Postsecondary Education: Multiple Tax Preferences and Title IV Student Aid Programs Create a Complex Education Financing Environment
Published: 2006-12-05T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Federal assistance helps students and families pay for postsecondary education through several policy tools--grant and loan programs authorized by title IV of the Higher Education Act of 1965 and more recently enacted tax preferences. This testimony summarizes and updates our 2005 report on (1) how title IV assistance compares to that provided through the tax code (2) the extent to which tax filers effectively use postsecondary tax preferences, and (3) what is known about the effectiveness of federal assistance. This hearing is an opportunity to consider whether any changes should be made in the government's overall strategy for providing such assistance or to the individual programs and tax provisions that provide the assistance. This statement is based on previously published GAO work and reviews of relevant literature.
section_title: What GAO Found
paragraphs: 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. Some tax filers do not appear to make optimal education-related tax decisions. For example, among the limited number of 2002 tax returns available for our analysis, 27 percent of eligible tax filers did not claim either the tuition deduction or a tax credit. In so doing, these tax filers failed to reduce their tax liability by $169, on average, and 10 percent of these filers could have reduced their tax liability by over $500. One explanation for these taxpayers' choices may be the complexity of postsecondary tax provisions, which experts have commonly identified as difficult for tax filers to use. Little is known about the effectiveness of title IV aid or tax preferences in promoting, for example, postsecondary attendance or school choice, in part because of research data and methodological challenges. As a result, policymakers do not have information that would allow them to make the most efficient use of limited federal resources to help students and families.

section_title: Letter
paragraphs: We are pleased to be here this morning to discuss the federal government’s  efforts to financially support attendance at postsecondary education  institutions. American higher education has long been crucial to the  development of our nation’s cultural, social, and economic capital. At the  dawn of the 21st Century, changing workforce demographics, a more  integrated global economy, and numerous technological advances are  placing new demands on our colleges and universities. For the United  States to remain competitive in the rising global knowledge economy, its  citizens will need both the ways and means to endow themselves with the  tools necessary for the task. However, rising tuition has become a  disconcertingly fixed feature of our higher education system, and in recent  months concerns about postsecondary access and affordability have  received notable attention through the findings of the Secretary of  Education’s Commission on the Future of Higher Education and the  Comptroller General’s recent forum on the Global Competitiveness of the  Nation’s Higher Education System.
This hearing is an opportunity to consider whether any changes should be  made in the government’s overall strategy and the individual programs and  tax provisions that provide financial assistance to students and families  saving or paying for postsecondary education or repaying student loans.  This opportunity to review the programs and tax provisions is important  for several reasons. The fact that we face large and growing structural  deficits in the future—primarily driven by demographics and rising health  care costs—emphasizes the need to consider how the government  allocates resources. In addition, GAO has noted that fundamental  reexamination of government programs, policies, and priorities is  necessary to assure that they match the needs of the 21st Century. GAO  has identified the coordination of student aid programs and the  effectiveness of those programs both as key topics needing congressional  oversight.
My statement today will focus on three issues that emerged in our 2005  report on student grant and loan assistance made available under Title IV  of the Higher Education Act and postsecondary education tax  preferences.
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.
Finally, we found that Congress has received little evidence concerning  the effectiveness of assistance provided under title IV or through tax  preferences, including whether such assistance increases attendance or  choice.
Our statement today is drawn from previous GAO reports and testimonies  covering postsecondary title IV programs and tax preferences, which were  done in accordance with generally accepted government auditing  standards, as well as reviews of relevant literature.
subsections: section_title: Background
paragraphs: 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. Much of this aid has been provided on the basis of the  difference between a student’s cost of attendance and an estimate of the  ability of the student and the student’s family to pay these costs, called the  expected family contribution (EFC). The EFC is calculated based on  information provided by students and parents on the Free Application for  Federal Student Aid (FAFSA). Statutory definitions establish the criteria  that students must meet to be considered independent of their parents for  the purpose of financial aid, and statutory formulas establish the share of  income and assets that are expected to be available for the student’s  education. In fiscal year 2005, the Department of Education made  approximately $14 billion in grants, and title IV lending programs made  available another $57 billion in loan assistance. Title IV also authorizes  programs funded by the federal government and administered by  participating higher education institutions, including the Supplemental  Educational Opportunity Grant (SEOG), Perkins loans, and federal work- study aid, collectively known as campus-based aid. Table 1 provides brief  descriptions of the title IV programs that we reviewed in our 2005 report  and includes two programs—Academic Competitiveness Grants and  National Science and Mathematics Access to Retain Talent Grants—that  were created since that report was issued.
