To address 

your interests, we answered the following questions: (1) How does title IV 

grant and loan assistance compare with that provided through the tax 

code? (2) To what extent are tax filers effectively using the opportunities 

presented by postsecondary tax preferences? (3) What is known about the 

effectiveness of federal assistance in promoting college attendance, 

providing students with a wider range of choices among postsecondary 

institutions, or encouraging students to persist in their studies? 

To compare title IV federal grant and loan assistance with that provided 

through the tax code, we used Department of Education (Education) and 

Internal Revenue Service (IRS) data, as well as agency documents and 

statutory provisions describing federal student financial assistance 

programs and tax preferences related to student financial assistance for 

postsecondary education. For the purpose of this review, we focused on 

federal grant and loan programs or tax preferences that served 500,000 or 

more students and families. We also used two data sets, the 2003-2004 

National Postsecondary Student Aid Study (NPSAS) from Education and 

IRS’s 2002 Statistics of Income (SOI) individual tax file.3

 We analyzed SOI 

data to determine, among other things, whether tax filers made effective 

use of the Hope and Lifetime Learning tax credits and the tuition 

deduction. However, information required to analyze whether tax filers 

made effective use of the tax credits and deduction was not consistently 

available for tax filers included in the SOI data. Educational institutions 

must provide IRS and students with Forms 1098-T, which document 

students’ enrollment status at the institution. Educational institutions may 

also, but are not required to, report on students’ qualified tuition and 

3

 Both data sets report 2002 adjusted gross income. In this report, dependent student 

income equals 2002 parental adjusted gross income, while independent student income 

equals the student’s 2002 adjusted gross income (and, if married, the spouse’s adjusted gross 

income).
Page 3 GAO-05-684 Federal Student Aid Programs

related expenses, scholarships, and grants. Consequently, our analysis of 

SOI data for this purpose was limited to the approximately 1.8 million tax 

filers for whom Forms 1098-T reported such information. We were unable 

to determine whether these tax filers were representative of the 

approximately 12.4 million tax filers for whom such information was 

unavailable. To address issues of complexity as students and families use 

postsecondary tax preferences, we reviewed relevant statutes, regulations, 

and IRS documents, government reports, and academic research. We 

assessed the reliability of NPSAS and SOI data sets in light of our data 

reliability standards and found them to be useful for the purpose of this 

review. Details of our data reliability assessment and other aspects of our 

scope and methodology can be found in appendix I. To learn what is known 

about the effectiveness of federal grant and loan programs and tax 

preferences, we reviewed the academic literature on financial aid and 

education-related tax preferences. We conducted our review from May 

2004 through June 2005 in accordance with generally accepted government 

auditing standards.

Results in Brief In general, assistance is provided to a wide range of students and families 

under both title IV programs and through several tax preferences, but three 

key differences exist when comparing the two sources of aid. First, while 

title IV aid and tax preferences focus primarily on helping students meet 

current expenses, tax preferences also assist students and families with 

saving for and repaying postsecondary costs. Second, 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, while both title IV aid and tax 

preferences require students and families to fill out forms, tax preferences 

require more responsibility on the part of students and families for 

obtaining benefits because they must identify applicable tax preferences, 

understand complex rules concerning their use, and correctly calculate and 

claim credits or deductions on their returns.

Some tax filers do not appear to be making the most effective use of certain 

postsecondary tax preferences and, as a result, fail to minimize their 

federal income tax liabilities. Among tax filers included in the 2002 SOI 

data set for whom information indicating eligibility for an education tax 

credit or tuition deduction was available, 27 percent failed to claim either 
Page 4 GAO-05-684 Federal Student Aid Programs

(1) a Hope or Lifetime Learning tax credit or (2) the tuition deduction. By 

not claiming an education tax credit or tuition deduction, we estimate that 

these tax filers failed to reduce their tax liabilities by $169, on average. 

Furthermore, we estimate that 10 percent of these apparently eligible tax 

filers failed to reduce their tax liabilities by more than $500. We also found 

that 21 percent of tax filers who claimed the tuition deduction would have 

reduced their tax liabilities by an additional $83, on average, had they 

chosen to claim the Lifetime Learning tax credit rather than the tuition 

deduction. While tax filers’ suboptimal choices may arise due to many 

factors, one reason may be the complexity of these tax provisions. Experts 

commonly identify postsecondary tax preferences as complex for tax filers 

to use because many of these preferences have similar objectives, 

dissimilar definitions, and rules that require extensive record keeping. 

Moreover, tax preferences can interact with title IV aid in a manner that 

affects the net amount of federal assistance received, adding to the 

complexity facing students and families. Students and families may make 

costly mistakes to the extent that they find using tax preferences to be 

difficult.

Little is known about the effectiveness of federal grant and loan programs 

and education-related tax preferences in promoting attendance, choice, 

and persistence. Many programs and tax preferences have not been 

studied, and even among those that have, important aspects of their 

effectiveness remain unexamined. When research exists, it suggests that 

federal programs and tax preferences have a range of results, from no 

measurable effects to modestly positive impacts on college attendance and 

persistence. Data and methodological challenges limit the certainty with 

which the effects of title IV programs and tax preferences, especially the 

latter, can be identified, and result in widespread gaps in knowledge of 

their effectiveness. Without this information, federal policy makers cannot 

weigh the relative effectiveness of postsecondary assistance provided 

through title IV and tax preferences. In 2002 we recommended, among 

other things, that Education sponsor research into the impact of title IV 

programs on postsecondary attendance and choice, completion, and 

college costs. Little progress has been made by Education; however, 

according to the department, it is in the process of establishing a 

postsecondary research center that will sponsor such research.

In commenting on a draft of this report, Education agreed overall that more 

research should be done on various federal programs that assist students 

enrolled in postsecondary education, but disagreed with our finding on the 

extent that title IV programs have been studied. Education also said that 
Page 5 GAO-05-684 Federal Student Aid Programs

we should have included its research in our description of available 

program effectiveness research, including a particular study of the Pell 

Grant program. In general, while Education’s research efforts—both the 

data collections conducted regularly by the agency and studies based upon 

those data—provide useful descriptive information, the data collections 

and related studies do not include information on those who do not receive 

postsecondary education and are therefore of limited use in establishing 

the effectiveness of title IV programs. Education’s letter is reprinted in 

appendix IV. Also, IRS provided technical comments which we 

incorporated where appropriate. 

Background The federal government helps students and families save, pay for, and 

repay the costs of postsecondary education through grant and loan 

programs authorized under title IV of the Higher Education Act of 1965, and 

through tax preferences—reductions in federal tax liabilities that result 

from preferential provisions in the tax code, such as exemptions and 

exclusions from taxation, deductions, credits, deferrals, and preferential 

tax rates. In fiscal year 2004, Education made approximately $14 billion in 

grants and provided another $56 billion in loan assistance (face value) 

through the title IV programs. The fiscal year 2004 outlay equivalent cost of 

the postsecondary tax preferences reviewed in this study was estimated to 

be $10 billion.

Federal Grant and Loan 

Assistance to 

Postsecondary Students

Assistance provided under title IV programs include Pell Grants for lowincome students, parent loans known as PLUS loans, and Stafford loans.4

 

While Pell Grants reduce 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 

4

 Consolidation 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, 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, GAO-04-568T

(Washington, D.C.: Mar. 17, 2004).
Page 6 GAO-05-684 Federal Student Aid Programs

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.5

 Stafford and PLUS loans are 

provided to students through both the Federal Family Education Loan 

Program (FFELP) 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 FFELP, private lenders, such as 

banks, provide loan capital and make loans, and the federal government 

guarantees FFELP 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 (FAFSA) form. Information from the FAFSA, particularly income and 

asset information, is used to determine the amount of money—called the 

expected family contribution (EFC)—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.6

 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 

5

 While 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.

6

 To 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.
Page 7 GAO-05-684 Federal Student Aid Programs

students, additional expenses.7 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 1, below. 

Table 1: Description of Federal Student Aid Programs Authorized under Title IV of the Higher Education Act

7

 These may include child care expenses for parents of young dependent children or 

supportive services for disabled students. 

Title IV student 

aid program Program details Annual award amounts Number and characteristics of beneficiaries

Pell Grant Grants are made on the basis of 

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.

$400 to $4,050 for school year 

2004-2005.

Dependent students: About 2.1 million grants 

were awarded in school year 2003-2004, totaling 

$5.3 billion. The average grant award was $2,573; 

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 

Educational 

Opportunity Grant

Schools administer grant funds, 

which are made to 

undergraduates with 

exceptional financial need; 

priority is given to Pell Grant 

recipients. Institutions must 

match a portion (at least 25%) 

of the federal funds allocated.

$100 to $4,000. Dependent students: About 554,000 grants were 

awarded in school year 2003-2004, totaling $494.2 

million. The average grant award was $892; the 

median income of recipients was $22,827. 

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. 

Federal WorkStudySchools administer funds, 

which are used to provide parttime jobs for undergraduate and 

graduate students with financial 

need. Participating schools or 

nonprofit employers generally 

contribute at least 25% of 

student’s earnings (50% in the 

case of for-profit employers).

No annual minimum or 

maximum award amounts.

Dependent students: About 1.1 million awards 

were awarded in school year 2003-2004, totaling 

$2 billion. The average award was $1,901; the 

median income of recipients was $46,441. 

Independent students: About 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. 
Page 8 GAO-05-684 Federal Student Aid Programs

Source: GAO analysis of school year 2003-2004 NPSAS data.

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.

$4,000 maximum for 

undergraduate students and 

$6,000 for graduate students; 

no minimum award amount. 

(Aggregate limits: $8,000 for 

undergraduates who have not 

completed 2 academic years; 

$20,000 for undergraduates 

who have completed 2 years; 

and, $40,000 for graduate 

students, including loans 

borrowed as an 

undergraduate.)

Dependent students: About 495,000 loans were 

made in school year 2003-2004, totaling $956 

million. The average loan amount was $1,932; the 

median income of recipients was $39,175. 

Independent students: About 329,000 loans 

were made in 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 

or Direct Stafford 

Loan 

Loans made on the basis of 

financial need to undergraduate 

and graduate students who are 

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.

$2,625 to $8,500 depending 

upon year of schooling. 

Aggregate limits are $23,000 

for undergraduates and 

$65,500 for graduate 

students.

Dependent students: About 2.6 million loans 

were made in school year 2003-2004, totaling $8.1 

billion. The average loan amount was $3,188; the 

median income of recipients was $44,678. 

Independent students: About 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 or Direct 

Stafford Loan

Loans made to undergraduate 

and graduate students who are 

enrolled at least half-time. 

Unlike subsidized loans, the 

federal government does not 

pay 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. 

Otherwise, the terms and 

conditions of unsubsidized 

loans are the same as those for 

subsidized loans.

$2,625 to $18,500 depending 

on year of schooling (including 

any subsidized loan amounts 

received for the same period). 

Aggregate limits are $23,000 

for dependent 

undergraduates, $46,000 for 

independent undergraduates, 

and $138,500 for graduate 

students.

