Student Aid and Tax Benefits: Better Research and Guidance Will Facilitate Comparison of Effectiveness and Student Use
Released: 2002-09-13T00:00:00

Letter

Background

Education is the primary agency overseeing federal investments in support of students enrolled in postsecondary education. Education’s grant and loan programs are the largest source of student aid in the United States; however, tax provisions recently enacted by Congress have created new sources of support to assist students in paying for postsecondary education. These two sources of student assistance—grants and loans, and tax benefits—are intended to promote access to higher education and to ensure its affordability. To help track progress toward these and other goals, Education has developed strategic and performance goals in accordance with the Government Performance and Results Act of 1993 (GPRA).

Title IV Aid

Title IV of the HEA of 1965, as amended, authorizes the federal government’s financial aid programs for postsecondary education. Title IV programs include Pell grants for low-income students, parent loans known as PLUS loans, and Stafford loans. Stafford loans may be either subsidized or unsubsidized. The federal government pays the interest cost on subsidized loans while the student is in school. The terms and conditions of unsubsidized loans are the same as those for subsidized loans, but the federal government does not pay the interest costs on the loan while the student is in school; rather, students are responsible for all interest costs. Title IV also authorizes programs funded by the federal government and administered by participating higher education institutions, commonly known as campus-based aid—Supplemental Educational Opportunity grants (SEOG), Perkins loans, and federal work-study aid. In academic year 1999-2000, Education awarded approximately $53 billion to students through the title IV programs.

In order to receive title IV aid, a student must apply using the Free Application for Federal Student Aid (FAFSA). Information from the FAFSA is used to determine the amount of money—called the expected family contribution (EFC)—that the student and/or the family is expected to contribute to the student’s education. Statutory definitions establish the criteria that students must meet to be considered independent of or dependent on their parents for purposes 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 to the cost of attendance at the institution chosen by the student. If the EFC is greater than the cost of attendance, the student is not considered to have financial need for federal title IV aid programs. If the cost of attendance is greater than the EFC, then the student is considered to have financial need. Financial aid administrators at the student’s school then create a federal financial aid package that may include grants, loans, and work-study. As part of the financial aid package students may also receive state, institutional, or private aid.

In 1999-2000, about one in four undergraduates (23 percent) received federal Pell or SEOG grant aid. Awarded on the basis of financial need, these grants were highly targeted. About 75 percent of dependent students receiving Pell and SEOG grants had family incomes of $30,000 or less,while three-quarters of independent students receiving them had incomes of $20,000 or less. Stafford loans were received by 28 percent of undergraduates, and served a more varied population. A broad range of dependent undergraduates made use of need-based (or subsidized) student loans. Of the unsubsidized loans received by dependent undergraduates, 60 percent were received by those with family incomes of $60,000 or above per year. Of all loans received by independent students— subsidized and unsubsidized—three quarters of their total dollar amount went to students whose incomes were less than $30,000 per year.

Tax Provisions

In recent years Congress has enacted eight higher education tax provisions that are specifically designed to help individuals and families save for, repay, or meet the current costs of higher education, and accomplish this by permitting tax filers to use their qualified educational expenses to reduce their federal income tax liability (see table 1).

Education’s Strategic and Annual Performance Goals

Education has a strategic goal that is particularly relevant to its title IV programs, to “Enhance the Quality of and Access to Postsecondary Education.” To ensure its progress toward this goal, Education has developed annual goals that focus on (1) reducing the gaps in student achievement and completion among students differing by race, ethnicity, income, and disability; and (2) improving the effectiveness of its title IV funding mechanisms in terms of, among other things, tuition prices and borrower indebtedness.

Hope and Lifetime Learning Credits Provide Benefits for a Substantial Portion of Undergraduate Students

In the 1999-2000 academic year, more than 4 in 10 undergraduate students received a higher education tax credit, according to our estimate. On average, the HOPE tax credit equaled about 20 percent of the tuition and fees that were charged to dependent students, and 30 percent of those charged to independent students. The Lifetime Learning credit equaled 8 percent of tuition and fees charged to dependent students, and 11 percent for independent students. For both groups of students the HOPE and Lifetime Learning credits comprised a larger share of the net tuition and fees they paid—that is, tuition and fees charged, minus all types of grant assistance. In addition to the credits, some students—about 14 percent—also received title IV aid. For these students, credit amounts ranged from 4 to 26 percent of the face value of the title IV aid that they received. Taken together, credits and title IV student aid now assist about 7 out of 10 undergraduate students in meeting the costs of postsecondary education.

