Community College Perspectives on Simplifying, Consolidating, and Improving Higher Education Tax Benefits
There is consensus that the current menu of higher education tax provisions needs to be simplified, and community colleges strongly support that effort. The American Opportunity Tax Credit (AOTC) will provide $17.2 billion to more than 10.1 million tax filers in 2017. The Lifetime Learning Credit will reach another 4 million filers, providing an addition $2.4 billion in tax benefits. (Estimates are from the Tax Policy Center at the Urban Institute and the Brookings Institution.) Combined, these credits represent two thirds of the expenditures of the much more prominent Pell Grant program.
Tax reform, as Congress improves the efficiency and efficacy of the credits, should meet the following policy objectives:
- Ensure that less affluent students attending community college are able to access AOTC benefits as fully as more affluent students and those attending more costly colleges. Currently, the construction of the AOTC statute along with low community college tuitions preclude many of their most financially needy students from qualifying for the AOTC, even though these are the very students who need the most help to succeed in college.There are different policy routes to remedying this situation. One is to change the AOTC statute itself, as was done in the House-passed H.R. 3394 in the 113th Congress, and as is reflected in a number of pending bills. Alternatively, the tax code can be changed to make Pell Grants entirely non-taxable (currently, only the portion used for tuition and fees is exempt), thereby allowing low-income community college students to qualify for both the AOTC and Pell Grants. The latter position is reflected in bipartisan legislation introduced in the 114th Congress by Rep. DeSaulnier (D-CA).
- Provide individuals who enroll in non-credit community college and other workforce-oriented programs with greater benefits than at present, to encourage necessary skills development. The Lifetime Learning tax credit, which is the tax provision that primarily addresses this population, covers only 20% of eligible tuition and/or fees. In order to receive the maximum credit, therefore, tuition must be at least $10,000. This means that students who enroll in low-cost, workforce-oriented community college programs receive very little benefit. In contrast, graduate and professional students who attend high-cost programs commonly receive the full $2,000 Lifetime Learning Credit.
Helping individuals who are trying to maintain their current jobs or to get a better one, which would help boost the economy, should be given a higher priority and more robust funding. Therefore, the Lifetime Learning eligibility formula, or that used for a new consolidated program, should be calculated using a higher percentage of the “first dollar” of qualifying expenses, allowing students in low-cost programs to benefit more.
- Consider targeting the credits on slightly less affluent individuals. This could be done by making adjustments to the income phase-outs for any of the existing or new programs. While financing college is a major stress for millions of Americans, priority may need to be placed on those most in need of support. Research consistently documents that lower-income students are at much greater risk of not completing their studies.
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