Dependent students: About 1.6 million loans 

were made in school year 2003-2004, totaling $5.3 

billion. The average loan amount was $3,293; the 

median income of recipients was $75,835. 

Independent students: About 3.3 million loans 

were made in school year 2003-2004, totaling 

$18.5 billion. The average loan amount was 

$5,671; the median income of recipients was 

$22,108. 

FFEL or Direct 

PLUS Loan

Loans made to parents on 

behalf of dependent 

undergraduate students 

enrolled at least half-time. 

Borrowers are subject to a 

credit check for adverse credit 

history and may be denied a 

loan.

Maximum loan amounts are 

limited to cost of attendance 

less other federal, state, 

private, and institutional aid 

received for the period of 

enrollment.

About 634,000 loans were made in school year 

2003-2004, totaling $5.7 billion. The average loan 

amount was $9,019; the median income of 

recipients was $71,397. 

(Continued From Previous Page)

Title IV student 

aid program Program details Annual award amounts Number and characteristics of beneficiaries
Page 9 GAO-05-684 Federal Student Aid Programs

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.8

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 2.

8

 Certain aspects of the tax-favored treatment of section 529 programs that were enacted in 

the Economic Growth and Tax Relief Act of 2001 are subject to expire on December 31, 

2010, if not extended.
Page 10 GAO-05-684 Federal Student Aid Programs

Table 2: Selected Postsecondary Education Tax Preferences

Preference details

Tax 

preference Eligibility

Income ranges 

for phasing out 

benefitsa Eligible expenses Tax benefit

Number and 

characteristics of 

beneficiaries

Hope Credit Tax filer on behalf of self, 

spouse, or dependent 

who is working toward a 

degree or certificate at 

least half-time in the first 2 

years of postsecondary 

enrollment.

Single filer:

$42,000-

$52,000

Joint return:

$85,000-

$105,000.b

Tuition and fees at 

institutions eligible 

to participate in title 

IV programs.

Maximum credit: $1,500 per 

student. Credit rate is 100 

percent on first $1,000 of 

qualified higher education 

expenses, 50 percent on 

next $1,000. 

Nonrefundable: if filer has 

no tax liability due to 

offsetting deductions, 

exemptions, or competing 

tax credits, filer cannot 

receive credit. 

In tax year 2002, 3.3 

million tax filers 

claimed $3.2 billion in 

Hope credits; the 

average credit 

claimed was $991, 

and the median 

income of filers 

claiming the credit 

was $39,203.

Lifetime 

Learning 

Credit

Tax filer on behalf of self, 

spouse, or dependent 

who is enrolled in 

undergraduate or 

graduate courses, or any 

course that aids in 

learning new or improving 

existing job skills, for as 

many years as the student 

is enrolled.

Single filer:

$42,000-

$52,000

Joint return:

$85,000-

$105,000.b

Tuition and fees at 

institutions eligible 

to participate in title 

IV programs.

Maximum credit: $2,000 per 

tax filer. (20 percent of 

qualified higher education 

expenses up to $10,000). 

Nonrefundable: if filer has 

no tax liability due to 

offsetting deductions, 

exemptions, or competing 

tax credits, filer cannot 

receive credit.

In tax year 2002, 3.5 

million tax filers 

claimed $1.7 billion in 

Lifetime Learning 

credits; the average 

credit claimed was 

$477, and the median 

income of filers 

claiming the credit 

was $39,706.

Student Loan 

Interest 

Deduction

Tax filer, on behalf of self, 

spouse, or dependent, 

available even to those 

who do not itemize 

interest paid. Student 

must have been enrolled 

at least half-time in a 

degree program.

Single filer:

$50,000-

$65,000

Joint return:

$100,000-

$130,000.

Eligible loans are 

those used to pay 

for tuition, fees, 

room and board, 

and related 

expenses and 

include, for example, 

student loans 

provided under title 

IV.

Maximum deduction: 

$2,500

interest paid on eligible 

education loans is 

deductible. 

In tax year 2002, 6.6 

million tax filers 

deducted $892.6 

million of student loan 

interest; the average 

deduction was $134, 

and the median 

income of filers 

deducting student 

loan interest was 

$43,544.
Page 11 GAO-05-684 Federal Student Aid Programs

Sources: IRS and College Savings Plan Network; 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 phaseout 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

 The Economic Growth and Tax Relief Reconciliation Act of 2001 provides that from January 1, 2001 

to December 31, 2011 eligible higher education institutions, in addition to states, may offer tuition 

prepayment programs. States remain the sole tax-exempt sponsors of college savings programs.

Section 529 

qualified 

tuition 

programs—

prepaid tuition 

programs and 

statesponsored 

college 

savings 

programsc

Specifics depend on 

particular program. 

Normally a prepaid 

program is open for 

contributions only on 

behalf of young children 

and accounts must be 

closed within some 

number of years after the 

beneficiary reaches 

college age. Generally, 

savings programs do not 

have age restrictions.

No phaseout. Tuition, fees, books, 

supplies, and 

equipment required 

for attendance. 

Room and board if 

enrolled half time or 

more.

No tax is due on a 

distribution from an account 

unless the amount 

distributed is greater than 

the beneficiary’s adjusted 

qualified education 

expenses. 

About 7.2 million 

prepaid tuition and 

college savings 

program accounts 

had been established 

by December 31, 

2004, with a reported 

balance of $64.7 

billion in both types of 

programs. 

Coverdell 

Education 

Savings 

Accounts

Distributions can be used 

for students enrolled on 

full-time, half- time, or less 

than half-time basis.

Account must be closed 

within 30 days after 

beneficiary reaches age 

30.

For 

contributions, 

$95,000-

$110,000 for 

single filers and 

$190,000-

$220,000 for 

joint returns.

Tuition, fees, books, 

supplies, and 

equipment required 

for attendance.

Room and board if 

enrolled half-time or 

more.

No tax is due on a 

distribution from an account 

unless the amount 

distributed is greater than 

the beneficiary’s adjusted 

qualified education 

expenses. 

Annual contribution limit is 

$2,000 per year per student 

(through age 17).

Approximately 1 

million contributions 

were made to 

accounts in tax year 

2002. 

Tuition 

Deduction 

(expires Dec. 

31, 2005)

Same as Lifetime 

Learning credit. 

Single filer:

$65,000-80,000

Joint Return: 

$130,000-

160,000.

Tuition and fees at 

institutions eligible 

to participate in title 

IV programs.

Maximum deduction: 

$4,000 per return for 

individual filers whose 

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).

In tax year 2002, 3.4 

million tax filers 

deducted $1.3 billion; 

the average 

deduction was $377, 

and the median 

income of filers using 

the deduction was 

$54,326.

(Continued From Previous Page)

Preference details

Tax 

preference Eligibility

Income ranges 

for phasing out 

benefitsa Eligible expenses Tax benefit

Number and 

characteristics of 

beneficiaries
Page 12 GAO-05-684 Federal Student Aid Programs

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.9

 

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.10 Appendix IV lists all tax preferences reported by IRS, including 

ones not included in this review.

Tax Preferences Are More 

Recent Than Most Title IV 

Programs

Title IV programs have been in place for decades, while most educationrelated tax preferences were created much more recently. Between the 

late 1950s and the early 1980s each major federal initiative to assist 

students with the costs of postsecondary education was provided either 

through grant or loan programs. From 1981 through 1995 no new federal 

grant or loan-financing vehicles were adopted; however, new financing 

options, such as loan consolidation, and new delivery systems, such as 

direct student lending, were introduced for student loan programs. Since 

1995, on the other hand, every federal initiative for the financing of 

postsecondary education has been implemented through the federal tax 

code, primarily through the Tax Relief Act of 1997 and the Economic 

Growth and Tax Relief Reconciliation Act of 2001. By 2002 the number of 

tax filers claiming a tax credit or tuition deduction was broadly comparable 

to the number of students aided through title IV programs: about 8.4 million 

students received a title IV grant and/or loan, and about 9.6 million tax 

9

 For example, scholarships covering tuition and fees and tuition reductions for the children 

of employees of an educational institution are not counted as income for income tax 

purposes. Similarly, student loans forgiven when a graduate goes into certain professions 

are also not subject to federal income taxes. 

10 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. 
Page 13 GAO-05-684 Federal Student Aid Programs

filers filed returns claiming a Hope tax credit, Lifetime Learning tax credit, 

or tuition deduction. (See fig. 1.)11

Figure 1: Recipients of Title IV Assistance and Tax Filers Claiming an Education Tax 

Credit or Tuition Deduction, 1997-2002

11 The 8.4 million title IV aid recipient figure is an unduplicated count of students, i.e., a 

student receiving both a grant and a loan is counted only once. Each of the 9.6 million tax 

filers represents at least one student and in some cases more than one student. A tax filer 

with more than one dependent with qualified educational expenses, or with qualified 

expenses of his or her own along with those of a dependent, may claim more than one tax 

preference on his or her tax return as long as other eligibility criteria are met.

Year

Recipients and tax filers (in millions)

Title IV aid recipients

Tax returns claiming postsecondary tax credits and/or tuition deduction

Source: GAO analysis of Budget of the United States Government, FY1994-2002 and Internal Revenue Service data 1994-2002.

1997 1998 1999 2000 2001 2002

0

2

4

6

8

10
Page 14 GAO-05-684 Federal Student Aid Programs

Tax Preferences Differ 

from Title IV 

Assistance in Timing, 

Distribution, and 

Students’ and Families’ 

Responsibility for 

Obtaining Benefits 

Postsecondary student financial assistance provided through programs 

authorized under title IV of the Higher Education Act and the tax code 

differ in three key ways. First, tax preferences and title IV programs differ 

in the timing and the distribution of benefits they provide. Title IV grant 

and loan programs primarily provide aid to students and families while 

students are in college, whereas tax preferences help both during the 

college years and before and after college by assisting with saving for or 

repaying college costs. Additionally, although student aid programs and 

tax preferences assist students and families across a wide range of income 

levels, some title IV programs, such as the Pell Grant and subsidized 

Stafford student loan programs, provide much of their financial assistance 

to students and families whose incomes are lower, on average, than 

students who receive unsubsidized Stafford loans, tax deductions, or make 

use of tax-exempt saving vehicles. Last, students and families have more 

responsibility for appropriately using and thereby obtaining the benefits of 

tax preferences compared with title IV aid.

Tax and Title IV Programs 

Differ in Benefit Timing

Title IV programs and education-related tax preferences differ significantly 

as to when eligibility is established and in the timing of the assistance they 

provide. Eligibility for title IV programs is generally established at the time 

of enrollment and prior to each subsequent school year thereafter, and title 

IV programs generally provide benefits to students while they are in school. 

Education-related tax preferences reach widely across the life span. They 

encourage saving for college, especially among families with dependent 

children through tax-exempt saving; assist enrolled students and their 

families in meeting the current costs of postsecondary education through 

credits and a tuition deduction; and assist students and families repaying 

the costs of past postsecondary education by allowing tax filers to claim a 

deduction for student loan interest paid. Thus, tax filers must determine 

their eligibility for these preferences every year that contributions are 

made to Coverdell Education Savings Accounts or every year that a former 

student claims a student loan interest deduction. Table 3 shows a 

comparison of the timing of title IV assistance and the assistance provided 

through various tax preferences.
Page 15 GAO-05-684 Federal Student Aid Programs

Table 3: Comparison of Assistance by Timing of Benefit for Selected Programs and Tax Preferences

Source: GAO.

