United States Government Accountability Office

GAO Testimony 

Before the Subcommittee on Select 

Revenue Measures, Committee on Ways 

and Means, House of Representatives

HIGHER EDUCATION

Multiple Higher Education 

Tax Incentives Create 

Opportunities for Taxpayers 

to Make Costly Mistakes 

Statement of Michael Brostek 

Director, Tax Issues 

Strategic Issues 

George A. Scott 

Director, Higher Education Issues 

Education, Workforce, and Income Security 

For Release on Delivery

Expected at 10:00 a.m. EDT 

Thursday, May 1, 2008

 

GAO-08-717T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

May 1, 2008

HIGHER EDUCATION

Multiple Higher Education Tax Incentives Create 

Opportunities for Taxpayers to Make Costly Mistakes

Highlights of GAO-08-717T, a testimony 

before the Subcommittee on Select 

Revenue Measures, Committee on Ways 

and Means, House of Representatives 

Federal assistance helps students 

and families pay for postsecondary

education through several policy 

tools—grant and loan programs 

authorized by Title IV of the Higher

Education Act of 1965 and more 

recently enacted tax preferences. 

This testimony summarizes our 

2005 report and provides updates 

on (1) how Title IV assistance 

compares to that provided through

the tax code (2) the extent to

which tax filers effectively use 

education tax preferences, (3) 

potential benefits and costs of 

simplifying federal student aid, and 

(4) what is known about the 

effectiveness of federal assistance. 

This hearing is an opportunity to 

consider whether changes should 

be made in the government’s 

overall strategy for providing such 

assistance or to the individual

programs and tax provisions that

provide the assistance. This 

statement is based on updates to

previously published GAO work

and reviews of relevant literature. 

What GAO Recommends

GAO does not make new 

recommendations in this 

testimony. In 2002, GAO 

recommended, among other things, 

that the Department of Education 

sponsor research into key aspects

of effectiveness of Title IV 

programs. Education began funding

grants in July 2007 to conduct

research on topics addressed in

this statement; however, no project 

to date appears to directly evaluate

the role and effectiveness of

federal assistance in improving 

access to postsecondary education. 

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

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

expenses, tax preferences also assist students and families with saving for and 

repaying postsecondary costs. Both serve students and families with a range 

of incomes, but some forms of Title IV aid—grant aid, in particular—provide 

assistance to those whose incomes are lower, on average, than is the case

with tax preferences. Tax preferences require more responsibility on the part 

of students and families than Title IV aid because taxpayers must identify 

applicable tax preferences, understand complex rules concerning their use, 

and correctly calculate and claim credits or deductions. While the tax 

preferences are a newer policy tool, the number of tax filers using them has

grown quickly, surpassing the number of students aided under Title IV in 2002.

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

Deduction, 1997—2005 

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

decisions. For example, our analysis of a limited number of 2005 tax returns 

indicated that 19 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 $219, 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. 

Simplifying the grants, loans, and tax preferences may reduce complexities in

higher education financing, including reducing the number of eligible tax filers

that do not claim tax preferences, but more research would be necessary to 

understand the full benefits and costs of any such changes. 

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

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

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

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

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

To view the full product, including the scope 

and methodology, click on GAO-08-717T. 

For more information, contact Michael 

Brostek at (202) 512-9110 or George Scott at 

(202) 512-7215. 
Mr. Chairman and Members of the Subcommittee: 

We are pleased to be here this morning to discuss the complexity of 

multiple tax incentives targeted to postsecondary education. American 

higher education has long been crucial to the development of our nation’s 

cultural, social, and economic capital. At the dawn of the 21st century, 

changing workforce demographics, a more integrated global economy, and 

numerous technological advances are placing new demands on our 

colleges and universities. For the United States to remain competitive in

the rising global knowledge economy, its citizens will need both the ways 

and means to endow themselves with the tools necessary for the task. 

Nevertheless, the affordability of American higher education remains a 

topic of considerable attention as evidenced by the work of the current 

Congress in both passing the College Cost Reduction and Access Act1

 and 

its ongoing efforts to reauthorize the Higher Education Act of 1965. 

This hearing is an opportunity to consider whether any changes should be 

made in the government’s overall strategy and the individual programs and 

tax provisions that provide financial assistance to students and families 

saving or paying for postsecondary education or repaying student loans. 

This opportunity to review the programs and tax provisions is important 

for several reasons. The fact that we face large and growing structural 

deficits in the future—primarily driven by demographics and rising health 

care costs—emphasizes the need to consider how the government 

allocates resources. In addition, we have noted that fundamental 

reexamination of government programs, policies, and priorities is 

necessary to assure that they match the needs of the 21st century. We have

identified the coordination of student aid programs2 and the effectiveness 

of those programs 3

both as key topics needing congressional oversight. 

Our statement today will focus on four issues that emerged in our 2005 

report and subsequent 2006 testimony on student grant and loan 

 1

Pub. L. No. 110-84, 121 Stat. 784 (Sept. 27, 2007). 

2

GAO, 21st Century Challenges: Reexamining the Base of the Federal Government, 

GAO-05-325SP (Washington, D.C.: February 2005). 

3

GAO, Suggested Areas for Oversight for the 110th Congress, GAO-07-235R (Washington,

D.C.: Nov. 17, 2006). 

Page 1 GAO-08-717T 
assistance made available under Title IV of the Higher Education Act and 

postsecondary education tax preferences.4

• Postsecondary student financial assistance provided through programs 

authorized under Title IV and the tax code differ in three key ways. 

First, Title IV grant and loan programs traditionally provide aid to 

students and families while students are in college, whereas tax 

preferences help both during the college years as well as before and 

after college by assisting with saving for or repaying college costs. 

Additionally, while student aid programs and tax preferences serve 

students and families across a wide range of income groups, some Title 

IV programs—particularly the Pell Grant program—provide much of 

their financial assistance to students and families whose incomes are 

lower, on average, than students and families who receive student 

loans, tax credits, and deductions, or who make use of tax-exempt 

saving vehicles. Last, students and families have more responsibility for 

appropriately using and thereby obtaining the benefits of tax 

preferences than they do with Title IV aid. 

• Second, postsecondary tax preferences are difficult for families to 

understand and use correctly. Perhaps due to the complexity of the tax 

provisions, hundreds of thousands of taxpayers fail to claim tax 

preferences to which they are entitled or do not claim the tax 

preference that would be most advantageous to them. 

• Third, proposals to simplify the federal financial assistance programs 

for postsecondary education may help to address the complexities in 

the current system and improve tax filers’ use of education tax 

preferences. However, more research is needed to understand the 

range of potential benefits and costs associated with any such changes. 

• Finally, we found that Congress has received little evidence concerning 

the effectiveness of assistance provided under Title IV or through tax 

preferences, including whether such assistance increases attendance or 

choice. 

 4

 See GAO, Student Aid and Postsecondary Tax Preferences: Limited Research Exists on

Effectiveness of Tools to Assist Students and Families through Title IV Student Aid and

Tax Preferences, GAO-05-684 (Washington, D.C.: July 29, 2005), and GAO, Postsecondary

Education: Multiple Tax Preferences and Title IV Student Aid Programs Create a

Complex Education Financing Environment, GAO-07-262T (Washington, D.C.: Dec. 5,

2006). 

Page 2 GAO-08-717T 
Our statement today is drawn from reviews of relevant literature and 

updates to previous GAO reports and testimonies covering postsecondary 

Title IV programs and tax preferences. We conducted our work in April 

2008 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives. 

Financial assistance to help students and families pay for postsecondary 

education has been provided for many years through student grant and 

loan programs authorized under Title IV of the Higher Education Act of 

1965, as amended. Examples of these programs include Pell Grants for 

low-income students, PLUS loans to parents and graduate students, and 

Stafford loans.5 Much of this aid has been provided on the basis of the 

difference between a student’s cost of attendance and an estimate of the 

ability of the student and the student’s family to pay these costs, called the 

expected family contribution (EFC). The EFC is calculated based on 

information provided by students and parents on the Free Application for

Federal Student Aid (FAFSA). Federal law establishes the criteria that 

students must meet to be considered independent of their parents for the 

purpose of financial aid and the share of family and student income and 

assets that are expected to be available for the student’s education.6 In 

fiscal year 2007, the Department of Education made available

approximately $15 billion in grants and another $65 billion in Title IV loan 

assistance. Title IV also authorizes programs funded by the federal 

government and administered by participating higher education 

institutions, including the Supplemental Educational Opportunity Grant 

Background 

 5

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, they are not addressed in this

testimony. 

