Higher Education: Multiple Higher Education Tax Incentives Create Opportunities for Taxpayers to Make Costly Mistakes
Released: 2008-05-01T00:00:00

Letter

Background

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). 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.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 (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 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. 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: 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.

Tax Preferences Differ from Title IV Assistance in Timing, Distribution, and Students’ and Families’ Responsibility for Obtaining Benefits

Postsecondary student financial assistance provided through programs authorized under Title IV of the Higher Education Act and the tax code differ in timing of assistance, the populations that receive assistance, and the responsibility of students and families to obtain and use the assistance.

Title IV and Tax Programs Differ in Benefit Timing

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.

Beneficiaries of Title IV Programs and Tax Preferences Differ

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.For example, Pell Grant 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.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 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.

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 support their tax filing, and correctly claim the credit or deduction on their return.

Some Tax Filers May Not Effectively Use Postsecondary Tax Preferences, Possibly Due to Complexity

According to our analysis of 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 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.

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 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. 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 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 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.

Benefits to Simplifying Federal Student Aid Have Associated Implementation Challenges and Costs

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.

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.

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. 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. 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 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.

Research on Effectiveness of Federal Postsecondary Assistance Is Incomplete

Little is known about the effectiveness of federal grant and loan programs and education-related tax preferences in promoting attendance, choice, and 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. One recently published study suggests that complexity in the federal grant and loan application processes may undermine its efficacy in promoting postsecondary attendance. 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.

GAO, Student Aid and Tax Benefits: Better Research and Guidance Will Facilitate Comparison of Effectiveness and Student Use, GAO-02-751 (Washington, D.C.: Sept. 13, 2002). 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.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.

Concluding Observations

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: 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 Subcommittee, this concludes our statement. We welcome any questions you have at this time.

Staff Contacts and Acknowledgments

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.

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.

Federal Grant and Loan Assistance to Postsecondary Students

Assistance provided under Title IV programs include Pell Grants for low- income 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. 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. 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 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.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.

Tax Preferences

Prior to the 1990s, virtually all major federal initiatives to assist students with the costs of postsecondary education were provided through grant and loan programs authorized under Title IV of the Higher Education Act. Since the 1990s, however, 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 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 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.

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.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.

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.