Beneficiaries of Title IV 

Programs and Tax 

Preferences Differ

While title IV programs and tax preferences assist many students and 

families, a variety of program and tax rules affect students’ and families’ 

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, as 

discussed below. 

Title IV Assistance Title IV programs 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.12 Pell Grant awards are calculated by subtracting 

the student’s expected family contribution (EFC) from the maximum Pell 

Grant award ($4,050 in academic year 2004-2005), or the student’s cost of 

attendance, whichever is less. Because the expected family contribution 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 received primarily by families 

with modest incomes. The maximum subsidized Stafford loan that a 

Type of assistance Save for future expenses Pay current expenses Repay expenses

Grant programs Pell Grants

Supplemental Educational 

Opportunity Grants 

Loan programs Subsidized and Unsubsidized 

Stafford Loans 

Federal Perkins Loans 

Federal PLUS Loans 

Tax preferences Coverdell Educational Savings 

Accounts

Section 529 Qualified Tuition

Programs

Hope Credit

Lifetime Learning Credit

Tuition Deduction

Student Loan Interest 

Deduction

Work-Study program Federal Work Study 

12 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 

excluded from our analysis. 
Page 16 GAO-05-684 Federal Student Aid Programs

student may obtain is based upon his or her cost of attendance, minus the 

expected family contribution and the estimated financial assistance that 

the student will receive.13 For a given cost of attendance, therefore, the 

amount of a subsidized Stafford loan increases as EFC decreases. 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.14 

The different award rules for Pell Grants and subsidized and unsubsidized 

Stafford loans result in different patterns of program participation among 

students of different incomes, and different distributions of dollar support 

among students. As table 4 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. With respect to subsidized Stafford loans, 67 percent of 

recipients had family incomes of $60,000 or less and received a 

proportional share of total subsidized loan volume. In contrast, 65 percent 

of unsubsidized Stafford loan recipients had family incomes above $60,000 

and received 69 percent of total unsubsidized loan volume.

Table 4: Percentage of Aid Recipients and Dollars of Aid by Income Category for Dependent Students Served by Selected Title IV 

Programs 

Source: GAO analysis of 2003-2004 NPSAS data.

13 Estimated financial assistance includes the Pell Grant and most other sources of state, 

federal, private, and institutional aid.

14 Additionally, loan amounts for both subsidized and unsubsidized loans are subject to 

statutory limits on annual and cumulative borrowing. 

Program

Dependent 

students $0-20,000

$21,001-

40,000

$40,001-

60,000

$60,001-

80,000

$80,001-

100,000

More than

$100,000

Pell Grant Recipients 38 47 14 2 0 0

Dollars 48 44 8 1 0 0

Stafford Subsidized 

Loan

Recipients 16 28 23 17 9 7

Dollars 16 28 24 17 9 6

Stafford Unsubsidized 

Loan

Recipients 7 14 14 19 18 28

Dollars 7 12 12 18 19 32
Page 17 GAO-05-684 Federal Student Aid Programs

Notes: See appendix II 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 5, the distribution of award dollars follows a nearly identical pattern.

Table 5: Percentage of Aid Recipients and Dollars of Aid by Income Category for Independent Students Served by Selected Title 

IV Programs

Source: GAO analysis of 2003-2004 NPSAS data.

Notes: See appendix II for confidence intervals associated with these estimates.

Numbers in rows may not add to 100 percent because of rounding.

Tax Preferences Many education-related tax preferences have both de facto lower limits 

created by the need to have a positive tax liability in order 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 2004 that 

begin at $42,000 and $85,000 for single and joint filers, respectively. The 

income-related phase-out provision for the tuition deduction, in 

comparison, begins in 2004 at $65,000 and $130,000 for single and joint 

filers, respectively. As a result, the majority of tax filers claiming the Hope 

and Lifetime Learning tax credits in 2002 had incomes under $40,000. 

Among those who claimed the tuition deduction, in contrast, 38 percent of 

tax filers had incomes in this range, while 62 percent had incomes over 

$40,000. Table 6 shows the income categories of tax filers claiming the 

Program

Independent

students $0-20,000

$21,001-

40,000

$40,001-

60,000

$60,001-

80,000

$80,001-

100,000

More than

$100,000

Pell Grant Recipients 67 28 5 0 0 0

Dollars 73 25 3 0 0 0

Stafford Subsidized 

Loan

Recipients 51 29 12 5 2 1

Dollars 52 28 12 5 2 2

Stafford Unsubsidized 

Loan

Recipients 46 28 14 6 3 3

Dollars 46 24 13 7 3 5
Page 18 GAO-05-684 Federal Student Aid Programs

three tax preferences available to current students and/or their families 

along with the distribution of dollars through those preferences in 2002.

The reduction in tax liability associated with the use of the Hope and 

Lifetime tax credits also differs from that associated with the use of the 

tuition deduction. In 2002 tax filers claimed Hope credits worth about $3.2 

billion and Lifetime Learning credits totaling about $1.7 billion. As shown 

in table 6, below, about 80 percent of the 2002 Hope and Lifetime credits’ 

reduction in tax liability went to tax filers with incomes between $20,001 

and $80,000. The distribution of benefits for the tuition deduction shows a 

substantially different pattern: more than half (52 percent) of the 

approximately $1.3 billion reduction in tax liability associated with the use 

of the deduction in 2002 went to families with incomes of $80,001 and 

above.

Table 6: Percentage of Tax Filers Claiming Hope and Lifetime Learning Credits and Tuition Deduction and Tax Preference Dollars 

by Income Category, Tax Year 2002

Source: GAO analysis of 2002 SOI data.

Notes: See appendix II for confidence intervals associated with these estimates.

Numbers in rows may not add to 100 percent because of rounding.

Although many families are eligible to participate in tax-exempt savings 

programs, the programs are more advantageous to those with higher 

incomes and tax liabilities. Families with higher than average incomes are 

more likely to use tax-exempt savings opportunities for a range of reasons, 

including, among others, that (1) these families hold greater assets to invest 

in these vehicles; (2) these families have a higher marginal tax rate, and 

thus benefit the most from the use of these vehicles; and (3) higher-income 

Type of aid $0-20,000

$20,001-

40,000

$40,001-

60,000

$60,001-

80,000

$80,001-

100,000

More than

$100,000

Hope Credit Tax filers 18 33 20 18 11 0

Dollars 10 33 23 24 10 0

Lifetime Learning Credit Tax filers 16 34 25 16 8 0

Dollars 12 34 25 21 7 0

Tuition Deduction Tax filers 20 18 16 13 16 17

Dollars 11 10 13 14 23 29
Page 19 GAO-05-684 Federal Student Aid Programs

families may gain a reduction in tax liability even if withdrawals are not 

used for postsecondary expenses.15

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 form, which in its 2004 paper 

version was over eight pages long and contained more than 100 questions. 

While concerns have been raised that the FAFSA application may deter 

potentially eligible students from participating in title IV grant and loan 

programs,16 filling out the FAFSA and submitting it to the Department of 

Education completes, by and large, students’ and families’ responsibility in 

obtaining aid. To benefit from title IV programs, students need not learn 

the rules of the federal student aid methodology, eligibility rules for 

individual programs, or understand the ways in which federal student aid 

programs interact with one another. Rather, the Department of Education 

is responsible for calculating students’ and families’ EFC on the basis of the 

FAFSA, and a student’s educational institution is responsible for 

determining aid eligibility and the amounts and packaging of aid awards. In 

addition, title IV educational institutions assist Education in verifying the 

information submitted on the FAFSA form for a sample of aid applicants.

Higher education tax preferences, in contrast to federal grants and student 

loans, require more responsibility on the part of students and families. 

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 taxpreferred savings. The federal government’s primary role with respect to 

higher education tax preferences is limited to the promulgation of rules; 

15 The earnings portion of a withdrawal from a Coverdell Education Savings Account is 

taxed at the student’s marginal rate, rather than the rate of the parents. For parents with 

more than $100,000 in household income, nonqualified withdrawals from such an account, 

even with a 10 percent tax penalty, are taxed at a lower rate than withdrawals from a 

nonadvantaged account. See Susan Dynarski, High Income Families Benefit Most from 

New Education Savings Incentives, Tax Policy Issues and Options, No. 9 (February 2005).

16 Advisory Committee on Student Financial Assistance, The Student Aid Gauntlet, Final 

Report of the Special Study of Simplification of Need Analysis and Application for Title 

IV Aid, (January 2005). Kane (1995) suggests that providing better information about 

financial aid and streamlining the process of applying for aid could increase enrollment.
Page 20 GAO-05-684 Federal Student Aid Programs

the provision of guidance to tax filers; and to the processing of tax returns, 

including some checks on the accuracy of items reported on those tax 

returns. In contrast, the primary responsibility for selecting among and 

properly using tax preferences rests with tax filers: they must understand 

the rules in light of their own situation, identify applicable tax preferences, 

understand how these tax preferences interact with one another and with 

federal student aid, keep records sufficient to support their tax filing, and 

correctly claim the credit or deduction on their return.

Some Tax Filers May 

Not Effectively Use 

Postsecondary Tax 

Preferences, Possibly 

Due to Complexity 

According to our analysis of IRS data on the use of Hope and Lifetime tax 

credits and the tuition deduction, some tax filers appear to make less-thanoptimal choices among them. The apparently suboptimal use of 

postsecondary tax preferences may arise, in part, from the complexity of 

using these provisions; however, our analysis of tax data does not permit us 

to identify why they are making these choices. Tax policy analysts 

consistently identify 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.17 Additional complexity associated with the 

use of postsecondary tax preferences also arises from the interaction of tax 

preferences and title IV student aid.

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 taxexempt 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 

17 See, for example, U.S. Congress, Joint Committee on Taxation, Study of the Overall State 

of the Federal Tax System, vol. II (April 2001); U.S. Congress, Joint Committee on Taxation, 

Present Law and Analysis Relating to Tax Benefits for Higher Education (July 21, 2004); 

Nina E. Olson (National Taxpayer Advocate), “Complexity, Compliance, and 

Communication: Why Should Tax Filers Comply in a Complex and Changing Tax 

Environment?” (presentation before the President’s Advisory Panel on Federal Tax Reform, 

Mar. 3, 2005).
Page 21 GAO-05-684 Federal Student Aid Programs

2004, 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 

$1,500 if they claimed the Hope credit. 