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 for other unusual circumstances. 

Page 3 GAO-08-717T 
(SEOG), Perkins loans, and federal work-study aid, collectively known as 

campus-based aid. Table 1 provides brief descriptions of the Title IV 

programs that we reviewed in our 2005 report and includes two 

programs—Academic Competitiveness Grants and National Science and 

Mathematics Access to Retain Talent Grants—that were created since that

report was issued.7

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

Title IV student aid program Program description 

Pell Grant Grants are made on the basis of the difference between the EFC and the maximum Pell award or 

the student’s cost of attendance, whichever is less. Grants are not available for postgraduate study.

Supplemental Educational 

Opportunity Grant (SEOG)

Schools administer grant funds, which are awarded to undergraduates with exceptional financial 

need; priority is given to Pell Grant recipients. Institutions must match a portion (at least 25 percent) 

of the federal funds allocated.

Academic Competitiveness 

Grant 

Available to first- and second-year students who have completed a rigorous course of study in high 

school. To be eligible, students must also be eligible to receive a Pell Grant. Second-year students 

must also maintain at least a 3.0 grade-point average. 

National Science and 

Mathematics Access to Retain 

Talent (SMART) Grant 

Available to third- and fourth-year students pursuing a major in mathematics, science, or a foreign 

language deemed critical to national security. To be eligible, students must also be eligible to 

receive a Pell Grant and maintain at least a 3.0 grade-point average. 

Federal Work-Study Schools administer funds, which are used to provide part-time jobs for undergraduate and graduate 

students with financial need. Participating schools or nonprofit employers generally contribute at 

least 25 percent of student’s earnings (50 percent in the case of for-profit employers). 

Federal Perkins Loan Schools administer funds, comprised of federal capital contributions and school matching funds (at 

least one-third of federal contributions), to make low-interest (5 percent) loans for both 

undergraduate and graduate students with exceptional financial need. Borrower repayments are 

owed to the school.

Subsidized Federal Family 

Education Loan (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. 

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 unsubsidized loans 

while the student is in school, for the first 6 months after the student leaves school, and during a 

period of deferment. Otherwise, the terms and conditions of unsubsidized loans are the same as 

those for subsidized loans. 

FFEL or Direct PLUS Loan Loans made to parents on behalf of dependent undergraduate students enrolled at least half-time, 

or to graduate and professional students. Borrowers are subject to a credit check for adverse credit 

history and may be denied a loan. 

Source: GAO analysis of applicable federal laws and regulations. 

 7

For greater detail on federal spending through Title IV postsecondary education assistance 

programs reviewed in our 2005 report and December 2006 testimony, see app. I.

Page 4 GAO-08-717T 
Postsecondary assistance also has been provided through a range of tax

preferences,8 including postsecondary tax credits, tax deductions, and taxexempt savings programs. For example, the Taxpayer Relief Act of 1997 

allows eligible tax filers to reduce their tax liability by receiving, for tax 

year 2007, up to a $1,650 Hope tax credit or up to a $2,000 Lifetime 

Learning tax credit for tuition and qualified related expenses paid for a 

single student.9

 According to the Office of Management and Budget, the

fiscal year 2007 federal revenue loss estimate of the postsecondary tax 

preferences that we reviewed was $8.7 billion. Tax preferences discussed 

as part of our 2005 report and December 2006 testimony include the 

following:10

• Lifetime Learning Credit—income-based tax credit claimed by tax filers 

on behalf of students enrolled in one or more postsecondary education 

courses. 

• Hope Credit—income-based tax credit claimed by tax filers on behalf 

of students enrolled at least half-time in an eligible program of study 

and who are in their first 2 years of postsecondary education. 

• Student Loan Interest Deduction—income-based tax deduction claimed 

by tax filers on behalf of students who took out qualified student loans 

while enrolled at least half-time. 

• Tuition and Fees Deduction—income-based tax deduction claimed by 

tax filers on behalf of students who are enrolled in one or more 

postsecondary education courses and have either a high school 

diploma or a General Educational Development (GED) credential.11 

• 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. 

 8

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.

9

Pub. L. No. 105-34, § 201, 111 Stat. 788, 799 (Aug. 5, 1997). 

10For expanded descriptions of postsecondary education-related tax preferences, see app. I.

11The Tuition and Fees Deduction expired on December 31, 2007. Legislation has been

introduced to reinstate the deduction. 

Page 5 GAO-08-717T 
• Coverdell Education Savings Accounts—income-based savings program 

providing favorable tax treatment to investments and distributions used to 

pay the expenses of future or current elementary, secondary, or

postsecondary students. 

As figure 1 demonstrates, the use of tax preferences has increased since 

1997, both in absolute terms and relative to the use of Title IV aid. 

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

Tax Credit or Tuition Deduction, 1997—2005 

Page 6 GAO-08-717T 
Postsecondary student financial assistance provided through programs 

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

differ in timing of assistance, the populations that receive assistance, and

the responsibility of students and families to obtain and use the assistance. 

Title IV programs and education-related tax preferences differ significantly 

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

provide. Title IV programs generally provide benefits to students while 

they are in school. Education-related tax preferences, on the other hand, 

(1) encourage saving for college through tax-exempt saving, (2) assist 

enrolled students and their families in meeting the current costs of 

postsecondary education through credits and tuition deductions, and (3) 

assist students and families repaying the costs of past postsecondary 

education through a tax deduction for student loan interest paid.12

While Title IV programs and tax preferences assist many students and 

families, program and tax rules affect eligibility for such assistance. These 

rules also affect the distribution of Title IV aid and the assistance provided

through tax preferences. As a result, the beneficiaries of Title IV programs 

and tax preferences differ. 

Title IV programs generally have rules for calculating grant and loan 

assistance that give consideration to family and student income, assets, 

and college costs in the awarding of financial aid.

13 For example, Pell Grant

Tax Preferences 

Differ from Title IV 

Assistance in Timing, 

Distribution, and 

Students’ and 

Families’ 

Responsibility for 

Obtaining Benefits 

Title IV and Tax Programs 

Differ in Benefit Timing 

Beneficiaries of Title IV 

Programs and Tax 

Preferences Differ 

 12Additional details on the differences in timing are available in app. II. 

13Campus-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 institutionspecific criteria consistent with federal program requirements. Because they have

institution-specific criteria, the relationship between program rules and the 

distribution of benefits is more complex and was excluded from the analysis of

our 2005 report. 

Page 7 GAO-08-717T 
awards are calculated by subtracting the student’s EFC from the maximum 

Pell Grant award ($4,310 in academic year 2007—2008) or the student’s 

cost of attendance, whichever is less. Because the EFC is closely linked to

family income and circumstances (such as the size of the family and the

number of dependents in school), and modest EFCs are required for Pell 

Grant eligibility, Pell awards are made primarily to families with modest

incomes. In contrast, the maximum unsubsidized Stafford loan amount is 

calculated without direct consideration of financial need: students may 

borrow up to their cost of attendance, minus the estimated financial 

assistance they will receive.14 As table 2 shows, 92 percent of Pell financial 

support in 2003—2004 was provided to dependent students whose family 

incomes were $40,000 or below, and the 38 percent of Pell recipients in the 

lowest income category ($20,000 or below) received a higher share (48 

percent) of Pell financial support. 

Table 2: Percentage of Aid Recipients and Dollars of Aid by Income Category for Dependent Students Served by Selected

Title IV Programs, Academic Year 2003—2004 

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 38 47 14 2 0 0

Dollars 48 44 8 1 0 0

Stafford Recipients 16 28 23 17 9 7

Subsidized Loan Dollars 16 28 24 17 9 6

Stafford Recipients 7 14 14 19 18 28

Unsubsidized Loan Dollars 7 12 12 18 19 32

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

Notes: See app. IV for confidence intervals associated with these estimates. 

Numbers in rows may not add to 100 percent due to 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

 14Additionally, loan amounts for both subsidized and unsubsidized Stafford loans 

are subject to statutory limits on annual and cumulative borrowing.

Page 8 GAO-08-717T 
(Pell) of program participants have incomes below this level. As shown in 

table 3, the distribution of award dollars follows a nearly identical pattern. 

Table 3: Percentage of Aid Recipients and Dollars of Aid by Income Category for Independent Students Served by Selected

Title IV Programs, Academic Year 2003—2004 

Program 

Independent

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 67 28 5 0 0 0

Dollars 73 25 3 0 0 0

Stafford Recipients 51 29 12 5 2 1

Subsidized Loan Dollars 52 28 12 5 2 2

Stafford Recipients 46 28 14 6 3 3

Unsubsidized 

Loan 

Dollars 46 24 13 7 3 5

Source: GAO analysis of 2003-2004 NPSAS data.