Postsecondary assistance also has been provided through a range of tax  preferences, including postsecondary tax credits, tax deductions, and tax- exempt savings programs. For example, the Taxpayer Relief Act of 1997  allows eligible tax filers to reduce their tax liability by receiving, for tax  year 2006, up to a $1,650 Hope tax credit or up to a $2,000 Lifetime  Learning tax credit for tuition and course-related fees paid for a single  student. The fiscal year 2005 federal revenue loss estimate of the  postsecondary tax preferences that we reviewed was $9.15 billion dollars.  Tax preferences discussed as part of our 2005 report include the  following:  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.
Section 529 Qualified Tuition Programs—College Savings Programs and  Prepaid Tuition Programs—non-income-based programs that provide  favorable tax treatment to investments and distributions used to pay the  expenses of future or current postsecondary students.
Coverdell Education Savings Accounts—income-based savings program  providing favorable tax treatment to investments and distributions used to  pay the expenses of future or current elementary, secondary, or  postsecondary students.
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.
section_title: Tax Preferences Differ from Title IV Assistance in Timing, Distribution, and Students’ and Families’ Responsibility for Obtaining Benefits
paragraphs: 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.
subsections: section_title: Title IV and Tax Programs Differ in Benefit Timing
paragraphs: 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.
section_title: Beneficiaries of Title IV Programs and Tax Preferences Differ
paragraphs: While title IV programs and tax preferences assist many students and  families, program and tax rules affect eligibility for such assistance. These  rules also affect the distribution of title IV aid and the assistance provided  through tax preferences. As a result, the beneficiaries of title IV programs  and tax preferences differ.
Title IV programs generally have rules for calculating grant and loan  assistance that give different consideration to family income, assets, and  college costs in the award of financial aid. For example, Pell Grant  awards are calculated by subtracting the student’s EFC from the maximum  Pell Grant award ($4,050 in academic year 2006-2007), or the student’s cost  of attendance, whichever is less. Because the EFC is closely linked to  family income and circumstances (such as the size of the family and the  number of dependents in school), and modest EFCs are required for Pell  eligibility, Pell awards are made primarily to families with modest  incomes. In contrast, the maximum unsubsidized Stafford loan amount is  calculated without direct consideration of financial need: students may  borrow up to their cost of attendance, minus the estimated financial  assistance they will receive. 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.
Because independent students generally have lower incomes and  accumulated savings than dependent students and their families, patterns  of program participation and dollar distribution differ. Participation of  independent students in Pell, subsidized Stafford, and unsubsidized  Stafford loan programs is heavily concentrated among those with incomes  of $40,000 or less: from 74 percent (unsubsidized Stafford) to 95 percent  (Pell) of program participants have incomes below this level. As shown in  table 3, the distribution of award dollars follows a nearly identical pattern.
Many education-related tax preferences have both de facto lower limits  created by the need to have a positive tax liability to obtain their benefit  and income ceilings on who may use them. For example, the Hope and  Lifetime Learning tax credits require that tax filers have a positive tax  liability to use them and income-related phase-out provisions in 2005 that  began at $45,000 and $90,000 for single and joint filers, respectively.  Furthermore, tax-exempt savings are more advantageous to families with  higher incomes and tax liabilities because, among other reasons, these  families hold greater assets to invest in these tax preferences and have a  higher marginal tax rate, and thus benefit the most from the use of these  tax preferences. Table 4 shows the income categories of tax filers claiming  the three tax preferences available to current students and/or their  families along with the reduced tax liabilities from those preferences in  2004.
section_title: Students and Families Have More Responsibility for Obtaining Benefits of Tax Preferences in Comparison to Title IV Aid
paragraphs: The federal government and postsecondary institutions have significant  responsibilities in assisting students and families in obtaining assistance  provided under title IV programs but only minor roles with respect to tax  filers’ use of education-related tax preferences. To obtain federal student  aid, applicants must first complete the FAFSA, a form which required  students to complete up to 100 fields in 2006-2007. Submitting a completed  FAFSA to the Department of Education largely concludes students’ and  families’ responsibility in obtaining aid. The Department of Education is  responsible for calculating students’ and families’ EFC on the basis of the  FAFSA, and students’ educational institutions are responsible for  determining aid eligibility and the amounts and packaging of awards.