HOPE and Lifetime Learning Tax Credits Were Received by Many, but Not All

According to our estimates, more than 4 in 10 undergraduate students received a higher education tax credit in 1999-2000, a larger share of students than participated in the federal government’s title IV programs. About 29 percent received a Lifetime Learning tax credit, while 17 percent received a HOPE tax credit. Students may receive title IV aid and a HOPE or Lifetime Learning credit, and many did—an estimated 14 percent of undergraduate students received both.

Not all undergraduates were eligible to receive a HOPE or Lifetime Learning tax credit. One factor that affects eligibility is income. Students from families with parents who filed jointly and had incomes above $100,000 were ineligible to receive the credits. In addition, in order to receive a credit, tax filers must have a positive tax liability. For a two- parent family with one dependent college student, federal income tax liability began in 2000 at about $15,750. As shown in figures 2 and 3, a small proportion of those dependent students whose family incomes were below $20,000 received the credits.

Figures 4 and 5 show that students who received the credits did not necessarily receive the full amount. Students may not have a sufficiently large tax liability or qualified educational expenses necessary to receive a tax credit’s full value. Tax filers must have qualified educational expenses of $2,000 per student to receive the maximum HOPE credit, while they must have $5,000 of qualified expenses (for themselves or others claimed on their return) to receive the maximum value of the Lifetime Learning credit. Tax filers must subtract the nontaxable aid they received, such as Pell grants or scholarships, from qualified educational expenses. The reduction of qualified educational expenses by nontaxable aid reduces the number of students who might otherwise receive the credits, and it reduces the credit amounts obtained, particularly, we estimate, among dependent students with family incomes in the $10-$50,000 range.

Credits Equaled a Varying Share of Tuition and Fees

For the 47 percent of all undergraduates who received a tax credit in 1999-2000, the higher education tax credits equaled a varying share of the tuition and fees. On average, the HOPE tax credit equaled about 20 percent of the tuition and fees that were charged to dependent students, and 30 percent of independent students’ tuition and fee charges. The Lifetime Learning credit equaled 8 percent of tuition and fees charged to dependent students, and 11 percent for independent students. Many students receive private, institutional, state, and federal grants that reduce the tuition and fee costs that they must pay out of their own resources. In claiming the HOPE and Lifetime Learning credits, tax filers must reduce their qualified educational expenses, tuition and fees, by these (and any other) forms of nontaxable aid. We calculated students’ net tuition and fees as the tuition and fees they were charged minus all private, institutional, state, and federal grant aid they received. We estimate that the HOPE credit equaled, on average, 28 percent of dependent students’ net tuition and fees, and 36 percent of independent students’ net tuition and fees. The Lifetime Learning credit equaled about 12 percent of dependents’ net tuition and fees, and 15 percent of independents’ net tuition and fees. Figure 6 compares the estimated HOPE credit to the total tuition and fees charged to dependent students, and to the net tuition and fees they paid. Figure 7 presents the same comparisons for independent students. Figure 8 compares the estimated Lifetime Learning credits received to the total tuition and fees charged to dependent students, and to the net tuition and fees they paid. Figure 9 presents the same comparisons for independent students.

For Title IV Recipients, Higher Education Tax Credits Equaled a Varying Share of Their Aid

Approximately 14 percent of undergraduate students received both title IV aid and a higher education tax credit in 1999-2000; for these students, the HOPE and Lifetime Learning tax credits equaled a varying share of the face value of the title IV aid they received. The HOPE credit equaled, on average, about one-fifth of the average title IV aid received by students. The Lifetime Learning tax credit provided a smaller benefit relative to title IV aid than the HOPE credit, equaling, on average, about one-tenth of the title IV aid received by dependent and independent students. For dependent students with family incomes of $20,000-$40,000, we estimate that the average HOPE credit ($924) was larger than the average title IV grant award ($569). For students with family incomes of $40,000-$80,000, who typically do not receive grant aid, the HOPE credit provides a significant benefit in comparison to the face value of their federal loan assistance. Figures 10 and 11 show, for dependent and independent students, the estimated HOPE credit and title IV grant and loan aid amounts received. Figures 12 and 13 compare the estimated Lifetime Learning credit and title IV grant and loan aid amounts received by dependent and independent students.