Notes: See app. IV for confidence intervals associated with these estimates. 

Numbers in rows may not add to 100 percent due to rounding. 

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

created by the need to have a positive tax liability to obtain their benefit 

and income ceilings on who may use them. For example, the Hope and 

Lifetime Learning tax credits require that tax filers have a positive tax 

liability to use them, and income-related phase-out provisions in 2007 

began at $47,000 and $94,000 for single and joint filers, respectively. 

Furthermore, tax-exempt savings are more advantageous to families with

higher incomes and tax liabilities because, among other reasons, these 

families hold greater assets to invest in these tax preferences and have a 

higher marginal tax rate, and thus benefit the most from the use of these 

tax preferences. Table 4 shows the income categories of tax filers claiming 

the three tax preferences available to current students or their families, 

along with the reduced tax liabilities from those preferences in 2005. 

Page 9 GAO-08-717T 
Table 4: Percentage of Tax Filers Claiming Hope and Lifetime Learning Credits and Tuition Deduction and Tax Preference 

Dollars by Income Category, Tax Year 2005

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 17 32 20 17 13 1

Dollars 10 32 22 21 14 0

Lifetime Learning Tax filers 17 32 20 20 11 1

Credit Dollars 10 31 21 24 15 0

Tuition and Fees Tax filers 24 12 16 9 12 28

Deduction Dollars 12 6 14 8 15 45

Source: GAO analysis of 2005 Statistics of Income (SOI) data. 

Notes: See app. IV for confidence intervals associated with these estimates. 

Numbers in rows may not add to 100 percent due to rounding. 

Students and Families 

Have More Responsibility 

for Obtaining Benefits of 

Tax Preferences in 

Comparison to Title IV Aid 

The federal government and postsecondary institutions have significant 

responsibilities in assisting students and families in obtaining assistance 

provided under Title IV programs but only minor roles with respect to tax 

filers’ use of education-related tax preferences. To obtain federal student 

aid, applicants must first complete the FAFSA, a form that requires 

students to complete up to 99 fields for the 2007—2008 academic year. 

Submitting a completed FAFSA to the Department of Education largely 

concludes students’ and families’ responsibility in obtaining aid. The 

Department of Education is responsible for calculating students’ and 

families’ EFC on the basis of the FAFSA, and students’ educational 

institutions are responsible for determining aid eligibility and the amounts 

and packaging of awards. 

In contrast, higher education tax preferences require students and families 

to take more responsibility. Although postsecondary institutions provide 

students and the Internal Revenue Service (IRS) with information about 

higher education attendance, they have no other responsibilities for higher 

education tax credits, deductions, or tax-preferred savings. The federal

government’s primary role with respect to higher education tax 

preferences is the promulgation of rules; the provision of guidance to tax 

filers; and the processing of tax returns, including some checks on the 

accuracy of items reported on those tax returns. The responsibility for 

selecting among and properly using tax preferences rests with tax filers. 

Unlike Title IV programs, users must understand the rules, identify 

applicable tax preferences, understand how these tax preferences interact 

with one another and with federal student aid, keep records sufficient to 

Page 10 GAO-08-717T 
support their tax filing, and correctly claim the credit or deduction on their 

return. 

According to our analysis of 2005 IRS data on the use of Hope and Lifetime 

Learning Credits and the tuition deduction, some tax filers appear to make 

less-than-optimal choices among them. The apparent suboptimal use of 

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

these provisions. 

Some Tax Filers May 

Not Effectively Use 

Postsecondary Tax 

Preferences, Possibly 

Due to Complexity 

Some Tax Filers Appear to 

Make Suboptimal Choices 

Making poor choices among tax preferences for postsecondary education

may be costly to tax filers. For example, families may strand assets in a 

tax-exempt savings vehicle and incur tax penalties on their distribution if 

their child chooses not to go to college. They may also fail to minimize 

their federal income tax liability by claiming a tax credit or deduction that 

yields less of a reduction in taxes than a different tax preference or by 

failing to claim any of their available tax preferences. For example, if a 

married couple filing jointly with one dependent in his/her first 2 years of 

college had an adjusted gross income of $50,000, qualified expenses of 

$10,000 in 2007, and tax liability greater than $2,000, their tax liability 

would be reduced by $2,000 if they claimed the Lifetime Learning Credit 

but only $1,650 if they claimed the Hope Credit. 

In our analysis of 2005 IRS data for returns with information on education 

expenses incurred, we found that some people who appear to be eligible 

for tax credits or the tuition deduction did not claim them. We estimate 

that 2.1 million filers could have claimed a tax credit or tuition deduction 

and thereby reduced their taxes. However, about 19 percent of those 

filers, representing about 412,000 returns, failed to claim any of them. The 

amount by which these tax filers failed to reduce their tax averaged $219;

10 percent of this group could have reduced their tax liability by over 

$500.

15

In total, including both those who failed to claim a tax credit or tuition 

deduction and those who chose a credit or a deduction that did not 

maximize their benefit, we found that in 2005, 28 percent, or nearly 601,000 

 15 Confidence intervals for all estimates in this section are included in app. IV. 

Page 11 GAO-08-717T 
tax filers did not maximize their potential tax benefit. Regarding those 

making a poor choice among the provisions, for example, 27 percent of tax 

filers that claimed the tuition deduction could have further reduced their 

tax liability by an average of $220 by instead claiming the Lifetime 

Learning Credit; 10 percent of this group could have reduced their tax 

liabilities by over $630. Tax filers that claimed the Hope Credit when the 

Lifetime Learning Credit was a more optimal choice failed to reduce their 

tax liabilities by an average of $356. 

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 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 301,000 of the approximately 601,000 suboptimal choices 

we found. Our April 2006 study of paid tax preparers corroborates the 

problem of confusion over which of the tax preferences to claim.16 Of the 

nine undercover investigation visits we made to paid preparers with a 

taxpayer with a dependent college student, three preparers did not claim 

the credit most advantageous to the taxpayer and thereby cost these 

taxpayers hundreds of dollars in refunds. In our investigative scenario, the 

expenses and the year in school made the Hope education credit far more 

advantageous to the taxpayer than either the tuition and fees deduction or

the Lifetime Learning credit. 

The Suboptimal Use of 

Postsecondary Tax 

Preferences May Result 

from Their Complexity 

The apparently suboptimal use of postsecondary tax preferences may 

arise, in part, because of the complexity of using these provisions. Tax 

policy analysts have frequently identified postsecondary tax preferences 

as a set of tax provisions that demand a particularly large investment of 

knowledge and skill on the part of students and families or expert 

assistance purchased by those with the means to do so. They suggest that 

this complexity arises from multiple postsecondary tax preferences with 

similar purposes, from key definitions that vary across these provisions, 

and from rules that coordinate the use of multiple tax provisions. Twelve 

 16GAO, Paid Tax Return Preparers: In a Limited Study, Chain Preparers Made Serious

Errors, GAO-06-563T (Washington, D.C.: Apr. 4, 2006). 

Page 12 GAO-08-717T 
tax preferences are outlined in IRS Publication 970, Tax Benefits for 

Education: For Use in Preparing 2007 Returns. The publication includes 

four different tax preferences for educational saving. Three of these 

preferences—Coverdell Education Savings Accounts, Qualified Tuition 

Programs, and U.S. education savings bonds—differ across more than a 

dozen dimensions, including the tax penalty that occurs when account

balances are not used for qualified higher education expenses, who may 

be an eligible beneficiary, annual contribution limits, and other features. 

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 educationrelated tax preference, sometimes referred to as “anti-double-dipping 

rules.” These rules are important because they prevent tax filers from 

underreporting their tax liability. Nonetheless, anti-double-dipping rules 

are potentially difficult for tax filers to understand and apply, and 

misunderstanding them may have consequences for a filer’s tax liability.17

Many researchers and policy analysts support simplifying the existing 

federal grant, loans and tax preferences in the belief that doing so would 

have a net benefit on encouraging access. Indeed, suggestions put forth in 

recent years to combine the federal grants and tax credits, for example, 

may help address some of the challenges we identified in recent years 

regarding tax filers’ suboptimal use of postsecondary tax preferences or

the confusion created by the interactions between direct student aid 

programs, such as the Pell Grant, and existing tax preferences. In this 

case, reducing the number of choices students and their families have to

make would likely reduce tax filers’ confusion and mistakes. 