In contrast, higher education tax preferences require students and families  to take more responsibility. Although postsecondary institutions provide  students and IRS with information about higher education attendance,  they have no other responsibilities for higher education tax credits,  deductions, or tax-preferred savings. The federal government’s primary  role with respect to higher education tax preferences is the promulgation  of rules; the provision of guidance to tax filers; and the processing of tax  returns, including some checks on the accuracy of items reported on those  tax returns. The responsibility for selecting among and properly using tax  preferences rests with tax filers. Unlike title IV programs, users must  understand the rules, identify applicable tax preferences, understand how  these tax preferences interact with one another and with federal student  aid, keep records sufficient to support their tax filing, and correctly claim  the credit or deduction on their return.
section_title: Some Tax Filers May Not Effectively Use Postsecondary Tax Preferences, Possibly Due to Complexity
paragraphs: According to our analysis of IRS data on the use of Hope and Lifetime tax  credits and the tuition deduction in our 2005 report, some tax filers appear  to make less-than-optimal choices among them. The apparent suboptimal  use of postsecondary tax preferences may arise, in part, from the  complexity of these provisions.
subsections: section_title: Some Tax Filers Appear to Make Suboptimal Choices
paragraphs: Making poor choices among tax preferences for postsecondary education  may be costly to tax filers. For example, families may strand assets in a  tax-exempt savings vehicle and incur tax penalties on their distribution if  their child chooses not to go to college. They may also fail to minimize  their federal income tax liability by claiming a tax credit or deduction that  yields less of a reduction in taxes than a different tax preference or by  failing to claim any of their available tax preferences. For example, if a  married couple filing jointly with one dependent in his/her first 2 years of  college had an adjusted gross income of $50,000, qualified expenses of  $10,000 in 2006, and tax liability greater than $2,000, their tax liability  would be reduced by $2,000 if they claimed the Lifetime Learning credit  but only $1,650 if they claimed the Hope credit.
In our 2005 report, we found that some people who appear to be eligible  for tax credits and/or the tuition deduction did not claim them. The files of  about 77 percent of the tax year 2002 tax returns that we were able to  review were apparently eligible to claim one or more of the three tax  preferences. However, about 27 percent of those returns, representing  about 374,000 tax filers, failed to use the any of them. The amount by  which these tax filers failed to reduce their tax averaged $169; 10 percent  of this group could have reduced their tax liabilities by over $500.
Suboptimal choices were not limited to tax filers who prepared their own  tax returns. A possible indicator of the difficulty people face in  understanding education-related tax preferences is how often the  suboptimal choices we identified were found on tax returns prepared by  paid tax preparers. We estimate that about 50 percent of the returns we  found that appear to have failed to optimally reduce the tax filer’s tax  liability were prepared by paid tax preparers. Generalized to the  population of tax returns we were able to review, returns prepared by paid  tax preparers represent about 223,000 of the approximately 447,000  suboptimal choices we found. Our April 2006 study of paid tax preparers  corroborated the problem of confusion over which of the tax preferences  to claim. Of the 9 undercover investigation visits we made to paid  preparers with a taxpayer with a dependent college student, 3 preparers  did not claim the credit most advantageous to the taxpayer and thereby  cost these taxpayers hundreds of dollars in refunds. In our investigative  scenario, the expenses and the year in school made the Hope education  credit far more advantageous to the taxpayer than either the tuition and  fees deduction or the Lifetime Learning credit.
section_title: The Suboptimal Use of Postsecondary Tax Preferences May Result from Their Complexity
paragraphs: The apparently suboptimal use of postsecondary tax preferences may  arise, in part, because of the complexity of using these provisions. Tax  policy analysts have frequently identified postsecondary tax preferences  as a set of tax provisions that demand a particularly large investment of  knowledge and skill on the part of students and families or expert  assistance purchased by those with the means to do so. They suggest that  this complexity arises from multiple postsecondary tax preferences with  similar purposes, from key definitions that vary across these provisions,  and from rules that coordinate the use of multiple tax provisions. Twelve  tax preferences are outlined in the IRS publication, Tax Benefits for  Education, for use in preparing 2005 returns (the most recent publication  available). The publication includes 4 different tax preferences for  educational saving. Three of these preferences—Coverdell Education  Savings Accounts, Qualified Tuition Programs, and U.S. education savings  bonds—differ across more than a dozen dimensions, including the tax  penalty that occurs when account balances are not used for qualified  higher education expenses, who may be an eligible beneficiary, annual  contribution limits, and other features.