For Students Who Did Not Receive Title IV Aid, Credits Equaled, on Average, from One-Tenth to One-Half of the Tuition and Fees They Were Charged

About 6 out of 10 undergraduates did not receive title IV student assistance in 1999-2000. We estimate that slightly more than half of these students received a higher education tax credit. Among those dependent students who received no federal financial aid, the HOPE tax credit equaled about 25 percent of the tuition and fees they were charged, while among independents this share was nearly 50 percent. The Lifetime Learning tax credit equaled a smaller share of tuition and fees charged to both, 10 percent and 14 percent, respectively.

Available Policy and Instructions Provide Clear Guidance about the Impact of Several, but Not All, Tax Provisions on Eligibility for Title IV Aid

Available policy and instructions provide clear guidance about the impact of several higher education tax provisions on eligibility for title IV aid, but in a few instances they do not. Education has not established a policy on how the income that students and parents report as part of the expected family contribution is affected by the tax-free earnings of state savings plans, prepaid tuition plans, and Coverdell accounts. As a result, those who wish to use these provisions are faced with uncertainty about how using them affects title IV aid eligibility. Although Education has established policies about the ownership of these assets for the purpose of calculating the EFC, these policies have not been clearly communicated to aid applicants. Specifically, families who choose to use state savings plans, Coverdell accounts, and Series EE Savings Bonds receive unclear instructions on the FAFSA form about who should claim these assets, the student or parent(s). As a result, they may err when reporting these assets, and their eligibility for aid may be miscalculated.

For many of the higher education tax provisions that we reviewed, the HEA or Education’s guidance make clear how their use affects aid eligibility. The HEA prohibits including HOPE and Lifetime Learning tax credits as income or assets in the computation of EFC. In contrast, the act specifies that assets in a tuition prepayment plan do reduce students’ eligibility for title IV aid because they reduce students’ cost of attendance.In specifying how federal taxation affects the EFC, the HEA also accounts for the effects of two other tax provisions: the student loan interest deduction and the higher education tax deduction. Under the rules of the federal financial aid methodology, aid applicants reduce their reported income by federal income and payroll taxes, and by an allowance for state taxes. The use of these tax provisions lowers an applicant’s tax liability and their adjusted gross income, reducing their EFC and increasing their aid eligibility. The HEA also specifies that interest on tax-free bonds, including Savings Bonds, must be reported as part of the untaxed income included in the EFC. As a result, the HEA makes clear that the use of Series EE Savings Bonds increases an aid applicant’s EFC, and reduces their aid eligibility.

In a few instances, neither the HEA’s financial aid methodology nor Education’s policies establish how parents’ and students’ use of certain tax provisions—state savings plans, prepaid tuition plans, and Coverdell accounts—affects their eligibility for title IV aid. Before January 2002, the earnings portion of prepaid tuition and state savings plans was taxable upon distribution. As part of the student’s taxable income, it was reported on the FAFSA form and included in the calculation of the EFC. After January 2002, in accordance with the Economic Growth and Tax Relief Reconciliation Act, the earnings of these plans were no longer subject to federal taxation. Education has not yet determined whether interest earned on prepaid tuition plans, savings plans, or Coverdell accounts should be reported on the FAFSA form and included in the calculation of EFC as a type of untaxed income. As a result, those who use either tax provision cannot predict whether interest earnings from these plans will increase the income that they report on the FAFSA, thereby increasing their EFC and reducing eligibility for most title IV aid.

For state savings plans and Coverdell accounts, as well as Series EE Saving Bonds, the FAFSA form does not provide clear instructions for reporting to whom these assets belong, the student or parent. The FAFSA has a single set of instructions directing parents and students to report their assets, including state savings plan assets, bonds, and Coverdell accounts. However, the instructions do not indicate who should claim which assets. As a result, parents may claim assets that should be reported as student assets, or vice versa. A mistake of this type has consequences because the HEA specifies that a larger share of student assets is to be included in the EFC than parental assets. Errors in reporting of these assets on the FAFSA may result in a miscalculation of the EFC, and students receiving more or less aid than they would if the assets were correctly reported.