Benefits to 

Simplifying Federal 

Student Aid Have 

Associated 

Implementation 

Challenges and Costs 

To date, we have not undertaken any studies of how current Title IV 

student aid programs or tax preferences could be simplified and, as a 

result, have not developed any such models or proposals. However, while 

different aspects of simplification may provide students and their families 

with various benefits, Congress would likely want to weigh those benefits 

against a number of potentially related costs. 

 17For an example of this phenomenon, please see app. III. 

Page 13 GAO-08-717T 
Simplifying the federal application for student aid—A better 

understanding is needed about whether or to what extent simplifying the 

application for federal aid would: (1) alter the administration of other 

federal, state and institutional student aid programs, (2) be capable of 

accommodating future federal policies designed to target aid, and (3) 

affect current programs that are specifically tied to Pell Grant eligibility.18 

The current FAFSA is used to determine students’ eligibility for various 

federal aid programs, including Pell Grants, Academic Competitiveness 

Grants, SMART Grants, Stafford and PLUS loans, Supplemental 

Educational Opportunity Grants (SEOG), Perkins Loans, and Federal 

Work-Study. In addition, many states and schools rely on the FAFSA 

when awarding state and institutional student aid.19 To the extent that 

other programs require FAFSA-like information from applicants to award 

financial aid, additional research is needed to determine whether 

simplifying the FAFSA may actually increase the number of applications 

students and families would be required to submit. 

Simplifying eligibility verification requirements—Both grants and tax 

credits are awarded based, in part, on students’ and their families’ 

incomes, which means students and families are required to document 

their income to receive the benefit. Under the current system, some 

students and families are eligible to apply for Title IV student aid even 

though they are not required to file a tax return; in such cases, eligibility is 

computed based upon information reported on the FAFSA. Any plan to 

consolidate some or all of the current federal grants and tax preferences

would need to consider how to minimize burden on students and families 

while also controlling federal administrative costs, for example, by 

minimizing the use of multiple verification procedures that use multiple 

forms of documentation and that are administered by multiple agencies. 

Simplifying program administration while maintaining federal cost 

controls —Federal grant and loan programs are administered by the 

Department of Education while federal tax preferences are administered 

by IRS. Under a system where existing grant aid and tax credits are 

consolidated, it is unclear without additional research, whether cost 

 18Examples include the recently established Academic Competitiveness and National 

Science and Mathematics Access to Retain Talent (SMART) Grants. 

19The first page of the FAFSA lists states’ filing deadlines of the form for the purpose of

state aid programs, which, for the 2007-2008 award year range from March 1, 2007, to June

30, 2008. 

Page 14 GAO-08-717T 
efficiency is better achieved through having the Department of Education 

or IRS assume federal budgeting and accounting responsibilities. In 

addition, the grant programs generally are subject to an annual

appropriation which enables Congress to control overall federal 

expenditures by taking into account other federal priorities. In contrast, 

most tax preferences are like entitlement programs and their revenue

losses can only be controlled by changing the statutory qualifications for 

the tax preference.

Simplifying aid distribution—Policymakers will need to consider costs 

associated with the federal government recovering funds if students fail to 

maintain eligibility requirements over the course of an academic year. 

Families currently claim tax preferences after qualifying higher education 

expenses have been incurred but receive federal grant benefits to pay 

current expenses. Program simplifications that consolidate grants and tax 

preferences into a benefit paid before expenses are incurred likely will 

require the implementation of new cost recovery mechanisms or other 

means to allocate payments based on costs actually incurred.

Simplifying eligible expenses—Room and board expenses are 

considered in the administration of the federal student aid programs 

authorized under Title IV of the Higher Education Act but not in all tax

preferences, particular the Hope and Lifetime Learning Credits. Careful 

analysis will be needed of how such expenses could be accounted for in a 

simplified scheme if it is changed to being structured as a tax preference

rather than a grant. Room and board expenses vary based on where a 

school is located or whether a student lives on or off campus, and they can

be a significant component of a student’s cost of attendance, particularly 

at community colleges. While certain strategies might be employed to 

lessen tax filers’ recordkeeping requirements and result in fewer tax filer 

compliance issues, further research is needed on how such an allowance 

would be optimally set. Establishing too high an allowance, for example, 

could result in some students receiving a benefit in excess of the costs 

they incur for room and board, especially for those students who choose 

to live with their parents. Alternatively, if tax assistance is provided in 

advance of incurring costs, but the assistance is to be limited to costs 

actually incurred, a cost recovery or other administrative mechanism 

would be needed as discussed above. 

Page 15 GAO-08-717T 
Little is known about the effectiveness of federal grant and loan programs 

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

and the likelihood that students either earn a degree or continue their 

education (referred to as persistence). Many federal aid programs and tax 

preferences have not been studied, and for those that have been studied, 

important aspects of their effectiveness remain unexamined. In our 2005 

report, we found no research on any aspect of effectiveness for several 

major Title IV federal postsecondary programs and tax preferences. For 

example, no research had examined the effects of federal postsecondary 

education tax credits on students’ persistence in their studies or on the 

type of postsecondary institution they choose to attend, and there is 

limited research on the effectiveness of the Pell Grant program on 

students’ persistence.20 One recently published study suggests that 

complexity in the federal grant and loan application processes may 

undermine its efficacy in promoting postsecondary attendance.21 The 

relative newness of most of the tax preferences also presents challenges 

because relevant data are just now becoming available. These factors may 

contribute to a lack of information concerning the effectiveness of the aid 

programs and tax preferences. 

Research on 

Effectiveness of 

Federal 

Postsecondary 

Assistance Is 

Incomplete 

In 2002, we recommended that the Department of Education sponsor 

research into key aspects of effectiveness of Title IV programs, that the 

Department of Education and the Department of the Treasury collaborate 

on such research into the relative effectiveness of Title IV programs and 

tax preferences, and that the Secretaries of Education and the Treasury 

collaborate in studying the combined effects of tax preferences and Title 

IV aid. 22 In April 2006, the Department of Education’s Institute for 

Education Sciences (IES) issued a Request for Applications to conduct 

research on, among other things, “evaluating the efficacy of programs, 

practices, or policies that are intended to improve access to, persistence 

 20Eric Bettinger. “How Financial Aid Affects Persistence,” in College Choices: The 

Economics of Where to Go, When to Go, and How To Pay for It, edited by Caroline Hoxby, 

(Chicago: University of Chicago Press, 2004) 207-238. This study cites numerous data 

availability and reliability challenges confronting research examining Pell Grant effects on

student collegiate outcomes. 

21Susan M. Dynarski, and Judith E. Scott-Clayton. “The Cost of Complexity in Federal 

Student Aid: Lessons from Optimal Tax Theory and Behavioral Economics.” National Tax 

Journal, June 2006. 

22GAO, 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 16 GAO-08-717T 
in, or completion of postsecondary education.” Multiyear projects funded 

under this subtopic began in July 2007. However, none of the grants 

awarded to date appear to directly evaluate the role and effectiveness of 

Title IV programs and tax preferences in improving access to, persistence 

in, or completion of postsecondary education. 

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

different forms of postsecondary education assistance is important. 23 

Without such information federal policymakers cannot make fact-based 

decisions about how to build on successful programs and make necessary 

changes to improve less-effective programs. The budget deficit and other 

major fiscal challenges facing the nation necessitate rethinking the base of 

existing federal spending and tax programs, policies, and activities by 

reviewing their results and testing their continued relevance and relative

priority for a changing society.24

In light of the long-term fiscal challenge this nation faces and the need to 

make hard decisions about how the federal government allocates 

resources, this hearing provides an opportunity to continue a discussion 

about how the federal government can best help students and their 

families pay for postsecondary education. Some questions that Congress 

should consider during this dialog include the following: 

Concluding 

Observations 

• Should the federal government consolidate postsecondary education 

tax provisions to make them easier for the public to use and 

understand? 

• Given its limited resources, should the government further target Title 

IV programs and tax provisions based on need or other factors? 

• How can Congress best evaluate the effectiveness and efficiency of 

postsecondary education aid provided through the tax code? 

• Can tax preferences and Title IV programs be better coordinated to 

maximize their effectiveness? 

 23GAO-02-751. 

24GAO-05-325SP. 

Page 17 GAO-08-717T 
Mr. Chairman and Members of the Subcommittee, this concludes our 

statement. We welcome any questions you have at this time. 

