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A Blog from New America's Federal Education Budget Project

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College Board Report Shows Fertile Ground for Deficit Reduction in Tax Credits

Published:  October 25, 2012

This week, The College Board released its annual Trends in College Pricing and Trends in Student Aid reports for the 2012-13 school year. This year, the headline of the reports has been that 2012-13 in-state tuition at public four-year colleges rose from last year’s tuition levels at a slower rate than it did in the previous two years. (Even that comparison fails to note the real news, though, that tuition rose by more than three times inflation this year. See this post from our sister blog, Higher Ed Watch, for more.)

Given that lawmakers are sure to plunge into a deficit-cutting frenzy after the November elections to avoid the across-the-board spending cuts set to take effect in January, the Student Aid report buries a key development in student aid trends. In 2010 (the most recent year for which data are available), the federal government spent some $3.5 billion more on education tax credits than the year before – a rapid rate of growth.

These so-called tax expenditures are a rarely noted, but highly significant, part of federal education spending, particularly for higher education. They go largely unnoticed in education funding debates because they don’t look like spending to the untrained eye. But in every way that matters, they are just like spending on Pell Grants or student loans. Yes, education tax benefits provide savings to families, but in the form of foregone tax revenue for the federal government. Therefore, they factor into the federal balance sheet as a cost, even though they’re less visible to policymakers and the public than appropriations.

So what’s behind the big increase in this form of federal education funding? For one, the American Opportunity Tax Credit (AOTC). This new benefit was created in the 2009 stimulus bill to provide additional tax relief to middle-income and lower-income families and policymakers extended it beyond its original expiration date to the end of the 2012 calendar year. Meanwhile, the Hope credit, a smaller credit that includes more income restrictions, was suspended until the AOTC expires.  According to the report, the total amount of tax credits and deductions before the AOTC took effect was $7 billion (adjusted for inflation). After, it jumped to $15.4 billion. By 2010 it had climbed to $18.8 billion.

The Trends in Student aid report also shows that, when those who claim the AOTC are mapped by their adjusted gross income (AGI refers to total income minus pre-tax benefits like health insurance premiums or 401k contributions), a substantial portion of the dollar total – 23 percent – went to families with incomes over $100,000. Meanwhile, only 24 percent went to low-income families with an AGI below $25,000.  Even worse, only 3 percent of the 1.2 families who claimed the tuition and fees deduction in 2010 (down from 3.0 million in 2008) were those low-income families.

When the dust settles from the elections next month, Congress will return for a quick session to finish out the year before the newly-elected members of Congress take their seats.  At the top of the agenda are two urgent items: extending the tax expenditures already in place before the expire at the end of the calendar year, and resolving the 8.2 percent across-the-board discretionary spending cuts before they take effect on January 2, 2013.  Millions of families reap substantial savings from the credits and deductions available to them, and changes to the expenditures might be unpopular. But the College Board report shows what many in Congress already recognize: The tax expenditures for education and other fields are big-ticket items on par with regular appropriations, and are benefiting families that could hardly be described as needy. That makes them ripe for the kind of large-scale deficit reduction Congress needs to reach a compromise.


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