Little Information Is Available to Congress on the Relative Effectiveness of Title IV Grants, Loans, and Hope and Lifetime Learning Tax Credits

Little information is available to Congress on the relative effectiveness of title IV grants and loans and the HOPE and Lifetime Learning tax credits in promoting postsecondary attendance, choice, and completion, or their impact on college costs. Data and methodological challenges make it difficult to isolate the impact of grants, loans, and tax credits. Some academic research has addressed these challenges, and developed evidence about the effects of student assistance, chiefly grant aid. Our review of research found little work undertaken by Education to assess the effectiveness of title IV programs. Treasury has studied the impact of some tax provisions, but has not yet done so for the HOPE or Lifetime Learning tax credits. As a result, Congress has little information to help it weigh the relative effectiveness of these policy tools.

Identifying Impact of Grants, Loans, and Tax Credits Is Difficult, and Little Is Known Beyond the Effects of Grants on Attendance

Data and methodological challenges make it difficult to identify the impact of grants, loans, and tax credits on college attendance and choice, completion, or costs. Many factors in addition to financial aid may influence college-going decisions, including academic preparation, family income and wealth, and the expected costs and benefits of college attendance. To isolate the effect of financial aid on college attendance, for example, researchers need data about each of these factors—both for those who chose to attend college and those who did not. National surveys do not contain complete data on all of these factors for those who attend and do not attend college. Moreover, researchers have little evidence about how postsecondary institutions respond to changes in the availability of federal aid. Despite such challenges, researchers have begun to establish a body of findings about the effects of federal aid, much of it focusing on the effects of grant aid. They have done so by using a variety of statistical techniques and research designs that mitigate these challenges.

Much of the research we identified examined the impact of grants on attendance. While some studies conclude that grants have not had a large effect on college attendance, most indicate that grants have a positive impact on attendance, though their estimates of its magnitude vary. Recent research by Dynarski (2001) and Seftor and Turner (2002) found that changes in grant aid significantly increased the probability that recipients would attend college.

Little is known about the effects of the higher education tax credits on college attendance and choice, completion or costs. No studies we identified used individual taxpayer data, collected after the credits were enacted, to estimate any of these effects. A few researchers have simulated the effects of the HOPE tax credit on rates of college attendance. One simulation estimated that 90 percent of the cost of the HOPE credit is received by students who would have attended college in its absence. None of the studies that we reviewed examined whether the credits have influenced the type of institution that students choose to attend or their rates of college completion. Moreover, none examined whether the credits have made college more affordable for recipients or have led instead to offsetting tuition increases or reductions in institutional aid to credit recipients.

Education and Treasury Have Not Focused on Impact of the Federal Grants, Loans, and Higher Education Tax Credits

Education is authorized to conduct studies on the impact of title IV programs; however, it has focused primarily on customer service and program delivery for two reasons. First, Congress has consistently expressed concern about the management and financial integrity of the title IV programs. A second reason, according to Education, is that it is difficult to “isolate the behavioral effects of title IV aid programs.” Therefore, Education has chosen to “assess the effectiveness of the student aid programs without attempting to establish a causal link between program funding and achievement of specific outcomes.” As discussed earlier, academic researchers facing the same methodological challenges have begun to produce a body of findings.

Because it lacks reliable data on the individuals using higher education tax credits, Education is unable to determine how tax credits affects college attendance and choice, completion, and costs. Section 6103(a) of the Internal Revenue Code prohibits the Internal Revenue Service, without congressional authorization, from sharing individual taxpayer data with Education. Education has attempted to collect information on the use of tax provisions by incorporating questions about their use into the student survey component of the NPSAS. Dependent students are often unfamiliar with how their parents use tax benefits and, as a result, the information they provide on surveys is unreliable.