For further information regarding this testimony, please contact Michael 

Brostek at (202) 512-9110 or brostekm@gao.gov or George Scott at (202) 

512-7215 or scottg@gao.gov. Individuals making contributions to this 

testimony include David Lewis, Assistant Director; Sarah Farkas, Sheila R. 

McCoy, John Mingus, Danielle Novak, Daniel Novillo, Carlo Salerno, 

Andrew J. Stephens, and Jessica Thomsen. 

Staff Contacts and 

Acknowledgments 

Page 18 GAO-08-717T 
Page 19 GAO-08-717T 

Appendix I: Postsecondary Aid Programs 

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

repay the costs of postsecondary education through grant and loan 

programs authorized under Title IV of the Higher Education Act of 1965, as 

amended, 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. 

Assistance provided under Title IV programs include Pell Grants for lowincome students, the Academic Competitiveness and National Science and 

Mathematics Access to Retain Talent Grants, PLUS loans, which parents

as well as graduate and professional students may apply for, and Stafford

loans.1

 While each of the three grants reduces the price paid by the 

student, student loans help to finance the remaining costs and are to be

repaid according to varying terms. Stafford loans may be either subsidized 

or unsubsidized. The federal government pays the interest cost on 

subsidized loans while the student is in school, and during a 6-month 

period known as the grace period, after the student leaves school. For 

unsubsidized loans, students are responsible for all interest costs.2

 Stafford

and PLUS loans are provided to students through both the Federal Family 

Education Loan program (FFEL) and the William D. Ford Direct Loan 

Program (FDLP). The federal government’s role in financing and 

administering these two loan programs differs significantly. Under the 

FFEL program, private lenders, such as banks, provide loan capital and

make loans, and the federal government guarantees FFEL lenders a 

minimum yield on the loans they make and repayment if borrowers 

Federal Grant and 

Loan Assistance to 

Postsecondary 

Students 

 1

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). 

2

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.
default. Under FDLP, the federal government makes loans to students 

using federal funds. 

The Department of Education and its private-sector contractors jointly 

administer the program. Title IV also authorizes programs funded by the 

federal government and administered by participating higher education 

institutions, including the Supplemental Educational Opportunity Grant 

(SEOG), Perkins loans, and federal work-study aid, collectively known as 

campus-based aid. 

To receive Title IV aid, students (along with parents, in the case of 

dependent students) must complete a Free Application for Federal 

Student Aid form. Information from the FAFSA, particularly income and 

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

expected family contribution—that the student and/or family is expected 

to contribute to the student’s education. Federal law establishes the 

criteria that students must meet to be considered independent of their 

parents for the purpose of financial aid and the share of family and student

income and assets that are expected to be available for the student’s 

education. Once the EFC is established, it is compared with the cost of 

attendance at the institution chosen by the student. The cost of attendance 

comprises tuition and fees; room and board; books and supplies; 

transportation; certain miscellaneous personal expenses; and, for some 

students, additional expenses. 3 If the EFC is greater than the cost of 

attendance, the student is not considered to have financial need, according 

to the federal aid methodology. If the cost of attendance is greater than the

EFC, then the student is considered to have financial need. Title IV 

assistance that is made on the basis of the calculated need of aid 

applicants is called need-based aid. Key characteristics of Title IV 

programs are summarized in table 5 below. 

 3

For example, these may include child care expenses for parents of young dependent 

children or supportive services for disabled students.

Page 20 GAO-08-717T 
Table 5: Description of Federal Student Aid Programs Authorized under Title IV of the Higher Education Act 

Title IV student aid 

program Program details 

Annual award

amounts Number and characteristics of beneficiaries 

Pell Grant Grants are awarded 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 $4,310 for 

school year 2007—

2008. 

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 awarded to 

undergraduates with 

exceptional financial need; 

priority is given to Pell Grant 

recipients. Institutions must 

match a portion (at least 25 

percent) of the federal funds 

allocated. 

$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. 

Academic 

Competitiveness 

Grant 

Applicable to first- and secondyear students who have 

completed a rigorous course of 

study in high school. To be 

eligible, students must also be

eligible to receive a Pell Grant. 

Second-year students must 

also maintain at least a 3.0 

grade-point average. 

$750 for first-year 

students and $1,300 for 

second-year students. 

Students: About 310,000 first-year grants and 

110,000 second-year grants were expected to be 

awarded in school year 2006—2007, totaling an 

estimated $340.0 million. The average grant award 

is estimated to be $657 and $1,245 respectively. 

 

National Science 

and Mathematics 

Access to Retain 

Talent (SMART) 

Grant 

Applicable to third- and fourthyear students pursuing a major 

in mathematics, science, or a 

foreign language deemed 

critical to national security. To 

be eligible, students must also 

be eligible to receive a Pell 

Grant and maintain at least a 

3.0 grade-point average. 

$4,000. Students: About 40,000 third-year grants and 

40,000 fourth-year grants were expected to be 

awarded in school year 2006—2007, totaling an 

estimated $310.0 million. The average grant award 

is estimated to be $3,718 and $3,875 respectively. 

Federal Work-Study Schools 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

percent of student’s earnings 

(50percent in the case of forprofit employers). 

Up to $300 more than 

the student’s 

determined financial 

need; if employment 

continues past this 

point, federal funds may 

not be used to 

subsidize the 

employment. 

Dependent students: About 1.1 million awards 

were awarded in school year 2003—2004, totaling 

$2.0 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 

$1.0 billion. The average award was $2,303; the 

median income of recipients was $10,561. 

Page 21 GAO-08-717T 
Title IV student aid 

program Program details 

Annual award

amounts Number and characteristics of beneficiaries 

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 $956.0 

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. 

$3,500 to $8,500 

depending upon year of 

schooling and 

dependency status. 

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 

unsubsidized loans while the 

student is in school, for the first 

6 months after the student 

leaves school, and during a 

period of deferment. 

Otherwise, the terms and 

conditions of unsubsidized 

loans are the same as those 

for subsidized loans. 

$3,500 to $20,500 

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. 

Page 22 GAO-08-717T 
Title IV student aid 

program Program details 

Annual award

amounts Number and characteristics of beneficiaries 

FFEL or Direct 

PLUS Loan 

Loans made to parents on 

behalf of dependent 

undergraduate students 

enrolled at least half-time, or to 

graduate and professional 

students. 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 

estimated financial 

assistance 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. 

Source: GAO analysis of applicable federal laws and regulations and academic year 2003-2004 NPSAS data. 

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, new 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 

Tax preferences also include tax-exempt savings vehicles. Section 529 of

the tax code makes tax free the investment income from qualified tuition 

programs. There are two types of qualified tuition programs: savings 

programs established by states and prepaid tuition programs established 

either by states or by one or more eligible educational institutions. 

Another tax-exempt savings vehicle is the Coverdell Education Savings 

Account. Tax penalties apply to both 529 programs and Coverdell savings 

accounts if the funds are not used for allowable education expenses. Key 

features of these and other education-related tax preferences are 

described below, in table 6. 

Page 23 GAO-08-717T 
Table 6: Selected Postsecondary Education Tax Preferences 

Preference details 

Tax preference Eligibility 

Income ranges for 

phasing out 

benefits (Tax Year 

2007)a

Eligible 

expenses 

Tax benefit (Tax Year 

2007) 

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: 

$47,000-$57,000 

Joint return: 

$94,000-$114,000.b

Tuition and fees at 

institutions eligible 

to participate in 

Title IV programs. 

Maximum credit: 

$1,650 per student. 

Credit rate is 100 

percent on first $1,100 

of qualified higher 

education expenses, 

50 percent on next 

$1,100.d

 

Nonrefundable: if filer 

has no tax liability due 

to offsetting 

deductions, 

exemptions, or

competing tax credits, 

filer cannot receive 

credit. 

In tax year 2005, 2.9 

million tax filers 

claimed $3.0 billion in 

Hope credits; the 

average credit 

claimed was $1,033, 

and the median 

income of filers

claiming the credit 

was $40,252. 

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:

$47,000-$57,000 

Joint return: 

$94,000-$114,000.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).d

 

Nonrefundable: if filer 

has no tax liability due 

to offsetting 

deductions, 

exemptions, or

competing tax credits, 

filer cannot receive 

credit.

In tax year 2005, 4.4 

million tax filers 

claimed $3.1 billion in 

Lifetime Learning 

credits; the average 

credit claimed was 

$715, and the median 

income of filers

claiming the credit 

was $40,527. 

