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. Postsecondary student financial assistance provided through programs authorized under title IV of the Higher Education Act and the tax code differ in timing of assistance, the populations that receive assistance, and the responsibility of students and families to obtain and use the assistance. Title IV programs and education-related tax preferences differ significantly in when eligibility is established and in the timing of the assistance they provide. Title IV programs generally provide benefits to students while they are in school. Education-related tax preferences, on the other hand, (1) encourage saving for college through tax-exempt saving, (2) assist enrolled students and their families in meeting the current costs of postsecondary education through credits and tuition deductions, and (3) assist students and families repaying the costs of past postsecondary education through a tax deduction for student loan interest paid. 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. 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. 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. 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.