Treasury has access to individual taxpayer information, from which data on the use of higher education tax provisions can be calculated. Although Treasury has studied the effects of other tax credits, it has not examined the HOPE or Lifetime Learning credits since their implementation in 1998.Treasury does not possess data on the receipt of title IV aid for those tax filers who use higher education tax credits, limiting its capacity to assess the credits’ effects. Treasury has indicated that its primary evaluation priority is the impact of tax provisions on rates of saving. It has no work underway, or scheduled, to evaluate the impact of higher education tax credits.

Conclusions

Higher education tax provisions are an important new tool in helping many students and families meet the costs of postsecondary education. Millions now receive higher education tax credits, and millions are now saving for college using a variety of other tax provisions. In the future a growing share of students and families may be making combined use of tax credits, other tax provisions and title IV aid. Although many of these tax provisions have clear consequences for title IV aid eligibility, some do not. Lacking clear guidance about the impact of some tax provisions on aid eligibility, some families may find it difficult to plan how they will pay for college. Faced with unclear instructions about reporting their use of tax provisions, some students may make errors that result in inaccurate awards of aid. As an increasing share of students use both aid and tax provisions, more families will be faced with uncertainty about aid eligibility and potential errors in aid awards. Education has the capacity to address both of these problems.

The adoption of higher education tax provisions creates new opportunities and choices for federal policymakers, providing them with a range of tools to accomplish their objectives. For Congress to weigh the relative effectiveness of these policy tools, it must receive information about who these tools serve and their impact. Congress does not yet have this information available to it. Several questions likely to be important to Congress remain to be fully addressed, including: Does the provision of student assistance—grants, loans, or tax credits—result in levels of postsecondary attendance greater than would otherwise occur, and are some forms of assistance more effective at promoting attendance than others?

Do changes in the availability of student assistance influence the types of institutions that students choose to attend?

Do changes in the availability of student assistance affect whether students complete their postsecondary education?

How do postsecondary institutions respond to the changes in the availability of federal student assistance? Have grant and loan increases, or the introduction of tax credits, resulted in tuition increases or reductions in institutional aid to grant, loan and credit recipients and, if so, to what degree?

Noting the difficulty of showing the link between title IV spending and outcomes, Education has undertaken little work identifying the impact of its grant and loan programs. As a result, it cannot fully assess its progress in achieving its strategic goal to “Enhance the Quality of And Access to Postsecondary Education.” Moreover, Treasury and Education have not collaborated to provide Congress with evidence about the impact of higher education tax credits and title IV student aid. Determining whether there is a causal link between program and tax expenditures and desired outcomes is difficult, but not impossible. Given an annual investment of billions of dollars—in outlays and revenues foregone—studying their effectiveness is warranted.

Recommendations to the Secretaries of Education and Treasury

To ensure that students and families understand how using tax provisions will affect their eligibility for title IV financial aid, we recommend that the Secretary of Education develop a policy specifying whether the tax-free earnings of state-sponsored college savings plans, tuition prepayment plans, and Coverdell Education Savings Accounts should be included in the calculation of the EFC and, therefore, reported by aid applicants as untaxed income on the FAFSA form. In addition, we recommend that the Secretary clarify FAFSA instructions, clearly explaining who should report ownership of the assets held in state-sponsored savings plans, Coverdell education savings accounts, and Series EE Savings Bonds.

In order to provide Congress with information about the effectiveness of its title IV programs as well as to ensure its programs are achieving results, we recommend that the Secretary of Education sponsor research on the impact of title IV programs on postsecondary education attendance and choice, completion, and costs.

In order to provide Congress with information about the relative effectiveness of Education’s direct expenditure programs and Treasury’s higher education tax provisions, we recommend that the Secretaries of Education and Treasury collaborate in studying the impact of tax credits and title IV student aid programs on college attendance and choice, completion, and costs. As a first step, the Secretaries will need to identify opportunities for, and limits to, the sharing of data, and develop a plan to address them.