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: 

$55,000-$70,000 

Joint return: 

$110,000-$140,000.c

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 2005, 8.1 

million tax filers 

deducted $1.1 billion 

of student loan

interest; the average 

deduction was $135, 

and the median 

income of filers

deducting student 

loan interest was 

$46,243. 

Page 24 GAO-08-717T 
Preference details 

Tax preference Eligibility 

Income ranges for 

phasing out 

benefits (Tax Year 

2007)a

Eligible 

expenses 

Tax benefit (Tax Year 

2007) 

Number and 

characteristics of

beneficiaries 

Section 529 

qualified tuition

programs—

prepaid tuition 

programs and 

state-sponsored

college savings 

programs 

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 

(expired Dec. 31, 

2007)e

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 2005, 4.7 

million tax filers 

deducted $2.4 billion; 

the average 

deduction was $520, 

and the median 

income of filers using 

the deduction was 

$57,913. 

Sources: IRS and College Savings Plan Network; GAO analysis of 2005 IRS Statistics of Income data.

a

Modified adjusted gross income amounts are provided. 

Page 25 GAO-08-717T 
b

Under section 25A(h) of title 26, United States Code, the income phase-out amounts are indexed to

inflation according to a formula specified in law for this purpose, which may or may not result in a 

yearly increase.

c

Under section 221(f) of title 26, United States Code, the income phase-out amounts are indexed to 

inflation according to a formula specified in law for this purpose, which may or may not result in a 

yearly increase.

d

 or students who attended otherwise eligible educational institutions located within the Gulf 

Opportunity Zone in tax years 2005 and 2006, the maximum Hope tax credit and maximum Lifetime 

Learning tax credit were doubled. This increase does not apply to tax years after 2006. Gulf 

Opportunity Zone Act, Pub. L. No. 109-135, § 102, 119 Stat. 2577, 2594 (Jan. 7, 2005). 

e

Although the tuition deduction has expired, legislation has been introduced that would reinstate the 

deduction. 

Our review of tax preferences did not include exclusions from income, 

which permit certain types of education-related income to be excluded

from the calculation of adjusted gross income on which taxes are based. 

For example, qualified scholarships covering tuition and fees and qualified 

tuition reductions from eligible educational institutions are not included in

gross income for income tax purposes. Similarly, student loans forgiven 

when a graduate goes into certain professions for a certain period of time 

are also not subject to federal income taxes. We did not include special

provisions in the tax code that also extend existing tax preferences when 

tax filers support a postsecondary education student. For example, tax 

filers may claim postsecondary education students as dependents after age 

18, even if the student has his or her own income over the limit that would 

otherwise apply. Also, gift taxes do not apply to funds used for certain 

postsecondary educational expenses, even for amounts in excess of the 

usual $12,000 limit on non-taxable 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 26 GAO-08-717T 
Page 27 GAO-08-717T 

Appendix II: Comparison of Assistance by 

Timing of Benefits for Selected Programs and 

Tax Preferences 

Table 7: Comparison of Assistance by Timing of Benefit for Selected Programs and Tax Preferences 

Type of assistance 

Save for future 

expenses Pay current expenses Repay expenses 

Grant programs Pell Grants 

Supplemental Educational 

 Opportunity Grants 

Academic Competitiveness 

 Grants 

SMART Grants 

Loan programs Subsidized and Unsubsidized 

 Stafford Loans 

Federal Perkins Loans 

Federal PLUS Loans 

Tax preferences Coverdell Educational 

 Savings Accounts 

Section 529 Qualified 

 Tuition Programs 

Hope Credit 

Lifetime Learning Credit 

Tuition Deduction 

Student Loan Interest 

 Deduction 

Work-Study program Federal Work-Study 

Source: GAO.
Page 28 GAO-08-717T 

Appendix III: Effects of Tax Rules on Tax 

Preference Use 

For an example of how the use of college savings programs and the tuition

deduction is affected by “anti-double-dipping” rules, consider the 

following: To calculate whether a distribution from a college savings 

program is taxable, tax filers must determine if the total distributions for 

the tax year are more or less than the total qualified educational expenses 

reduced by any tax-free educational assistance, i.e., their adjusted 

qualified education expenses (AQEE). After subtracting tax-free assistance 

from qualified educational expenses to arrive at the AQEE, tax filers 

multiply total distributed earnings by the fraction (AQEE / total amount 

distributed during the year). If parents of a dependent student paid $6,500 

in qualified education expenses from a $3,000 tax-free scholarship and a 

$3,600 distribution from a tuition savings program, they would have $3,500 

in AQEE. If $1,200 of the distribution consisted of earnings, then $1,200 x 

($3,500 AQEE / $3,600 distribution) would result in $1,167 of the earnings

being tax free, while $33 would be taxable. However, if the same tax filer 

had also claimed a tuition deduction, anti-double-dipping rules would 

require the tax filer to subtract the expenses taken into account in figuring

the tuition deduction from AQEE. If $2,000 in expenses had been used 

toward the tuition deduction, then the taxable distribution from the 

section 529 savings program would rise to $700. 1 For families such as 

these, anti-double-dipping rules increase the computational complexity 

they face and may result in unanticipated tax liabilities associated with the 

use of section 529 savings programs. 

 1

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 29 GAO-08-717T 

Appendix IV: Point Estimates and 

Confidence Intervals 

We used two data sets for this testimony: Education’s 2003-2004 National 

Postsecondary Student Aid Study and the Internal Revenue Service’s 2005 

Statistics of Income. Estimates from both data sets are subject to sampling 

errors and the estimates we report are surrounded by a 95 percent 

confidence interval. The following tables provide the lower and upper 

bounds of the 95 percent confidence interval for all estimate figures in the 

tables in this testimony. For figures and text drawn from these data, we 

provide both point estimates and confidence intervals. 

Table 8: Federal Student Aid Programs Authorized under Title IV of the Higher Education Act, Academic Year 2003-2004: 

Confidence Intervals 

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 0 0 0 0

Source: GAO analysis of 2003-2004 National Postsecondary Student Aid Study (NPSAS) data. 
Table 9: Selected Postsecondary Education Tax Preferences, Tax Year 2005 

Number of returns Total benefits ($) Average benefit ($) Median income ($)

Type of assistance Estimate Estimate Estimate Estimate

Hope Credit 2,892,288 2,988,183,691 1,033 40,252

Lifetime Learning Credit 4,382,182 3,131,447,378 715 40,527

Student Loan Interest Deduction 8,072,896 1,069,200,260 135 46,243

Tuition Deduction 4,696,013 2,425,899,689 520 57,913

Source: GAO analysis of 2005 Statistics of Income data. 

Table 10: Selected Postsecondary Education Tax Preferences, Tax Year 2005: Confidence Intervals 

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 2,793,098 2,994,041 2,871,011,860 3,105,355,522 1,014 1,053 39,117 41,727

Lifetime 

Learning

Credit 4,260,679 4,506,182 3,013,903,998 3,248,990,757 696 733 39,605 41,700

Student Loan

Interest 

Deduction 7,910,043 8,235,749 1,021,740,137 1,116,660,382 130 141 45,336 47,021

Tuition 

Deduction 4,573,917 4,820,453 2,331,295,407 2,520,503,972 504 535 56,259 60,249

Source: GAO analysis of 2005 Statistics of Income data. 

Table 11: Number of Tax Filers Claiming an Education Tax Credit or Tuition Deduction, Tax Years 1998-2005 

Hope Credit, Lifetime 1998 1999 2000 2001 2002 2003 2004 2005

Learning Credit, and 

Tuition Deduction 4,652,600 6,436,650 6,815,320 7,212,550 9,564,760 10,626,200 11,626,220 11,478,662

Source: GAO analysis of Statistics of Income data.

Table 12: Number of Tax Filers Claiming an Education Tax Credit or Tuition Deduction, Tax Years 1998-2005: Confidence 

Intervals 

1998 1999 2000 2001 2002 2003 2004 2005

Lower 

bound 4,482,106 6,233,732 6,606,583 6,997,019 9,319,692 10,370,110 11,360,283 11,288,996

 Hope Credit, 

Lifetime 

Learning

Credit, and 

Tuition 

Deduction 

Upper 

bound 4,827,719 6,639,576 7,024,049 7,428,088 9,809,833 10,882,359 11,892,067 11,668,329

Source: GAO analysis of 2005 Statistics of Income data. 