To assess whether tax filers faced difficulty with choosing among these 

preferences, we examined whether tax filers who were confronted with a 

relatively common tax choice—whether to claim the Hope or Lifetime 

Learning credit or the tuition deduction—chose the tax preference that 

minimized their tax liability. We analyzed information that IRS was 

provided with by educational institutions using Form 1098-T and tax return 

information in IRS’s 2002 Statistics of Income sample. Because 87 percent 

of Form 1098-T returns did not contain educational expense information, 

we were able to analyze only the remaining 13 percent of tax returns 

(representing about 1.8 million returns) in the SOI sample that received a 

Form 1098-T and contained information concerning students’ educational 

expenses. We were unable to determine if this 13 percent of returns is 

representative of the entire population of Form 1098-Ts. (See appendix I 

for details.) All estimates and their associated confidence intervals can be 

found in appendix II.

We found that some people who appear to be eligible for tax credits and/or 

the tuition deduction did not claim them. The filers of about 77 percent of 

the tax returns that we were able to review were apparently eligible to 

claim one or more of the three tax preferences: the tax filers appear to have 

had a positive income tax liability, qualified educational expenses, an 

adjusted gross income below statutory phase-out limits, and were 

otherwise eligible.18 Among filers who were apparently eligible to claim 

one of the three tax preferences, 27 percent, representing about 374,000 tax 

filers, failed to do so. 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.

18 We examined whether tax filers had (1) tax liability after claiming other tax credits, (2) net 

educational expenses after accounting for scholarships and grants as reported on the Form 

1098-T, and (3) taxable income under program thresholds for tax year 2002. We also 

examined whether tax filers were married filing separately or filed a Form 1040EZ because 

this would prevent tax filers from being able to claim the education tax credits or tuition 

deduction. We were unable to consider other possible explanations, including whether tax 

filers did not meet certain qualification requirements, such as, in the case of the Hope tax 

credit, whether the student was in his or her first 2 years of postsecondary education. 

Eligibility for more than one tax preference for the same student does not mean that a tax 

filer may claim more than one—the tax filer must choose just one of the three tax 

preferences we discuss here per student.
Page 22 GAO-05-684 Federal Student Aid Programs

Some tax filers used a higher education tax credit or the tuition deduction 

but chose one that yielded a smaller reduction in their tax liability than they 

could have otherwise realized.19 Among those who claimed the tuition 

deduction, we estimate that 21 percent (representing about 51,000 tax 

filers) would have been better off claiming the Lifetime Learning tax credit 

while 8 percent (representing about 22,000 tax filers) of those claiming the 

Lifetime Learning credit would have reduced their taxes by a greater 

amount if they had claimed the tuition deduction instead. The average 

amount by which these tax filers failed to reduce their taxes was $83 for tax 

filers claiming the tuition deduction and $138 for those claiming the 

Lifetime Learning credit. Some tax filers making these decisions failed to 

realize larger reductions in their tax liabilities—10 percent of suboptimal 

tuition deduction claimants could have reduced their tax liabilities by 

about $158 or more and 10 percent of suboptimal Lifetime Learning credit 

claimants could have reduced their tax liabilities by about $237 or more. On 

the other hand, we found no cases where tax filers claiming a Hope credit 

would have been better off by claiming a Lifetime Learning credit instead.

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.

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 

19Our analysis considered the difference between (1) the 2002 maximum allowable Lifetime 

Learning credit, calculated from 20 percent of each tax filer’s reported qualified educational 

expenses of up to $5,000 and (2) the amount of possible deduction from income for qualified 

educational expenses of up to $3,000 in combination with the tax filer’s 2002 marginal tax 

rate. 
Page 23 GAO-05-684 Federal Student Aid Programs

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. 

Additional complexity associated with the use of these provisions may 

arise from the interaction of tax preferences and title IV student aid. 

Complexity may lead some not to claim a credit because they judge the 

added costs of filing for the credit to outweigh its benefits.

Multiple Tax Preferences Multiple tax preferences with similar purposes may place substantial 

demands on the knowledge and skills of millions of students and families. 

Twelve tax preferences are outlined in the IRS publication, Tax Benefits for 

Education,20 including four different tax preferences for educational 

saving.21 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.22 Attempting to learn about, compare, and choose from 

among these tax-preferred higher education savings options may require 

substantial knowledge and skill on the part of parents with young 

dependents beyond that required of savings and investment decisions in 

general.

Among the tax preferences we reviewed, three help students meet current 

costs—the Hope credit, Lifetime Learning credit, and the tuition deduction. 

These tax preferences also differ across many dimensions.23 Though 

similar in purpose, the three preferences have different eligibility criteria, 

benefit levels, and income-related phase-outs. For tax filers to obtain the 

maximum benefit from these preferences, they must first ascertain which 

20 Department of Treasury, IRS Publication 970, Tax Benefits for Education (2004).

21 The 12 programs and 2 others not listed in the Publication are listed in appendix III.

22 Albert J. Davis, Choice Complexity in Tax Benefits for Higher Education, National Tax 

Journal, Vol. LV, No. 3 (September 2002).

23 See, for example, U.S. Congress, Joint Committee on Taxation, Present Law and Analysis 

Relating to Tax Benefits for Higher Education (July 21, 2004); U.S. Congress, Joint 

Committee on Taxation, Study of the Overall State of the Federal Tax System, vol. II (April 

2001).
Page 24 GAO-05-684 Federal Student Aid Programs

preference they are eligible to use,24 and then correctly calculate which 

preference minimizes their tax liability by making separate calculations 

between the Hope and Lifetime Learning credits. If filers are within the 

phase-out range, they must calculate whether the tuition deduction is 

preferable to either credit. Tax filers with more than one student in 

postsecondary education may be eligible to claim multiple preferences, and 

may need to test different combinations of benefits to optimize tax savings.

Varying Qualified Expense 

Definitions 

Additional demands on the skill and knowledge of students and families 

may result from the fact that higher education tax preferences do not all 

use the same definition of qualified higher education expenses. What tax 

filers are allowed to claim as a qualified higher education expense varies, 

for example, between tax-exempt savings vehicles and tax credits. For 

example, while Coverdell Education Savings Accounts and section 529 

Qualified Tuition Programs permit tax filers to include tuition, fees, books, 

supplies, and equipment required for enrollment as part of their qualified 

educational expenses, higher education tax credits permit only tuition and 

fees required for enrollment to be counted as qualified higher education 

expenses. 25 These dissimilar definitions require that tax filers keep track 

of expenses separately, applying some expenses to some tax preferences, 

but not others, and the Joint Committee on Taxation has suggested that 

they may increase the likelihood of inadvertent errors and may also 

increase taxpayer frustration.26

Tax Rules Coordinating the 

Use of Multiple Preferences

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 

24 Credit eligibility depends, in part, upon the academic year in which the student is enrolled, 

the number of credits taken by the student, the student’s status with respect to a degree or 

certificate program, and the adjusted gross income of the parents.

25 Fees and expenses are qualified only if they must be paid to the institution as a condition 

of enrollment or attendance.

26 Study of the Overall State of the Federal Tax System, vol. II, 125-6.
Page 25 GAO-05-684 Federal Student Aid Programs

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. 

Consider, for example, how the use of college savings programs and the 

tuition deduction is affected by these rules. To calculate whether a 

distribution from a college savings program is taxable, a tax filer 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 $700.27 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.

Interaction between Tax 

Preferences and Student 

Financial Aid

Because the use of federal higher education tax preferences may affect a 

student’s eligibility for title IV federal student assistance—and the receipt 

of title IV federal student assistance may affect a student’s ability to use 

federal higher education tax preferences—many students and families 

must develop knowledge and skill sufficient to understand the relationship 

between the two. For example, the Internal Revenue Code requires tax 

filers to reduce the qualified higher education expenses they apply toward 

higher education tax credits by the amount of nontaxable aid they receive, 

including federal aid such as a Pell Grant. As a result, receiving a Pell 

Grant has the potential to reduce the amount of Hope or Lifetime Learning 

tax credit for which a filer is eligible. More generally, tax filers must take 

27 The new nontaxable distribution figure is calculated $1,200 x ($1,500/$3,600) = $500. The 

taxable portion then becomes $1,200 - $500 = $700.
Page 26 GAO-05-684 Federal Student Aid Programs

care to reduce their qualified higher education expenses by the amount of 

all nontaxable assistance that they receive—federal and nonfederal—

applying only adjusted qualified higher education expenses toward credits, 

deductions, and distributions from tax-exempt savings vehicles.

While some federal higher education tax preferences, such as tax credits, 

have no effect on one’s eligibility for title IV federal student assistance,28

others do: like other family savings, assets held in tax-exempt savings 

vehicles, such as a Coverdell Education Savings Account or a section 529 

savings account, are included in the calculation of the expected family 

contribution. In those instances where students are on the margin of 

eligibility to participate in need-based title IV federal aid programs, using 

these accounts may reduce the aid for which a student is eligible. 

The federal financial aid methodology in place prior to January 2004 

treated assets held in different savings vehicles in widely varying ways. 

According to one set of calculations, each dollar of funds held in a 529 

savings program resulted in a reduction of 15 cents in need-based aid, while 

each dollar of funds held in a Coverdell Educational Savings Account 

resulted in a $1.22 reduction in need-based aid.29 For families close to the 

income limit for eligibility for need-based aid, a $1,000 pretax investment in 

a Coverdell Educational Savings Account yielded a simulated final return 

(net of income taxation and foregone student aid) of -$1,194, leaving the 

family worse off than if they had not saved, or if they had saved using a 

regular savings account (+$490) or a traditional individual retirement 

account (+$844). In response to recommendations contained in our 2002 

report on student aid,30 the Department of Education modified its guidance 

concerning federal financial aid methodology,31 announcing that Coverdell 

assets would be treated as assets of the parent, rather than the student—

28 The Higher Education Act stipulates that the Hope and Lifetime Learning tax credits may 

not be considered either as estimated financial assistance in the assessment of aid eligibility, 

or as income or assets in the calculation of the expected family contribution. 

29 See Dynarski (2004). These calculations include school need-based grants and needbased federal aid (grant aid, work-study, and the Perkins and Stafford subsidized federal 

loans).

30 GAO, Student Aid and Tax Benefits: Better Research and Guidance Will Facilitate 

Comparison of Effectiveness and Student Use, GAO-02-751 (Washington, D.C.: Sept. 13, 

2002).

31 Department of Education, “Treatment of Coverdell Accounts and 529 Tuition Plans,” Dear 

Colleague Letter, DCL ID: GEN-04-02 (posted Jan. 22, 2004).
Page 27 GAO-05-684 Federal Student Aid Programs

and, therefore, result in the same reduction in need-based aid as 529 

savings program assets. Nonetheless, families that save in prepaid tuition 

programs remain subject to a dollar-for-dollar reduction in federal aid for 

each dollar distributed by the program.32

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 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. When research exists, it reaches 

varying conclusions about the effects of federal programs and tax 

preferences. Some studies identify no measurable effects on college 

attendance and persistence, while others find positive effects. (A 

bibliography listing the studies we reviewed is included at the end of this 

report.) Data and methodological challenges limit the certainty with which 

the effects of title IV programs and tax preferences, especially the effects of 

the latter, can be identified and result in widespread gaps in the knowledge 

of their effectiveness.33 In 2002 we recommended that Education sponsor 

research into key aspects of effectiveness of title IV programs and that 

Education and the Department of the Treasury collaborate on such 

research into the relative effectiveness of title IV programs and tax 

preferences.34 Since our prior report, little has been done to implement 

these recommendations, although Education is the process of establishing 

a postsecondary research center.