Agency Comments

In their written comments, Education and Treasury noted that the report was useful and informative, and generally agreed with our findings and recommendations. In response to our recommendation that Education develop policy and clarify instructions on how the use of certain tax provisions affect title IV aid eligibility, Education stated that it would take advantage of the opportunity provided by the upcoming HEA reauthorization to comprehensively review how families now pay for college and, consequently, the title IV student aid eligibility formulas. Regarding our recommendation that Education sponsor research on the effectiveness of title IV programs, Education indicated that it would identify opportunities to sponsor such research, including how the federal investment affects students’ postsecondary education attendance and completion as well as institutions’ tuition and financial aid behavior. In response to our recommendation that Education and Treasury collaborate in studying the impact of tax credits and title IV student aid programs, Treasury said that such an effort would be beneficial. Treasury also noted that it would take time and staff resources to develop a useful longitudinal database, and that the confidentiality of individuals’ tax return information must always be protected. Education noted that it recently collaborated with Treasury in developing a legislative proposal that would allow the agencies to match income information contained on tax returns with title IV student aid application data for the purpose of reducing erroneous payments to individuals participating in the title IV programs. Education said it looked forward to future collaborations with Treasury.

We are sending copies of this report to the Secretaries of Education and Treasury and other interested parties. We will also make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov.

If you have any questions about this report, please contact me on (202) 512-8403. Other contacts and acknowledgments are listed in appendix V.

Appendix I: Estimation of HOPE and Lifetime Learning Tax Credits and Title IV Student Aid

All estimates of title IV student financial aid are based upon the 1999-2000 National Postsecondary Student Aid Study (NPSAS). NPSAS is a comprehensive study that examines how students and their families pay for postsecondary education. It includes nationally representative samples of 50,000 undergraduates, and 12,000 graduate and first-professional students enrolled at approximately 1,000 postsecondary institutions during the 1999-2000 academic year. The data are based on student interviews and administrative records, and NPSAS contains both students who received financial aid and those who did not. Title IV financial aid included Pell and SEOG grants, Stafford loans, PLUS loans, and federal work-study assistance. In reporting on title IV loans, we indicate the face amount of the loans received.

We computed estimates of the HOPE and Lifetime Learning credits received by students using data from NPSAS. NPSAS data are collected at the individual student level, and cannot be aggregated into families or linked to tax filing status. Therefore, our analysis treated individual students as if they were the credit claimants and recipients. Credit amounts for each student in NPSAS were computed by calculating a completed Internal Revenue Service (IRS) form 8863, the form used by tax filers to claim the credits, for each student in the NPSAS sample. We determined a student’s eligibility for the HOPE credit on the basis of enrollment status and year in school. We subsequently assumed that all students not eligible for the HOPE credit were potentially eligible for the Lifetime Learning credit.

After establishing eligibility for students in the database, we determined the maximum tax credit each student could receive using the formulas contained in the IRS form 8863, applying the income eligibility requirements associated with these credits. Form 8863 uses adjusted gross income (AGI) for these measures, which is all income minus exclusions from income such as student-loan interest and IRA contributions. For one-half of students in the NPSAS database who filed a Free Application for Federal Student Aid (FAFSA), NPSAS reports the adjusted gross income for the student (and spouse) if they are independent, or the parents (if the student is a dependent). For the other half of students, income is based on a computer-assisted telephone interview, and/or stochastic imputation.

In addition to income, the amount of credit allowed is limited by the amount of tax liability reduced by amounts of dependent care and the elderly and disabled credits claimed. Generally speaking, tax liability is tax owed on a filer’s taxable income, which is their AGI minus personal exemptions and either the standard deduction or the sum of itemized deductions such as mortgage interest or property taxes. Without tax data we had no means of estimating potential itemized deductions, so we assumed that all tax filers used the standard deduction. We calculated the amount of liability owed using the standard tax tables provided by the IRS. There is no information in NPSAS about the amount claimed for dependent care and the elderly and disabled tax credits. We therefore assumed that these returns only had education tax credits.

The steps above allowed us to calculate a tax credit for every student in the NPSAS sample. We estimated that approximately 90 percent of the students in the NPSAS sample who were eligible to claim the credits did so. We had no reliable evidence about different rates of tax credit use across family income or student type; therefore, we randomly selected a 90 percent sample of those students who had a non-zero credit to be the population of credit recipients used to calculate our tax credit estimates.

The results of our estimation were compared to data on credits claimed and allowed, computed from the Statistics of Income (SOI) and provided to us by the IRS. Our estimate of the net value of HOPE and Lifetime credits allowed was 94 percent of the SOI estimate. Our estimates of HOPE credits claimed was significantly lower than the SOI estimate, while our estimate of Lifetime Learning credits claimed was significantly higher than the SOI estimate.