Page 30 GAO-08-717T 
Table 13: Percentage of Aid Recipients and Dollars of Aid by Income Category for Dependent Students Served by Selected

Title IV Programs, Academic Year 2003-2004: Confidence Intervals 

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

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

Lower bound 46.29 42.41 7.38 0.65 0 0

Pell Grant 

Dollars 

Upper bound 48.82 44.89 8.5 1.04 0 0

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

Lower bound 15.32 27.14 22.83 15.68 7.92 5.87

Stafford 

Subsidized Loan 

Dollars 

Upper bound 17.07 29.35 24.94 17.51 9.3 7.08

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

Lower bound 6.22 11.05 11.31 16.69 17.55 30.3

Stafford 

Unsubsidized 

Loan 

Dollars 

Upper bound 7.75 12.99 13.41 19.2 20.15 33.37

Source: GAO analysis of 2003-2004 NPSAS data.

Table 14: Percentage of Aid Recipients and Dollars of Aid by Income Category for Independent Students Served by Selected

Title IV Programs, Academic Year 2003-2004: Confidence Intervals 

 Program 

$0- 

20,000

$20,001-

40,000

$40,001-

60,000

$60,001-

80,000 

$80,001-

100,000

More than

$100,000

Recipients Lower bound 66.28 26.59 4.59 0 0 0

Upper bound 68.35 28.57 5.62 0 0 0

Lower bound 71.68 23.62 2.32 0 0 0

Pell Grant 

Dollars 

Upper bound 73.77 25.65 2.96 0 0 0

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

Lower bound 49.93 25.26 10.05 3.87 1.2 0.46

Stafford 

Subsidized Loan 

Dollars 

Upper bound 54.61 29.79 14.73 5.4 2.05 2.65

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

Lower bound 44.28 22.51 11.96 6.22 2.86 3.42

Stafford 

Unsubsidized 

Loan 

Dollars 

Upper bound 48.37 26 14.78 8.49 4.12 6.99

Source: GAO analysis of 2003-2004 NPSAS data.

Page 31 GAO-08-717T 
Table 15: Percentage of Tax Filers Claiming Hope and Lifetime Learning Credits and Tuition Deduction and Tax Preference 

Dollars by Income Category, Tax Year 2005: Confidence Intervals 

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

Tax filers Lower bound 15.85 30.64 18.36 15.29 11.8 0.92

Upper bound 18.53 33.92 21.09 17.85 14.12 1.71

Lower bound 8.57 30.44 20.49 19.77 12.86 0.21

Hope Credit 

Dollars 

Upper bound 10.46 34.11 23.8 23.18 15.67 0.44

Tax filers Lower bound 15.66 31.06 18.53 18.43 10.02 0.57

Upper bound 17.81 33.72 20.74 20.66 11.78 1.09

Lower bound 8.79 28.94 19.18 22.12 13.41 0.17

Lifetime 

Learning Credit 

Dollars 

Upper bound 10.52 32.4 22.25 25.49 16.25 0.46

Tax filers Lower bound 22.56 11.2 14.69 8.43 10.68 26.63

Upper bound 24.83 12.95 16.65 10.01 12.42 28.96

Lower bound 10.93 5.39 13.24 6.58 13.39 43.42

Tuition 

Deduction 

Dollars 

Upper bound 12.55 6.62 15.69 8.54 16.17 47.48

Source: GAO analysis of 2005 Statistics of Income data. 

Table 16: Number and Percentage of Form 1098-Ts with and without Postsecondary 

Education Expense Information, Tax Year 2005 

 Number of returns Percent of returns

1098-Ts with expense information 4,292,132 24

1098-Ts without expense information 13,399,837 76

Source: GAO analysis of 2005 Statistics of Income data. 

Table 17: Number and Percentage of Form 1098-Ts with and without Postsecondary Education Expense Information, Tax Year 

2005: Confidence Intervals 

Number of returns: 

Lower bound

Number of returns: 

Upper bound

Percent of returns: 

Lower bound

Percent of returns: 

Upper bound 

1098-Ts with expense information 4,173,915 4,410,349 24 25

1098-Ts without expense 

information

13,200,126 13,599,548 75 76a

Source: GAO analysis of 2005 Statistics of Income data. 

a

Lower and upper bounds were estimated independently and therefore may not add up to 100 

percent. 

Page 32 GAO-08-717T 
Table 18: Number and Percentage of Taxpayers Apparently Eligible to Claim an

Education Tax Credit or Tuition Deduction in Tax Year 2005 

 Number of returns Percent of returns

Total 4,292,132 100

Apparently eligible 2,770,570 65

All other 1,521,562 35

Source: GAO analysis of 2005 Statistics of Income data. 

Table 19: Number and Percentage of Taxpayers Apparently Eligible to Claim an Education Tax Credit or Tuition Deduction in

Tax Year 2005: Confidence Intervals 

Number of returns: 

Lower bound

Number of returns: 

Upper bound

Percent of returns: 

Lower bound

Percent of returns: 

Upper bound 

Total 4,290,711 4,292,132 100 100

Apparently eligible 2,673,200 2,867,940 63 66

All other 1,453,105 1,590,019 34 37a

Source: GAO analysis of 2005 Statistics of Income data. 

a

Lower and upper bounds were estimated independently and therefore may not add up to 100 

percent. 

Table 20: Number and Percentage of Taxpayers Apparently Eligible to Claim an

Education Tax Credit or Tuition Deduction That Failed to Do So in Tax Year 2005

 Number of returns Percent of returns

Failed to claim 412,058 19

Source: GAO analysis of 2005 Statistics of Income data. 

Table 21: Number and Percentage of Taxpayers Apparently Eligible to Claim an Education Tax Credit or Tuition Deduction

That Failed to Do So in Tax Year 2005: Confidence Intervals 

Number of returns: Lower

bound 

Number of returns: Upper 

bound

Percent of returns: Lower 

bound 

Percent of returns: Upper 

bound 

Failed to claim 374,089 450,027 18 21

Source: GAO analysis of 2005 Statistics of Income data. 

Page 33 GAO-08-717T 
Table 22: Amounts by Which Taxpayers Apparently Eligible for an Education Tax 

Credit or Tuition Deduction Failed to Reduce Their Tax Liability in Tax Year 2005 

 Inaction led to increased tax liability

Median 79.16

Mean 219.12

10th percentile 7.64

25th percentile 24.07

75th percentile 268.99

90th percentile 577.38

Maximum value 2,000.00

Source: GAO analysis of 2005 Statistics of Income data. 

Table 23: Amounts by Which Taxpayers Apparently Eligible for an Education Tax 

Credit or Tuition Deduction Failed to Reduce Their Tax Liability in Tax Year 2005: 

Confidence Intervals 

Inaction led to increased tax liability

Median: Lower bound 66.5

Median: Upper bound 99.58

Mean: Lower bound 189.46

Mean: Upper bound 248.97

10th percentile: Lower bound 5.8

10th percentile: Upper bound 11.71

25th percentile: Lower bound 19.69

25th percentile: Upper bound 31.9

75th percentile: Lower bound 217.46

75th percentile: Upper bound 324.17

90th percentile: Lower bound 492.24

90th percentile: Upper bound 721.48

Source: GAO analysis of 2005 Statistics of Income data. 

Page 34 GAO-08-717T 
Table 24: Number and Percentage of Apparently Eligible Taxpayers That Claimed 

the Tuition Deduction but Would Have Been Better off Claiming the Lifetime 

Learning Credit in Tax Year 2005 

 

Number of 

returns

Percent of

returns

Would have been better off claiming Lifetime 

Learning Credit 131,912 27

Source: GAO analysis of 2005 Statistics of Income data. 

Table 25: Number and Percentage of Apparently Eligible Taxpayers That Claimed the Tuition Deduction but Would Have Been

Better off Claiming the Lifetime Learning Credit in Tax Year 2005: Confidence Intervals 

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 110,152 153,672 23 30

Source: GAO analysis of 2005 Statistics of Income data. 

Table 26: Amounts by Which Apparently Eligible Taxpayers That Claimed the 

Tuition Deduction Could Have Reduced Their Tax Liability by Claiming the Lifetime 

Learning Credit in Tax Year 2005

 Lifetime Learning Credit produced larger reduction

Median 73.04

Mean 220.24

10th percentile a

25th percentile 25.16

75th percentile 233.91

90th percentile 631.37

Maximum value 1,697.00

Source: GAO analysis of 2005 Statistics of Income data. 

a

Estimate cannot be calculated due to small sample size.