32 Dr. Susan Dynarski, testimony on “The Role of Higher Education Financing in 

Strengthening U.S. Competitiveness in a Global Economy” before the U.S. Congress, Senate 

Committee on Finance (July 22, 2004).

33 We looked for studies addressing a program or tax preference’s affect on rates of 

postsecondary attendance, persistence, and choice because these measures have been the 

focus of congressional concern as expressed in committee reports, statutorily established 

study commissions, and requests for our work from Congress.

34 GAO-02-751.
Page 28 GAO-05-684 Federal Student Aid Programs

Little Is Known about the 

Effectiveness of Federal 

Title IV Postsecondary 

Programs and Tax 

Preferences

We found no research on any aspect of effectiveness for several major title 

IV federal postsecondary programs and tax preferences, including the 

Federal Work-Study program, the tuition deduction, tax-exempt savings 

programs, and others. For other federal programs, no research exists on 

important aspects of program effectiveness. For example, no research has 

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. 

Limited Research about 

Federal Assistance Reaches 

Varying Conclusions about 

Some Aspects of 

Effectiveness 

When research on the effectiveness of federal assistance does exist, it 

reaches varying findings about title IV student aid and tax preferences. 

Some studies find that title IV programs increase the rates of college 

attendance and persistence, while others have identified no positive 

effects. Research on Pell Grants shows that they generally have little or no 

impact on attendance, with the exception of one study that found Pell 

Grants to have increased attendance for students from 22 to 35 years of 

age.35 The study attributed the program’s impact to the fact that older 

students generally attend less-expensive institutions where Pell Grants 

represent a larger share of the cost of college than the same size grants 

provided to students in general. The study also suggests that the limited 

impact of Pell Grants on attendance in general may be due to the fact that 

institutional aid awards may decrease at the same time as Pell Grant 

awards increase, creating a substitution effect that could diminish the 

impact of Pell Grants on attendance. According to the study, this occurs 

less often for older students because they tend to go to institutions that 

have less institutional aid for which Pell Grant awards might substitute. 

Some research has also found that Pell Grants, like other grant programs, 

appear to increase students’ persistence toward completing their studies.36

35 Hansen (1983), Kane (1995), and Kitmitto (2004) found that Pell Grants had little or no 

impact on attendance, while Seftor and Turner (2002) found they increased attendance for 

students of from 22 to 35 years of age.

36 See Li (1999), Bettinger (2004), and Kitmitto (2004) for research on the impact of Pell 

Grants on persistence. Angrist (1993) and Bound and Turner (2002) found that the G.I. Bill 

and other veteran’s benefits increased the amount of college completed. Dynarski (2003) 

found that the Social Security Student Benefit Program increased college completion as 

well. Dynarski (2004) found that merit aid increased college completion.
Page 29 GAO-05-684 Federal Student Aid Programs

Student loans have been found to modestly increase college attendance, 

persistence, and choice, but there are various limitations to consider. Of 

the three studies examining the effect of borrowing on college attendance, 

only one focuses on lower-income students.37 The study estimates that a 

$1,000 increase (in 1977 dollars) resulted in a 4.3 percentage point increase 

in college enrollment among dependent students with family incomes 

below $15,000. However, given long-term changes in lending markets, 

returns to schooling, and other conditions, students’ behavioral responses 

to equivalent changes in loan amounts may be different today from what 

they were in 1977.38 Findings about the impact of loans on persistence and 

choice are each based on only one study, and focus only on middle-income 

students.39 

We found one study concerning how the Hope and Lifetime Learning tax 

credits affect college attendance. The study found the credits to have no 

effect on college attendance. This may be because the students who 

receive these credits are likely to attend college anyway.40 The author 

acknowledges several limitations of the study. For example, the study uses 

income categories—as opposed to actual income—thereby introducing 

measurement error and attenuating the estimated effects of the credits on 

attendance. We also note that the study measured eligibility for the credits, 

rather than the receipt of tax credits. Measuring eligibility rather than the 

receipt of credits tends to underestimate the effect of credits on attendance 

because many tax filers who appear to be eligible for the credits do not 

37 See Reyes (1995), Dynarski (2002), and Long (2004), which focuses on low-income 

students.

38 Likewise, because the composition of financial aid has changed—the frequency and levels 

of borrowing have increased—an equivalent (real) change in loan amounts may elicit a 

different response. In particular, some students, especially lower-income students, may 

already have large loan levels and be less willing to increase their loan debt than they were 

in 1977.

39 See Reyes (1995) for estimates on how loans affect persistence and Dynarski (2002) for 

information on how loans affect college choice.

40 See Long (2003b), which does not separately examine the Hope and the Lifetime Learning 

tax credits. A few additional papers have simulated the effect of the Hope tax credit on 

college attendance, including Cronin (1997) and Cameron and Heckman (1999). These 

estimates, however, are based on the findings of how students respond to other financial aid 

policies, which may be different from the response to these tax credits. In addition, Cronin 

(1997) bases her analysis on a proposed version of the tax credit as opposed to the enacted 

tax credit.
Page 30 GAO-05-684 Federal Student Aid Programs

claim them.41 This study did not examine whether federal student tax 

credits affect persistence or choice.

In addition to the research into the federal tax, grant, and loan programs 

described above, a large body of research estimates the effects of both 

tuition changes and non-title IV financial aid programs on postsecondary 

attendance.42 These studies all found either an inverse relationship 

between the cost of tuition and level of enrollment or that financial 

assistance increased enrollment.43 One survey of this work concludes that 

a $1,000 reduction in net costs (in 2001 dollars) would result in a 3 to 6 

percent increase in college enrollment rates.44 Federal Pell Grants and 

postsecondary tax credits do not show similar effects in the studies we 

examined. Substitution effects caused by offsetting reductions in 

nonfederal aid may diminish the enrollment effect of Pell awards. Also, the 

impact of tax credits on enrollment may be limited by the fact that tax filers 

receive higher education tax credits the year following tuition outlays. 

Program design and information may also account for some of these 

differences: tuition information and many nonfederal aid benefits are 

known when a person is choosing whether or not to attend college; 

however, students may not be aware of tax credits and Pell Grants or their 

effects on price until after they have already decided to go to college. 

While federal grants, student loans, and tax credits were created to result in 

beneficial consequences, such as increasing college attendance, they have 

41 Bershadker and Cronin (2004).

42 There is also research on the effects of financial aid policy, in general, on choice. 

Linsenmeier, Rosen, and Rouse (2002) and Van Der Klaauw (2002) found that financial aid 

policy at specific schools positively affected the likelihood of whether accepted students 

chose to attend those schools. Avery and Hoxby (2003), focusing on high aptitude students, 

found that larger amount of grants, loans, and work-study made from all sources—federal, 

state, and institutions—were associated with students who were more likely to attend that 

school. Although it is unlike any existing federal program, Dynarski (2000) found that the 

Georgia Hope program shifted some would-be 2-year school students to 4-year schools and 

caused some students to choose to stay within state for college.

43 See Leslie and Brinkman (1988), McPherson and Shapiro (1991), Rouse (1994), Kane 

(1995) and (1999), and Cameron and Heckman (1999) on the effects of tuition changes. See 

studies of the Georgia Hope Scholarship by Dynarski (2000) and Cornwell, Mustard, and 

Sridhar (2004) as well as those conducted by Bound and Turner (2002) on the G.I. Bill, by 

Dynarski (2003) on the Social Security Benefit Program, and by Kane (2003) on the Cal 

Grant Program.

44 Kane (2002).
Page 31 GAO-05-684 Federal Student Aid Programs

also been found to result in the raising of tuition by institutions in some 

circumstances.45 One potential explanation is that institutions raise tuition 

because federal aid increases the amount students are able to pay. 

Alternatively, federal aid may increase the demand for education, and with 

no offsetting factors, this drives the price of tuition up.

Data and Methodological 

Challenges Hinder Research

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. Additionally, to analyze the tax programs, actual 

tax return data are preferred to indirect or processed data, but researchers 

are often limited to publicly available data containing self-reported 

information on income because of tax data confidentiality protections. 

Methodological challenges add to the difficulty of estimating the effects of 

these programs. In general, researchers can reliably identify the behavioral 

effects of a program when one factor changes while all others remain 

unchanged. For example, if no other factors change, a researcher could 

identify the impact of postsecondary tax credits on enrollment by 

comparing enrollment rates before and after the tax credits are enacted. 

Typically, however, many factors change simultaneously, either offsetting 

or enhancing the effect of the policy intervention being studied. For 

example, tuition rates may rise at the same time that postsecondary tax 

credits are introduced, or other sources of postsecondary assistance—such 

as federal, state, or institutional grants—may decrease. These changes 

undermine researchers’ ability to reliably isolate the behavioral effects of 

the policy under study. While researchers in some fields address this 

problem through the use of experiments, few opportunities exist for 

experimentation in the study of postsecondary education finance. 

Alternatively, researchers may address this problem through the use of 

quasi-experimental research designs, which attempt to approximate the 

random assignment of participants to treatment and control groups by 

matching participants to nonparticipants having similar characteristics. In 

practice, however, data limitations often make this difficult to implement. 

To isolate the impact of tax credits on college attendance, for example, 

45 For studies of the effect on tuition, see Li (1999) for Pell Grants, Long (2003b) for tax 

credits, and Acosta (2001) for federal grant and federal loan aid. The Georgia Hope 

Scholarship has also been found to increase college costs by Long (2003a).
Page 32 GAO-05-684 Federal Student Aid Programs

researchers may need to compare credit recipients with nonrecipients who 

are similar in a range of ways—including academic preparation, family 

income and wealth. National surveys often do not contain complete data 

on all of these necessary factors both for those who attend and do not 

attend college.

Steps to Support 

Effectiveness Research

In 2002, we recommended that Education sponsor research into key 

aspects of effectiveness of title IV programs, and that Education and the 

Department of the Treasury collaborate on such research into the relative 

effectiveness of title IV programs and tax preferences.46 In order to provide 

Congress with information about the effectiveness of title IV programs, we 

recommended in 2002 that Education sponsor research on the impact of 

title IV programs on postsecondary attendance, choice, completion, and 

costs. To provide information about the relative effectiveness of 

Education’s direct expenditure programs and Treasury’s postsecondary tax 

provisions, we recommended that the Secretaries of Education and 

Treasury collaborate in studying the combined effects of tax preferences 

and title IV aid. Few steps have been taken to implement these 

recommendations. However, Education is in the process of establishing a 

postsecondary research center that will, among other things, examine the 

impact of title IV programs.

As we noted in our 2002 report, research into the effectiveness of different 

forms of postsecondary education assistance is important. 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. As we stress in our recent report 

21st Century Challenges: Reexamining the Base of the Federal 

Government47, 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. 

46 GAO, Student Aid and Tax Benefits: Better Research and Guidance Will Facilitate 

Comparison of Effectiveness and Student Use, GAO-02-751 (Washington, D.C.: September 

13, 2002).