Limitations of Our Analysis

Some aspects of our methodology tend to overstate the credit amounts claimed, while others aspects of the methodology have the opposite effect. Tax filers who had more than one family member enrolled in postsecondary education were able to apply the qualified education expenses of each to the Lifetime Learning tax credit, up to a $5,000 per household limit. NPSAS data do not allow individual student records to be linked into households. Therefore, we were unable to adjust our estimates of students’ qualified educational expenses to reflect this feature of the credit. Our estimates of total Lifetime Learning credit amounts were larger than those estimated from the SOI; some of this overestimation may have resulted from this limitation.

Tax filers using either the HOPE or Lifetime Learning credit may find that they are unable to obtain the full value of the credit because they lack sufficient tax liability to do so. Our methodology assigns the tax liability of each family to one student, regardless of the number of family members actually enrolled. For those families that had more than one student enrolled, our methodology may overestimate the tax liability available to the student and thus overestimate the credit received.

We assumed that all tax filers used the standard deduction. Our estimates of pre-credit tax liability among those with adjusted gross incomes of $20-30,000 were 17 percent lower than SOI’s, and 8 percent lower for tax filers with adjusted gross incomes of $30-$40,000. Our estimates of tax liability were slightly higher than those of SOI at AGIs above $75,000. This may result in an underestimation of the credits claimed by tax filers with adjusted gross incomes below $40,000.

Some individuals who are eligible to claim the credit may not do so. There are no reliable data on the rate at which eligible tax filers claim the HOPE and Lifetime Learning credits. Our methodology estimated that 90 percent of the students in the NPSAS sample who were eligible to claim the credits did so. We first calculated a credit amount for all students. Lacking any empirical basis for establishing different rates of credit usage among students, we randomly selected a 90 percent sample of students who had a non-zero credit to be the population of credit recipients used to calculate our tax credit estimates. To the extent that the rate of usage varies across student populations by income or dependency status, our estimates of credit amounts will be too small for some populations, and too large for others.

Data limitations may also affect the quality of tax credit estimates. Our estimates of tax credits may be lower than those obtained from the SOI because SOI data represent pre-audited amounts, and tax filers may have over claimed the credits. While income data for those students who did apply for federal financial aid is reported by NPSAS to be very precise, for the other half of students the income information is acknowledged by NPSAS to be much less reliable. This lack of reliability in the measurement of income may result in imprecise estimates of credit usage and credit amounts received.

Because our estimates come from a sample of the larger population, NPSAS, there is some sampling error associated with them. Moreover, taking a 90 percent sample of those data introduces additional sampling errors. In calculating sampling errors and confidence intervals, we took into account this complex sample design. Sampling errors are often represented as a 95 percent confidence interval: an interval that 95 times out of a 100 will contain the true population value. The upper and lower bounds of the 95 percent confidence intervals for each estimate are presented in the following tables.

Appendix II: Research on the Effects of Grants, Loans, and Tax Credits

To identify available information on the relative effectiveness of title IV aid and the HOPE and Lifetime Learning tax credits, we reviewed studies of the factors that affect college attendance and choice, completion, and costs. These outcomes were chosen because they have been the focus of congressional concern, as expressed in committee reports, statutorily established study commissions, and requests for our work from Congress. We examined studies that appeared in books, refereed journals, working papers, dissertations, or government reports. Some of these studies were excluded from further assessment because they did not undertake original data analysis that could identify the effectiveness of federal financial aid programs. Studies that provided an original empirical analysis (or, in the case of tax credits, a simulation methodology) were subsequently assessed according to professional standards of econometric analysis for their methodological rigor. Some of these studies explicitly estimated the effects of federal aid programs. Others estimated how sensitive student attendance, completion, or choice decisions are to changes in the net cost of college. The studies are listed in the bibliography. The results of studies that were judged to contain acceptably identified statistical estimates formed the basis for our findings about the availability of information concerning the relative effectiveness of title IV grants and loans and HOPE and Lifetime Learning tax credits.