In addition to learning about, comparing, and selecting tax preferences,  filers who wish to make optimal use of multiple tax preferences must  understand how the use of one tax preference affects the use of others.  The use of multiple education-related tax preferences is coordinated  through rules that prohibit the application of the same qualified higher  education expenses for the same student to more than one education- related tax preference, sometimes referred to as “anti-double-dipping  rules.” These rules are important because they prevent tax filers from  underreporting their tax liability. Nonetheless, anti-double-dipping rules  are potentially difficult for tax filers to understand and apply, and  misunderstanding them may have consequences for a filer’s tax liability.
section_title: Research on Effectiveness of Federal Postsecondary Assistance Is Incomplete
paragraphs: Little is known about the effectiveness of federal grant and loan programs  and education-related tax preferences in promoting attendance, choice,  and the likelihood that students either earn a degree or continue their  education (referred to as persistence). Many federal aid programs and tax  preferences have not been studied, and for those that have been studied,  important aspects of their effectiveness remain unexamined. In our 2005  report, we found no research on any aspect of effectiveness for several  major title IV federal postsecondary programs and tax preferences. For  example, no research had examined the effects of federal postsecondary  education tax credits on students’ persistence in their studies or on the  type of postsecondary institution they choose to attend. Gaps in the  research-based evidence of federal postsecondary program effectiveness  may be due, in part, to data and methodological challenges that have  proven difficult to overcome. The relative newness of most of the tax  preferences also presents challenges because relevant data are just now  becoming available.
In 2002, we recommended that Education sponsor research into key  aspects of effectiveness of title IV programs, that Education and the  Department of the Treasury collaborate on such research into the relative  effectiveness of title IV programs and tax preferences, and that the  Secretaries of Education and Treasury collaborate in studying the  combined effects of tax preferences and title IV aid. In April 2006,  Education’s Institute for Education Sciences (IES) issued a Request for  Applications to conduct research on, among other things, “evaluating the  efficacy of programs, practices, or policies that are intended to improve  access to, persistence in, or completion of postsecondary education.”  Multiyear projects funded under this subtopic are expected to begin in  July 2007.
As we noted in our 2002 report, research into the effectiveness of different  forms of postsecondary education assistance is important. 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.
section_title: Concluding Observations
paragraphs: 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:    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?
Mr. Chairman and Members of the Committee, this concludes our  statement. We welcome any questions you have at this time.
section_title: Staff Contacts and Acknowledgments
paragraphs: For further information regarding this testimony, please contact Michael  Brostek at (202) 512-9039 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; Jeff Appel, Assistant  Director; Shirley Jones, Sheila McCoy, John Mingus, Jeff Procak, Carlo  Salerno, Andrew Stephens, and Michael Volpe.
section_title: Appendix I: Postsecondary Aid Programs
paragraphs: The federal government helps students and families save, pay for, and  repay the costs of postsecondary education through grant and loan  programs authorized under title IV of the Higher Education Act of 1965,  and through tax preferences—reductions in federal tax liabilities that  result from preferential provisions in the tax code, such as exemptions  and exclusions from taxation, deductions, credits, deferrals, and  preferential tax rates.
subsections: section_title: Federal Grant and Loan Assistance to Postsecondary Students
paragraphs: Assistance provided under title IV programs include Pell Grants for low- income students, the newly established Academic Competitiveness and  National Science and Mathematics Access to Retain Talent Grants, PLUS  loans, which parents as well as graduate and professional students may  apply for, and Stafford loans. While each of the three grant types reduces  the price paid by the student, student loans help to finance the remaining  costs and are to be repaid according to varying terms. Stafford loans may  be either subsidized or unsubsidized. The federal government pays the  interest cost on subsidized loans while the student is in school, and during  a 6-month period known as the grace period, after the student leaves  school. For unsubsidized loans, students are responsible for all interest  costs. Stafford and PLUS loans are provided to students through both the  FFEL program and the William D. Ford Direct Loan Program (FDLP). The  federal government’s role in financing and administering these two loan  programs differs significantly. Under the FFEL program, private lenders,  such as banks, provide loan capital and make loans, and the federal  government guarantees FFEL lenders a minimum yield on the loans they  make and repayment if borrowers default. Under FDLP, federal funds are  used as loan capital and loans are provided through participating schools.