47 GAO, 21st Century Challenges: Reexamining the Base of the Federal Government, GAO05-325SP (Washington, D.C.: February 2005).
Page 33 GAO-05-684 Federal Student Aid Programs

In our January 2004 report on OMB’s Program Assessment Rating Tool 

(PART),48 we recommended that OMB target PART assessments based on 

such factors as the relative priorities, costs, and risks associated with 

related clusters of programs and activities and that OMB select related or 

similar programs for review in the same year to facilitate comparisons and 

trade-offs.49 Furthermore, in our June 14, 2005 testimony before the Senate 

Committee on Homeland Security and Governmental Affairs, 

Subcommittee on Federal Financial Management, Government 

Information, and International Security, we reported that it is often critical 

to understand how programs fit with a portfolio of tools and strategies in 

order to capture whether programs complement and support related 

programs, are duplicative or redundant, or work at cross purposes to other 

initiatives.50 The different tax preferences and title IV programs in place to 

help students and families finance postsecondary education are a good 

example of the sort of related clusters of programs and activities to which 

we were referring. 

Concluding 

Observations

Congress has adopted a range of tools to help students and families pay for 

postsecondary education, including grants, loans, and tax preferences. 

Many title IV financial aid programs have a long history, while most of the 

tax preferences do not. The addition of tax preferences to the title IV grant 

and loan programs has increased the number of options and given students 

and families new choices about how to combine saving, borrowing, and 

current income to meet the costs of postsecondary education. 

Postsecondary tax preferences are widely thought to present challenges of 

complexity to students and families. As we have shown, tax filers appear 

to have some difficulty in making fully effective use of some postsecondary 

48 GAO, Performance Budgeting: Observations on the Use of OMB’s Program Assessment 

Rating Tool for the Fiscal Year 2004 Budget, GAO-04-174 (Washington, D.C.: January 30, 

2004).

49 OMB describes the PART as a diagnostic tool meant to provide a consistent approach to 

evaluating federal programs as part of the executive budget formulation process. It applies 

25 questions under four broad topics: (1) program purpose and design, (2) strategic 

planning, (3) program management, and (4) program results. It also uses additional 

questions specific to the mechanism or approach used to deliver the program, such as 

grants or credit programs (e.g. student loans). OMB has not systematically applied the 

PART to tax preferences.

50 21st Century Challenges: Performance Budgeting Could Help Promote Necessary 

Reexamination, GAO-05-709T (Washington D.C.: June 14, 2005).
Page 34 GAO-05-684 Federal Student Aid Programs

tax preferences now in the tax code. Also, although millions of tax filers 

are receiving billions of dollars in assistance with postsecondary costs 

through both title IV programs and tax preferences, little is known about 

the effectiveness of any of these forms of assistance in part because of data 

and methodological issues. As we recommended in our 2002 report on 

federal financial aid,51 it is important that information about the 

effectiveness of both tax preferences and title IV federal grant and loan 

programs be developed so that decision makers in Congress and in the 

executive branch can make efficient use of limited federal resources and 

reexamine, if necessary, the tools used to help students and families pay for 

postsecondary education.

Agency Comments and 

Our Evaluation

We provided a draft of this report to the Internal Revenue Service, the 

Department of the Treasury, and the Department of Education for review 

and comment. The Internal Revenue Service provided technical 

comments, which we incorporated. The Department of the Treasury did 

not provide comments on our report.

In its written comments, Education disagreed with our conclusion on the 

extent that title IV programs have been studied. Education also said that 

we did not properly acknowledge the role that its National Postsecondary 

Student Aid Study (NPSAS) played in our analysis and that the report did 

not cite many Departmental publications prepared on the basis of NPSAS 

and other Departmental data collections, such as Persistence and 

Attainment of Beginning Students with Pell Grants.52 In our report, we 

describe NPSAS as a comprehensive study examining how students and 

their families pay for postsecondary education and note that we relied 

upon NPSAS data to conduct our analysis. Further, we explain in our 

report that our findings about the effectiveness of federal postsecondary 

assistance are based upon studies that meet professional standards of 

econometric analysis and contain acceptably identified statistical estimates 

51 GAO-02-751.

52 Wei, C.C., and Horn, L., Persistence and Attainment of Beginning Students with Pell 

Grants, NCES 2002-169, U.S. Department of Education, National Center for Education 

Statistics (Washington, D.C.: May 2002).
Page 35 GAO-05-684 Federal Student Aid Programs

of program effects. We do not include publications that fail to meet these 

standards. While the data collections cited by the Department provide 

useful descriptive information concerning title IV programs, they do not 

provide data sufficient to determine key program effects. In particular, 

because these data collections do not contain information about those who 

do not attend postsecondary institutions, they are of limited use in 

establishing the effectiveness of title IV programs, especially with respect 

to postsecondary attendance—a challenge we note in our report. 

Consequently, publications based upon these data share this limitation. 

With respect to the study specifically cited by the Department—Persistence 

and Attainment of Beginning Students with Pell Grants—it does not 

contain acceptably identified estimates of Pell Grant effects on persistence. 

In particular, the study does not implement a design and include variables 

that can isolate the effect of Pell Grant receipt on persistence from other 

factors that are associated both with persistence and with Pell Grant 

receipt, including academic preparation, changes in family income, and the 

net cost of education. Thus the study’s estimate of the effect of Pell Grants 

on persistence may reflect not only the influence of the Pell Grant, but also 

the influence of these other factors. Consequently, its results cannot be 

used to reliably assess the impact of Pell Grant receipt on persistence.53 

Although Education stated that our report presented an incomplete and 

inaccurate assessment of its research, it nonetheless agreed that more 

research should be done and that it is “committed to continuing to increase 

its research associated with the effectiveness of the [its] programs.” The 

Department expressed a similar commitment in response to our September 

2002 report54 which found that Education had undertaken little work 

identifying the impact of its grant and loan programs and recommended 

that the Department sponsor research on the impact of title IV programs on 

postsecondary education attendance and choice, completion, and costs.

53 A similar conclusion is reached in Review of NCES Research on Financial Aid and 

College Participation and Omitted Variables and Sample Selection Issues in the NCES 

Research on Financial Aid and College Participation, Reports Prepared for the Advisory 

Committee on Student Financial Assistance by Donald E. Heller and William E. Becker 

(September 2003).

54 GAO, Student Aid and Tax Benefits: Better Research and Guidance Will Facilitate 

Comparison of Effectiveness and Student Use, GAO-02-751 (Washington, D.C.: Sept. 13, 

2002).
Page 36 GAO-05-684 Federal Student Aid Programs

As agreed with your offices, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days after its 

date. At that time, we will send copies of this report to The Commissioner 

of Internal Revenue, The Secretary of Education, The Secretary of the 

Treasury, and other interested parties. This report is available at no charge 

on GAO’s web site at http://www.gao.gov.

If you or any of your staff have any questions, please contact Michael 

Brostek at (202) 512-9110 or Cornelia Ashby at (202) 512-7215. You may 

also reach us by e-mail at BrostekM@gao.gov and AshbyC@gao.gov. 

Contact points for our Offices of Congressional Relations and Public 

Affairs may be found on the last page of this report. Key contributors to 

this report were David Lewis, Assistant Director, Jeff Appel, Assistant 

Director, Eric Mader, Thomas Weko, John Mingus, Cynthia Decker, Jeffrey 

Weinstein, and Katherine France.

Michael Brostek

Director, Tax Issues

Strategic Issues 

Cornelia M. Ashby 

Director, 

Education Workforce and 

Income Security 
Page 37 GAO-05-684 Federal Student Aid Programs

Appendix I

Objectives, Scope, and Methodology AAppenednxidexiIs

Our review focused on answering the following three questions: (1) How 

does title IV grant and loan assistance compare with that provided through 

the tax code? (2) To what extent are tax filers effectively using the 

opportunities presented by postsecondary tax preferences? (3) What is 

known about the effectiveness of federal assistance in promoting college 

attendance, providing students with a wider range of choices among 

postsecondary institutions, or encouraging students to persist in their 

studies?

To compare title IV programs and tax preferences, we reviewed articles, 

studies, and reports on federal assistance for postsecondary education 

published by the Joint Committee on Taxation, the Internal Revenue 

Service (IRS), the Department of Education’s National Center for 

Education Statistics and Office of Federal Student Aid, and other sources. 

Programs or tax preferences that served more than 500,000 participants 

were judged to be, for the purpose of our review, major. To obtain 

information on participant numbers and other comparative information, 

we used (1) fiscal year 2004 information from the President’s fiscal year 

2006 budget request,1

 (2) IRS’s 2002 Statistics of Income (SOI) data set 

including IRS Form 1098-T information for all tax filers in the 2002 SOI 

sample, (3) 2003-2004 school year data from the National Postsecondary 

Student Aid Study (NPSAS),2

 (4) data as of December 31, 2004, on the 

number of accounts and amounts invested in section 529 Qualified Tuition 

Programs from the College Savings Plans Network,3

 and (5) tax year 2002 

data on the estimated number of contributions to Coverdell Education 

Savings Accounts from IRS. We also reviewed studies conducted by 

Congressional Research Service, the Congressional Budget Office, GAO, 

the Department of the Treasury, the Urban Institute, and the College Board. 

We also interviewed individuals from the Congressional Research Service, 

Education, IRS, Treasury, and universities. 

The 2002 SOI data and 2003-2004 NPSAS data were the most recent data 

available. The SOI individual tax return file is a stratified probability 

1

 Office of Management and Budget, Appendix, Budget of the United States Government, 

Fiscal Year 2006 (Washington, D.C.: Feb 7, 2005).

2

 The NPSAS school year begins July 1 and ends on June 30 of the following year.

3

 The College Savings Plan Network collects information from the states about the numbers 

of 529 accounts. The data are voluntarily provided by the states. On the basis of our 

interview with College Savings Plan Network staff, we determined that these data were 

sufficiently reliable for our use in this study.
Appendix I

Objectives, Scope, and Methodology

Page 38 GAO-05-684 Federal Student Aid Programs

sample of income tax returns filed with IRS. The SOI sample of 175,000 

returns represented the approximately 130 million tax returns filed for 

2002. NPSAS is a comprehensive study that examines how students and 

their families pay for postsecondary education. It includes nationally 

representative samples of 79,852 undergraduates, 9,611 graduate students, 

and 1,283 first-professional students enrolled during the 2003-2004 

academic year. The NPSAS data are based on student interviews and 

administrative records, and NPSAS includes survey results from both 

students who received financial aid and those who did not. To assess the 

reliability of the SOI and NPSAS sample data, we reviewed existing 

information about the samples and performed electronic testing of the 

required data elements to detect obvious problems in accuracy and 

completeness. We determined that SOI and NPSAS data, as well as other 

data used to provide certain specific pieces of information, were 

sufficiently reliable for this report. 

Because estimates from the SOI and NPSAS data are based on samples, 

they are subject to sampling errors. These sampling errors measure the 

extent to which the point estimates may vary from the actual values in the 

population of tax filers. Each of our estimates is surrounded by a 95 

percent confidence interval: an interval that 95 times out of 100 will contain 

the true population value. The upper and lower bounds of the 95 percent 

confidence intervals for each estimate are presented in the tables in 

appendix II.