Appendix III: Comments from the Department of Education

Appendix IV: Comments from the Department of Treasury

Appendix V: GAO Contacts and Staff Acknowledgments

GAO Contacts

Staff Acknowledgments

In addition to those named above, the following people also made significant contributions to this report: Paul L. Posner, Managing Director, Federal Budget Issues, Strategic Issues; Michael Brostek, Director, Tax Issues; and Patrick di Battista, Malcolm Drewery, Bryon Gordon, John Mingus, Edward Nannenhorn, Linda Stokes, Andrea Romich Sykes, and James Wozny.

Bibliography

Cameron, Stephen V., and James J. Heckman. “Can Tuition Policy Combat Rising Wage Inequality?” Kosters, Marvin H. (ed) Financing College Tuition: Government Policies and Educational Priorities. Washington, D.C.: The American Enterprise Institute, 1999.

Cameron, Stephen V., and James J. Heckman. “The Dynamics of Educational Attainment for Black, Hispanic, and White Males.” Journal of Political Economy, 109, no. 3, (2001): 455-499.

Cronin, Julie-Anne. “The Economic Effects and Beneficiaries of the Administration’s Proposed Higher Education Tax Subsidies” National Tax Journal 50 no. 3 (September 1997): 519-540.

Dynarski, Susan. “Hope for Whom? Financial Aid for the Middle Class and Its Impact on College Attendance.” National Tax Journal 53, no.3, part 2 (September 2000): 629-661.

Dynarski, Susan. “Does Aid Matter? Measuring the Effect of Student Aid on College Attendance and Completion.” John F. Kennedy School of Government, Harvard University Working Paper (RWP01-034), September 2001.

Ellwood, David T., and Thomas J. Kane. “Who Is Getting a College Education? Family Background and the Growing Gaps in Enrollment” in Danziger, Sheldon, and Jane Waldfogel (eds). Securing the Future: Investing in Children from Birth to College. New York: Russell Sage Foundation, 2000.

Gravelle, Jane, and Dennis Zimmerman. “Tax Subsidies for Higher Education: An Analysis of the Administration’s Proposal.” Congressional Research Service: Report 97-581E, May 1997.

Heckman, James J., Lance Lochner, and Christopher Taber. “General- Equilibrium Treatment Effects: A Study of Tuition Policy.” The American Economic Review, 88 no. 2 (1998): 381-386.

Kane, Thomas J. “Rising Public College Tuition and College Entry: How Well Do Public Subsidies Promote Access to College?” National Bureau of Economic Research Working Paper no. 5164 (July 1995).

Kane, Thomas J. The Price of Admission. Washington, D.C., and New York, N.Y.: The Brookings Institution and the Russell Sage Foundation, 1999.

Li, Judith. “Estimating the Effect of Federal Financial Aid on Higher Education: A Study of Pell Grants.” (Ph.D. diss., Harvard University, 1999).

Manski, Charles, and David Wise. College Choice in America. Cambridge, Massachusetts: Harvard University Press, 1983.

McPherson, Michael S. and Morton Owen Schapiro. Keeping College Affordable Washington, D.C.: The Brookings Institution, 1991.

Oberg, Jon H. “Testing Federal Student-Aid Fungibility in Two Competing Versions of Federalism.” Publius: The Journal of Federalism 27:1 (Winter 1997): 115-134.

Reyes, Suzanne. “Education Opportunities and Outcomes: The Role of the Guaranteed Student Loan.” (Ph.D. diss., Harvard University, 1995).

Rouse, Cecilia Elena. “What to Do after High School: The Two-Year versus Four-Year College Enrollment Decision” in Ronald G. Ehrenberg (ed). Choices and Consequences: Contemporary Policy Issues in Education. Ithaca, N.Y.: ILR Press, 1994.

Schwartz, J. Brad. “Wealth Neutrality in Higher Education: The Effects of Student Grants.” Economics of Education Review 5, no. 2 (1986): 107-117.

Seftor, Neil S., and Sarah E. Turner. “Back to School: Federal Student Aid Policy and Adult College Enrollment.” The Journal of Human Resources 37 (2002): 336-352.

Turner, Sarah E. “Does Federal Aid Affect the Price Students Pay for College? Evidence from the Pell Program.” mimeo (1998).