The Department of Education and its private-sector contractors jointly  administer the program. Title IV also authorizes programs funded by the  federal government and administered by participating higher education  institutions, including the Supplemental Educational Opportunity Grant  (SEOG), Perkins loans, and federal work-study aid, collectively known as  campus-based aid.
To receive title IV aid, students (along with parents, in the case of  dependent students) must complete a Free Application for Federal  Student Aid form. Information from the FAFSA, particularly income and  asset information, is used to determine the amount of money—called the  expected family contribution—that the student and/or family is expected  to contribute to the student’s education. Statutory definitions establish the  criteria that students must meet to be considered independent of their  parents for the purpose of financial aid, and statutory formulas establish  the share of income and assets that are expected to be available for the  student’s education. Once the EFC is established, it is compared with the  cost of attendance at the institution chosen by the student. The cost of  attendance comprises tuition and fees; room and board; books and  supplies; transportation; miscellaneous personal expenses; and, for some  students, additional expenses. 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.
section_title: Tax Preferences
paragraphs: Prior to the 1990s, virtually all major federal initiatives to assist students  with the costs of postsecondary education were provided through grant  and loan programs authorized under title IV of the Higher Education Act.  Since the 1990s, however, federal initiatives to assist families and students  in paying for postsecondary education have largely been implemented  through the federal tax code. The federal tax code now contains a range of  tax preferences that may be used to assist students and families in saving  for, paying, or repaying the costs of postsecondary education. These tax  preferences include credits and deductions, both of which allow tax filers  to use qualified higher education expenses to reduce their federal income  tax liability. The tax credits reduce the tax filers’ income tax liability on a  dollar-for-dollar basis but are not refundable. Tax deductions permit  qualified higher education expenses to be subtracted from income that  would otherwise be taxable. To benefit from a higher education tax credit  or tuition deduction, a tax filer must use tax form 1040 or 1040A, have an  adjusted gross income below the provisions’ statutorily specified income  limits, and have a positive tax liability after other deductions and credits  are calculated, among other requirements.
Tax preferences also include tax-exempt savings vehicles. Section 529 of  the tax code makes tax free the investment income from qualified tuition  programs. There are two types of qualified tuition programs: savings  programs established by states and prepaid tuition programs established  either by states or by one or more eligible educational institutions.  Another tax-exempt savings vehicle is the Coverdell Education Savings  Account. Tax penalties apply to both 529 programs and Coverdell savings  accounts if the funds are not used for allowable education expenses. Key  features of these and other education-related tax preferences are  described below, in table 6.
Our review of tax preferences did not include exclusions from income,  which permit certain types of education-related income to be excluded  from the calculation of adjusted gross income on which taxes are based.  For example, qualified scholarships covering tuition and fees and qualified  tuition reductions from eligible educational institutions are not included in  gross income for income tax purposes. Similarly, student loans forgiven  when a graduate goes into certain professions for a certain period of time  are also not subject to federal income taxes. We also did not include  special provisions in the tax code that also extend existing tax preferences  when tax filers support a postsecondary education student. For example,  tax filers may claim postsecondary education students as dependents after  age 18, even if the student has his or her own income over the limit that  would otherwise apply. Also, gift taxes do not apply to funds used for  certain postsecondary educational expenses, even for amounts in excess  of the usual $11,000 limit on gifts. In addition, funds withdrawn early from  an Individual Retirement Account are not subject to the usual 10 percent  penalty when used for either a tax filer’s or his or her dependent’s  postsecondary educational expenses.
section_title: Appendix III: Effects of Tax Rules on Tax Preference Use
paragraphs: 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. 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.
section_title: Appendix IV: Confidence Intervals
paragraphs: We used two data sets for this testimony: Education’s 2003-2004 National  Postsecondary Student Aid Study and the Internal Revenue Service’s 2002  and 2004 Statistics of Income. Estimates from both data sets are subject to  sampling errors and the estimates we report are surrounded by a 95  percent confidence interval. The following tables provide the lower and  upper bounds of the 95 percent confidence interval for all estimate figures  in the tables in this testimony. For figures drawn from these data, we  provide both point estimates and confidence intervals.