To examine the extent to which tax filers are effectively using 

postsecondary education tax preferences, we used much of the same 

information we obtained for the description and comparison of the 

programs and tax preferences. In addition we estimated the number of tax 

filers who were eligible for an education tax credit or tuition and fees 

deduction but either did not claim one at all or appeared to make a lessthan-optimal choice among these tax preferences and the amounts of tax 

benefits lost as a result. To do this analysis we used IRS’s SOI sample of 

individual tax returns for tax year 2002 and all Form 1098-T information 

returns for tax filers in the sample. Postsecondary institutions participating 

in Education’s student aid programs are required to issue Form 1098-Ts to 

all enrolled students. Form 1098-Ts include the student’s name, address, 

and social security number, and the school’s taxpayer identification 

number (TIN). Form 1098-Ts also indicate if the student was a graduate 

student and if he or she was enrolled at least half-time. Postsecondary 

institutions had the option of providing information concerning students’ 

educational expenses, scholarships, and grants but were not required to do 
Appendix I

Objectives, Scope, and Methodology

Page 39 GAO-05-684 Federal Student Aid Programs

so. By combining information on the Form 1098-Ts with information on the 

tax return, we were able to identify the postsecondary student population 

in the SOI sample and the choices that tax filers made concerning 

education-related tax preferences. 

To conduct the analysis, we had to exclude two types of tax returns from 

consideration. Because a person cannot claim the tuition deduction or the 

Hope or Lifetime Learning credits if he or she is claimed as a dependent on 

someone else's tax return, we excluded dependent tax returns in the SOI 

sample from our analysis. We also excluded the tax returns of tax filers 

that received a Form 1098-T with no information concerning students’ 

educational expenses because we could not analyze the tax returns without 

these data. This included the tax returns of individuals who received an 

education tax credit or tuition deduction but did not receive a Form 1098-T. 

These limitations excluded 87 percent of the returns in the sample.

We considered different explanations for why those tax filers with 

education expenses did not claim an education tax credit or tuition 

deduction. For example, we examined whether tax filers had (1) income 

that exceeded the program thresholds for tax year 2002, (2) no taxable 

income, (3) no tax liability after claiming other tax credits, or (4) no net 

educational expenses after accounting for scholarships and grants as 

reported on the Form 1098-T. We also examined whether tax filers were 

married filing separately or filed a Form 1040EZ because this would 

prevent tax filers from being able to claim the education tax credits or 

tuition deduction. 

We calculated tax filers’ optimal choice among the Hope and Lifetime 

Learning credits, and the tuition deduction on the basis of program 

eligibility criteria for tax year 2002. Tax filers are limited to claiming either 

a tuition deduction or an education tax credit for the same student. 

Eligibility is restricted by modified adjusted gross income and, in the case 

of the Hope tax credit, whether or not students are enrolled at least halftime. 

We shared our methodology for this analysis with tax policy researchers 

outside of GAO and incorporated their comments into our analysis. 

To identify available academic research on the effectiveness of major 

federal financial aid programs, we reviewed studies that examined whether 

the programs or tax preferences affect college attendance, persistence, and 

choice. We looked for these measures because they have been the focus of 
Appendix I

Objectives, Scope, and Methodology

Page 40 GAO-05-684 Federal Student Aid Programs

congressional concern as expressed in committee reports, statutorily 

established study commissions, and requests for our work from Congress. 

We examined studies we found through searches in EconLit, Digital 

Dissertations from ProQuest, and the National Bureau of Economic 

Research web site. These online sources are nationally recognized 

repositories of research results. In addition, we also examined relevant 

studies cited in studies found from our searches. Some of these studies 

were excluded from further assessment because they did not undertake 

original data analysis that could identify the effectiveness of federal 

financial aid programs. We assessed studies that provided an original 

empirical analysis according to professional standards of econometric 

analysis for their methodological rigor. The results of the studies that we 

judged to contain acceptably identified statistical estimates formed the 

basis for our findings about the availability of information concerning the 

relative effectiveness of major federal financial aid programs.

We conducted our review from May 2004 through June 2005 in accordance 

with generally accepted government auditing standards.
Page 41 GAO-05-684 Federal Student Aid Programs

Appendix II

Confidence Intervals ApendxiI

We used two data sets in this review: Education’s 2003-2004 National 

Postsecondary Student Aid Study and the Internal Revenue Service’s 2002 

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 report. For figures drawn from these data, we provide both 

point estimates and confidence intervals.

Table 7: Description of Federal Student Aid Programs Authorized under Title IV of the Higher Education Act

Source: GAO analysis of 2003-2004 National Postsecondary Student Aid Study data.

Number of recipients Total award Average award Median income

Type of assistance

Lower

bound

Upper

bound Lower bound Upper bound

Lower

bound

Upper

bound

Lower

bound

Upper

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 

Educational Opportunity 

Grant

530,408 577,316 466,079,305 522,325,472 857 892 22,022 23,484

Federal Work- Study 1,023,755 1,089,687 1,927,247,135 2,090,819,033 1,856 1,901 45,000 48,231

Federal Perkins Loan 472,640 517,207 907,800,538 1,004,290,295 1,887 1,932 37,623 40,814

Subsidized FFEL or 

Direct Stafford Loan

2,505,118 2,604,668 7,962,531,788 8,329,729,995 3,155 3,188 43,834 45,446

Unsubsidized FFEL or 

Direct Stafford Loan

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 PLUS 

Loan

609,125 659,071 5,458,550,634 5,979,275,038 8,787 9,019 69,547 73,439

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 

Educational Opportunity 

Grant

684,528 745,839 368,492,546 415,343,758 526 548 10,425 11,626

Federal Work- Study 676,216 766,317 933,916,755 1,084,530,206 2,192 2,303 9,808 11,525

Federal Perkins Loan 522,918 595,499 839,749,704 970,851,318 2,648 2,752 9,181 11,628

Subsidized FFEL or 

Direct Stafford Loan

3,658,692 3,869,237 15,604,880,694 17,068,144,196 4,244 4,340 18,754 20,148

Unsubsidized FFEL or 

Direct Stafford Loan

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 PLUS 

Loan

0 0 0 0 00 00
Appendix II

Confidence Intervals

Page 42 GAO-05-684 Federal Student Aid Programs

Table 8: Selected Postsecondary Education Tax Preferences

Source: GAO analysis of Statistics of Income data for 2002.

Table 9: Tax Filers Claiming an Education Tax Credit or Tuition Deduction

Source: GAO analysis of Statistics of Income data for 2002.

Table 10: Percentage of Aid Recipients and Dollars of Aid by Income Category for Dependent Students Served by Selected Title 

IV Programs

Source: GAO analysis of 2003-2004 National Postsecondary Student Aid Study data.

Number of returns Total benefits Average benefit Median income

Type of assistance

Lower

bound

Upper

bound Lower bound Upper bound

Lower

bound

Upper

bound

Lower

bound

Upper

bound

Hope Credit 3,115,595 3,414,023 3,064,601,005 3,399,426,275 965 1,016 37,506 41,004

Lifetime Learning Credit 3,307,354 3,612,179 1,560,825,683 1,740,857,453 462 493 38,060 41,001

Student Loan Interest 

Deduction

6,432,399 6,849,170 848,115,632 937,085,664 129 140 42,378 44,657

Tuition Deduction 3,295,741 3,599,012 1,226,452,349 1,370,953,823 364 391 51,808 56,842

1998 1999 2000 2001 2002

Hope Credit, Lifetime Learning 

Credit, and Tuition Deduction

Lower bound 4,482,106 6,233,732 6,606,583 6,997,019 9,319,692

Upper bound 4,827,719 6,639,576 7,024,049 7,428,088 9,809,833

Program

Dependent 

students

$0-

20,000

$20,001-

40,000

$40,001-

60,000

$60,001-

80,000

$80,001-

100,000

More than

$100,000

Pell Grant Recipients Lower bound 36.66 45.41 13.17 1.41 0 0

Upper bound 38.89 47.72 14.76 2.02 0 0

Dollars Lower bound 46.29 42.41 7.38 0.65 0 0

Upper bound 48.82 44.89 8.5 1.04 0 0

Stafford 

Subsidized Loan

Recipients Lower bound 15.41 26.79 22.45 16.1 8.38 6.23

Upper bound 16.94 28.73 24.3 17.72 9.61 7.33

Dollars Lower bound 15.32 27.14 22.83 15.68 7.92 5.87

Upper bound 17.07 29.35 24.94 17.51 9.3 7.08

Stafford 

Unsubsidized 

Loan

Recipients Lower bound 6.51 12.83 13.15 17.69 16.68 27

Upper bound 7.88 14.76 15.21 19.94 18.84 29.5

Dollars Lower bound 6.22 11.05 11.31 16.69 17.55 30.3

Upper bound 7.75 12.99 13.41 19.2 20.15 33.37
Appendix II

Confidence Intervals

Page 43 GAO-05-684 Federal Student Aid Programs

Table 11: Percentage of Aid Recipients and Dollars of Aid by Income Category for Independent Students Served by Selected 

Title IV Programs

Source: GAO analysis of 2003-2004 National Postsecondary Student Aid Study data

Table 12: Percentage of Tax Filers Claiming Hope and Lifetime Learning Credits and Tuition Deduction and Tax Preference 

Dollars by Income Category, Tax Year 2002

Source: GAO analysis of Statistics of Income data for 2002.

Program $0- 20,000

$20,001-

40,000

$40,001-

60,000

$60,001-

80,000

$80,001-

100,000

More than

$100,000

Pell Grant Recipients Lower bound 66.28 26.59 4.59 0 0 0

Upper bound 68.35 28.57 5.62 0 0 0

Dollars Lower bound 71.68 23.62 2.32 0 0 0

Upper bound 73.77 25.65 2.96 0 0 0

Stafford 

Subsidized Loan

Recipients Lower bound 49.67 27.54 10.78 4.04 1.3 0.86

Upper bound 52.62 30.38 13.48 5.36 1.98 2.38

Dollars Lower bound 49.93 25.26 10.05 3.87 1.2 0.46

Upper bound 54.61 29.79 14.73 5.4 2.05 2.65

Stafford 

Unsubsidized 

Loan

Recipients Lower bound 44.65 26.59 12.09 5.48 2.31 2.26

Upper bound 47.82 29.75 15.18 6.87 3.18 4.08

Dollars Lower bound 44.28 22.51 11.96 6.22 2.86 3.42

Upper bound 48.37 26 14.78 8.49 4.12 6.99

Type of Aid $0-20,000

$20,001-

40,000

$40,001-

60,000

$60,001-

80,000

$80,001-

100,000

More than

$100,000

Hope Credit Tax filers Lower bound 16.63 30.43 18.06 16.2 9.45 0.1

Upper bound 20.29 34.75 21.67 19.7 12.27 0.62

Dollars Lower bound 9.14 30.19 20.37 21.75 8.66 0

Upper bound 11.82 35.06 24.77 26.52 11.7 0.03

Lifetime 

Learning Credit

Tax filers Lower bound 14.59 32.04 23.06 14.74 6.73 0.14

Upper bound 17.89 36.25 26.85 18.03 9.14 0.67

Dollars Lower bound 10.73 31.78 22.56 18.58 5.98 0

Upper bound 13.97 37.02 27.24 23.32 8.79 0.02

Tuition 

Deduction

Tax filers Lower bound 18.38 16.56 14.81 11.03 14.08 15.23

Upper bound 21.91 20.04 18.14 14.01 17.33 18.49

Dollars Lower bound 9.41 8.83 11.55 11.53 20.79 26.16

Upper bound 11.93 11.63 15.1 15.52 25.91 31.65
Appendix II

Confidence Intervals

Page 44 GAO-05-684 Federal Student Aid Programs

Table 13: Percentage of Form 1098-Ts with Postsecondary Expense Information in 

2002: Point Estimates

Source: GAO analysis of Statistics of Income data for 2002.