Page 35 GAO-08-717T 
Table 27: Amounts by Which Apparently Eligible Taxpayers That Claimed the 

Tuition Deduction Could Have Reduced Their Tax Liability by Claiming the Lifetime 

Learning Credit in Tax Year 2005: Confidence Intervals 

Lifetime Learning Credit produced larger reduction 

Median: Lower bound 53.82

Median: Upper bound 110.64

Mean: Lower bound 161.41

Mean: Upper bound 279.06

10th percentile: Lower 

bound a

10th percentile: Upper 

bound a

25th percentile: Lower 

bound 

18.92

25th percentile: Upper 

bound 

42.66

75th percentile: Lower 

bound 

157.16

75th percentile: Upper 

bound 

312.42

90th percentile: Lower 

bound 

345.18

90th percentile: Upper 

bound 

1,025.46

Source: GAO analysis of 2005 Statistics of Income data. 

a

Estimate cannot be calculated due to small sample size. 

Table 28: Number and Percentage of Apparently Eligible Taxpayers That Claimed 

the Lifetime Learning Credit but Would Have Been Better off Claiming the Tuition

Deduction in Tax Year 2005

 

Number of 

returns

Percent of

returns

Would have been better off claiming the 

Tuition Deduction 37,580 7

Source: GAO analysis of 2005 Statistics of Income data. 

Page 36 GAO-08-717T 
Table 29: Number and Percentage of Apparently Eligible Taxpayers That Claimed the Lifetime Learning Credit but Would

Have Been Better off Claiming the Tuition Deduction in Tax Year 2005: Confidence Intervals 

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 26,897 50,845 5 9

Source: GAO analysis of 2005 Statistics of Income data. 

Table 30: Amounts by Which Apparently Eligible Taxpayers That Claimed the 

Lifetime Learning Credit Could Have Reduced Their Tax Liability by Claiming the 

Tuition Deduction in Tax Year 2005 

 Tuition deduction produced larger reduction

Median 145.17

Mean 204.61

10th percentile a

25th percentile a

75th percentile 274.32

90th percentile 397.45

Maximum value 934

Source: GAO analysis of 2005 Statistics of Income data. 

a

Estimate cannot be calculated due to small sample size. 

Page 37 GAO-08-717T 
Table 31: Amounts by Which Apparently Eligible Taxpayers That Claimed the 

Lifetime Learning Credit Could Have Reduced Their Tax Liability by Claiming the 

Tuition Deduction in Tax Year 2005: Confidence Intervals 

Tuition deduction produced larger reduction

Median: Lower bound 83.73

Median: Upper bound 194.37

Mean: Lower bound 141.96

Mean: Upper bound 267.26

10th percentile: Lower bound a

10th percentile: Upper bound a

25th percentile: Lower bound a

25th percentile: Upper bound a

75th percentile: Lower bound 177.32

75th percentile: Upper bound 374.41

90th percentile: Lower bound a

90th percentile: Upper bound a

Source: GAO analysis of 2005 Statistics of Income data. 

a

Estimate cannot be calculated due to small sample size. 

Table 32: Number and Percentage of Apparently Eligible Taxpayers That Claimed a 

Hope Credit but Would Have Been Better off Claiming a Lifetime Learning Credit in 

Tax Year 2005

 

Number of 

returns

Percent of

returns

Total 368,605 100

Would have been better off claiming

Lifetime Learning Credit 20,727 6

All other 347,878 94

Source: GAO analysis of 2005 Statistics of Income data. 

Page 38 GAO-08-717T 
Table 33: Number and Percentage of Apparently Eligible Taxpayers That Claimed a Hope Credit but Would Have Been Better 

off Claiming a Lifetime Learning Credit in Tax Year 2005: Confidence Intervals 

Number of returns: 

Lower bound

Number of returns: 

Upper bound

Percent of returns: 

Lower bound

Percent of

returns: Upper

bound

Total 332,477 404,733 99 100

Would have been better off claiming

Lifetime Learning Credit 12,950 31,217 4 8

All other 337,388 355,655 92 96a

Source: GAO analysis of 2005 Statistics of Income data. 

a

Lower and upper bounds were estimated independently and therefore may not add up to 100 

percent. 

Table 34: Amounts by Which Apparently Eligible Taxpayers That Claimed the Hope 

Credit Could Have Reduced Their Tax Liability by Claiming the Lifetime Learning 

Credit in Tax Year 2005

 Lifetime credit produced larger reduction ($)

Median 296.15

Mean 356.37

10th percentile 86.43

25th percentile a

75th percentile 494.62

90th percentile a

Maximum value 863

Source: GAO analysis of 2005 Statistics of Income data. 

a

Estimate cannot be calculated due to small sample size. 

Page 39 GAO-08-717T 
Table 35: Amounts by Which Apparently Eligible Taxpayers That Claimed the Hope 

Credit Could Have Reduced Their Tax Liability by Claiming the Lifetime Learning 

Credit in Tax Year 2005: Confidence Intervals 

Lifetime credit produced larger reduction ($)

Median: Lower bound 166.16

Median: Upper bound 491.75

Mean: Lower bound 257.82

Mean: Upper bound 454.93

10th percentile: Lower bound 64.32

10th percentile: Upper bound 156.97

25th percentile: Lower bound a

25th percentile: Upper bound a

75th percentile: Lower bound 303.59

75th percentile: Upper bound 654.08

90th percentile: Lower bound a

90th percentile: Upper bound a

Source: GAO analysis of 2005 Statistics of Income data. 

a

Estimate cannot be calculated due to small sample size. 

Table 36: Number and Percentage of Returns where Apparently Eligible Taxpayers 

Made Suboptimal Choice, Tax Year 2005

 Number of returns Percent of returns

Total 2,141,870 100

Taxpayers making suboptimal choice 601,267 28

All other 1,540,603 72

Source: GAO analysis of 2005 Statistics of Income data. 

Table 37: Number and Percentage of Returns where Apparently Eligible Taxpayers Made Suboptimal Choice, Tax Year 2005: 

Confidence Intervals

Number of returns: 

Lower bound

Number of returns: 

Upper bound

Percent of returns: 

Lower bound

Percent of returns: 

Upper bound

Total 2,056,824 2,229,485 100 100

Taxpayers making suboptimal 

choice 555,166 647,638 26 30

All other 1,467,713 1,613,493 70 74

Source: GAO analysis of 2005 Statistics of Income data. 

Page 40 GAO-08-717T 
Table 38: Amounts by which Apparently Eligible Taxpayers that Made Suboptimal 

Choice Could Have Further Reduced Their Tax Liability in Tax Year 2005 

 Amount ($)

Median 85.74

Mean 222.04

10th percentile 8.32

25th percentile 25.88

75th percentile 284.13

90th percentile 576.86

Maximum value 2,000.00

Source: GAO analysis of 2005 Statistics of Income data. 

Table 39: Amounts by which Apparently Eligible Taxpayers that Made Suboptimal 

Choice Could Have Further Reduced Their Tax Liability in Tax Year 2005: 

Confidence Intervals 

Amount ($)

Median: Lower bound 75.5

Median: Upper bound 105.94

Mean: Lower bound 197.46

Mean: Upper bound 246.62

10th percentile: Lower bound 6.41

10th percentile: Upper bound 11.79

25th percentile: Lower bound 22.28

25th percentile: Upper bound 34.6

75th percentile: Lower bound 236.65

75th percentile: Upper bound 317.04

90th percentile: Lower bound 499.46

90th percentile: Upper bound 697.14

Source: GAO analysis of 2005 Statistics of Income data. 

Page 41 GAO-08-717T 
Table 40: Number and Percentage of Suboptimal Choices Made by Paid Tax 

Preparers, Tax Year 2005

Taxpayers making suboptimal choice 

Number of returns Percent

Total 601,267 100

No preparer 290,884 48

Paid preparer 301,355 50

IRS prepared/reviewed a0

VITA/self help/outreach/elderly 

assistance a

1

Source: GAO analysis of 2005 Statistics of Income data. 

a

Estimate cannot be calculated due to small sample size. 

Table 41: Number and Percentage of Suboptimal Choices Made by Paid Tax Preparers, Tax Year 2005: Confidence Intervals 

Taxpayers making suboptimal choice 

Number of returns: 

Lower bound

Number of returns: 

Upper bound

Percent: Lower 

bound 

Percent: Lower 

bound

Total 555,166 647,368 99.59 100

No preparer 258,439 323,329 44.53 52

Paid preparer 269,038 333,672 46.27 54

IRS prepared/reviewed a a0 1

VITA/self help/outreach/elderly 

assistance a a

0.58 3

Source: GAO analysis of 2005 Statistics of Income data. 

a

Estimate cannot be calculated due to small sample size. 

Page 42 GAO-08-717T (450671) 
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