Table 14: Percentage of Form 1098-Ts with Postsecondary Expense Information in 2002: Confidence Intervals

Source: GAO analysis of Statistics of Income data for 2002.

Table 15: Percentage of Taxpayers Apparently Eligible to Claim an Education Tax 

Credit or Tuition Deduction in 2002: Point Estimates

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: 

Confidence Intervals

Source: GAO analysis of Statistics of Income data for 2002.

Number of

returns

Percent of

returns

1098Ts with expense information 1,795,180 13

1098Ts without expense information 12,356,444 87

Number of returns:

Lower bound

Number of returns:

Upper bound

Percent of returns:

Lower bound

Percent of returns:

Upper bound

1098Ts with expense information 1,687,744.88 1,902,614.62 11.97 13.4

1098Ts without expense information 12,087,410.46 12,625,476.86 86.6 88.03

Number of returns Percent of returns

Total 1,795,180 100

Potentially eligible 1,386,659 77

All Other 408,521 23

Number of Returns:

Lower bound

Number of returns:

Upper bound

Percent of returns:

Lower bound

Percent of returns:

Upper bound

Total 1,795,176.75 1,795,179.75 100 100

Potentially eligible 1,290,394.34 1,482,923.26 74.83 79.66

All other 360,292.26 456,749.64 20.34 25.17
Appendix II

Confidence Intervals

Page 45 GAO-05-684 Federal Student Aid Programs

Table 17: Percentage of Apparently Eligible Taxpayers to Claim an Education Tax 

Credit or Tuition Deduction That Failed to Do So in 2002: Point Estimates

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: Confidence Intervals

Source: GAO analysis of Statistics of Income data for 2002.

Table 19: Amounts by Which Apparently Eligible Taxpayers Failed to Reduce Their 

Tax Liability: Point Estimates 

Source: GAO analysis of Statistics of Income data for 2002.

Number of returns Percent of returns

Failed to claim 373,595 27

Number of returns:

Lower bound

Number of returns:

Upper bound

Percent of returns:

Lower bound

Percent of returns:

Upper bound

Failed to claim 323,504.26 423,686.08 23.85 30.04

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
Appendix II

Confidence Intervals

Page 46 GAO-05-684 Federal Student Aid Programs

Table 20: Amounts by Which Apparently Eligible Taxpayers Failed to Reduce Their 

Tax Liability: Confidence Intervals 

Source: GAO analysis of Statistics of Income data for 2002.

Table 21: 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

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: Confidence Intervals

Source: GAO analysis of Statistics of Income data for 2002.

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

Number of returns Percent of returns

Would have been better off 

claiming Lifetime Learning 

Credit

50,908 21

Number of Returns:

Lower bound

Number of returns:

Upper bound

Percent of returns:

Lower bound

Percent of returns:

Upper bound

Would have been better off claiming Lifetime 

Learning Credit

34,819.89 70,274.77 14.53 29.33
Appendix II

Confidence Intervals

Page 47 GAO-05-684 Federal Student Aid Programs

Table 23: Amounts by Which Apparently Eligible Taxpayers Could Have Reduced 

Their Tax Liability in 2002: Point Estimates

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: Confidence Intervals

Source: GAO analysis of Statistics of Income data for 2002.

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

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 .
Appendix II

Confidence Intervals

Page 48 GAO-05-684 Federal Student Aid Programs

Table 25: 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

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: Confidence Intervals

Source: GAO analysis of Statistics of Income data for 2002.

Table 27: Amounts by Which Apparently Eligible Taxpayers Could Have Reduced 

Their Tax Liability in 2002: Point Estimates

Source: GAO analysis of Statistics of Income data for 2002.

Number of returns Percent of returns

Would have been better off 

claiming the Tuition 

Deduction

22,469 8

Number of Returns:

Lower bound

Number of returns:

Upper bound

Percent of returns:

Lower bound

Percent of returns:

Upper bound

Would have been better off claiming the 

Tuition Deduction

12,228.08 37,165.3 4.48 13.61

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
Appendix II

Confidence Intervals

Page 49 GAO-05-684 Federal Student Aid Programs

Table 28: Amounts by Which Apparently Eligible Taxpayers Could Have Reduced 

Their Tax Liability in 2002: Confidence Intervals

Source: GAO analysis of Statistics of Income data for 2002.

Table 29: 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 

Source: GAO analysis of Statistics of Income data for 2002.

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

Number of returns Percent of returns

Total 271,494 100

Would have been better off 

claiming Lifetime Learning 

Credit

0 0

All other 271,494 100
Appendix II

Confidence Intervals

Page 50 GAO-05-684 Federal Student Aid Programs

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: Confidence Intervals

Source: GAO analysis of Statistics of Income data for 2002.

Table 31: Percentage of Suboptimal Choices Made by Paid Tax Preparers: Point 

Estimates

Source: GAO analysis of Statistics of Income data for 2002.

Table 32: Percentage of Suboptimal Choices Made by Paid Tax Preparers: Confidence Intervals

Source: GAO analysis of Statistics of Income data for 2002.

Number of Returns:

Lower bound

Number of returns:

Upper bound

Percent of returns:

Lower bound

Percent of returns:

Upper bound

Total 271,491.04 271,494.04 100 100

Would have been better off claiming 

Lifetime Learning Credit

000 0

All other 271,491.04 271,494.04 100 100

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 assistance 4,822 1.08

Taxpayers Making Suboptimal choice

Number of returns:

Lower bound

Number of returns:

Upper bound

Percent: Lower

bound

Percent: Lower

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 assistance 1,131 9,328 0.26 2.91
Page 51 GAO-05-684 Federal Student Aid Programs

Appendix III

Postsecondary-Education-Related Tax 

Preferences ApendxiI

We analyzed the following postsecondary-education-related tax 

preferences in detail in this review.

Lifetime Learning Credit: Income-based tax credit claimed by tax filer 

on behalf of students enrolled in one or more postsecondary education 

courses.

Hope Credit: Income-based tax credit claimed by tax filer 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.

Student Loan Interest Deduction: Income-based tax deduction claimed 

by tax filer on behalf of students who took out qualified student loans while 

enrolled at least half time.

Tuition and Fees Deduction: Income-based tax deduction claimed by tax 

filer on behalf of students who are enrolled in one or more postsecondary 

education course and have either a high school diploma or a General 

Educational Development (GED) credential.

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.

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. 

The following postsecondary-education-related tax preferences were not 

included in this review.

Scholarships, Fellowships, Grants, and Tuition Reductions Income 

Exclusion: Scholarships and fellowships paid directly to degree-candidate 

students or to their educational institutions for tuition and fees are not 

taxed as income. However, scholarships and fellowships covering room 

and board or transportation or paid in return for services, such as teaching, 

are taxable. Also, tuition reductions, for example discounts given to 

employees of an educational institution or their children, are not counted 

as income for tax purposes.
Appendix III

Postsecondary-Education-Related Tax 

Preferences

Page 52 GAO-05-684 Federal Student Aid Programs

Employer-Provided Education Benefits Exclusion: Financial 

assistance provided by employers to employees up to $5,250 in 2004 to pay 

for employee educational expenses is not counted as income for tax 

purposes. Only funds used to pay for tuition, fees, books, equipment, and 

similar expenses qualify. Funds from an employer and used to pay for 

meals, lodging, or transportation count as income for tax purposes.1

Student Loan Forgiveness Exclusion: Student loan repayment 

assistance or cancellation provided in exchange for working for a period of 

time in certain professions for any of a broad class of employers is not 

treated is taxable income.

Education Savings Bonds: Interest earned on U.S. savings bonds is not 

taxed if the bond holder is paying postsecondary education tuition and fees 

or making contributions to a 529 qualified tuition program or a Coverdell 

education savings account. The exclusion is available to tax filers with 

modified adjusted gross incomes below $74,850 ($119,750 if married filing 

jointly or qualified widow(er)). 

Business Expense Deduction of Work-Related Education: Tax filers 

may deduct the cost of work-related education if the education is required 

by their employer or the law to maintain the tax filer’s present salary, 

status, or job and maintains or improves skills needed in the tax filer’s 

present work. Education to meet the minimum educational requirements of 

the tax filer’s present trade or business or education towards a new trade or 

business does not qualify. The tax filer must itemize deductions on form 

1040 Schedule A, C, or F. The amount of the deduction is the total of workrelated education expenses plus other job and certain miscellaneous 

expenses that is in excess of 2 percent of adjusted gross income. 

Uniform Transfers to Minors: Money paid directly to an educational 

institution for another person’s tuition are not subject to gift taxes.2

1

 Under the Working Condition Fringe Benefit Exclusion, employer-provided educational 

assistance that exceeds $5,250 may still not be counted as income, provided it is used to pay 

for any educational expenses that are required by the employer or the law to maintain the 

tax filer’s present salary, status, or job and maintain or improve skills needed in the tax 

filer’s present work.

2

 This tax preference is not listed in the 2004 IRS Publication 970.
Appendix III

Postsecondary-Education-Related Tax 

Preferences

Page 53 GAO-05-684 Federal Student Aid Programs

Early Withdrawals From Individual Retirement Accounts: The 10 

percent additional tax that applies to withdrawal of funds from an 

Individual Retirement Account does not apply if the funds are used to pay 

for the postsecondary education expenses of the account holder or his or 

her dependent.

Parental Personal Exemption for Dependent Students: The tax code 

definition of “dependent” for tax filing purposes involves 5 tests, including 

whether the dependent is (1) a member of your household or related to 

you, (2) a U.S. citizen or resident, (3) filing a joint tax return, (4) earning 

less than $3,100, and (5) receiving more than half of their support from the 

taxpayer claiming the dependent. In 2004, someone over age 18, earning 

more than $3,100, and not living with the tax filer throughout the year 

would likely not qualify as a dependent. However, the tax code makes 

exceptions to these rules for students under age 24, thus postsecondary 

education students are still dependents for tax purposes while they are in 

school.3

3

Ibid.
Page 54 GAO-05-684 Federal Student Aid Programs

Appendix IV

Comments from the Department of Education ApendxiIV
Page 55 GAO-05-684 Federal Student Aid Programs

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