Tax credits have been hailed by politicians as a good way to help families pay for college. But new research suggests that the billions of dollars the government spends on these credits have had meager effects encouraging more kids to go to college.
The federal government has for decades offered tax credits to families paying for college. Last year, it spent $23 billion on three programs offering tax credits for college tuition, books and supplies. But critics say that the money hasn't reached the families that need it the most.
In 2009, the Obama administration tried to address that problem by offering a wider pool of families credit worth up to $2,500 per student.
But college attendance didn't increase among households that were newly eligible for the credit, according to a new study from the National Bureau of Economic Research. And that may have to do with the way the credits are calculated.
Obama tried to expand the the credit to families earning up to $180,000 and lower-income families. But low-income households pay relatively low federal taxes. And that means that few benefits wind up in the hands of these families—the ones who need the most financial help to attend college—since they don't owe enough in federal taxes to get the full credit.
Generally, research shows that most of the benefits of these tax credits go to families making at least $100,000, according to the Tax Policy Center.
And tax credits are more complicated for families to claim than grants. Researchers at the Government Accountability Office found that 14 percent of eligible families failed to claim any of the tax benefits, while 27 percent of families who claimed one tax benefit would have been better off claiming another.
"Credits have been justified as an investment: generating more educated people and thus more earnings," wrote the authors of the bureau study. But there is little evidence that "the Treasury, federal government, or society will recoup the tax credits with interest through higher education investments."
Authors of the bureau study also said the timing of tax credits undercuts their effectiveness. Families typically have to pay tuition nine to 10 months before they receive money from the credits, so the upfront costs can remain a hurdle.
It's the same argument student advocates have used to press the government to redirect the money used for tax credits to Pell Grants, the free money given to needy students to pay for college. They argue that the $24 billion spent on tax credits that disproportionately benefit families who could already afford to send their kids to college could do more to help struggling parents.
But the administration has contended that simplifying, not ending, higher education tax breaks would improve college access and affordability.
In his State of the Union address in January, Obama proposed folding the jumble of education tax credits into one expanded program—in part to address the criticism that higher education credits have become too complex. And the administration also wanted to help target the credits so they wind up in the hands of more the people who need them the most. The president's plan would open the benefit to people attending college less than half the time, offering them up to $1,250 and extending the credit for five years instead of four for all students.
But his plan failed to gain much support, especially after the president included a proposal to end a major tax benefit of a popular college savings account, known as 529 plans to help pay for the expansion.
The backlash against the president’s plan exposed the frustration felt by families over how hard it is to cover rising tuition costs. Everyone, except for the super wealthy, is having a hard time paying for college. Federal dollars are divvied up in a way that tends to shut out families making more than $50,000 and less than $100,000. And even families receiving Pell--typically those earning less than $60,000--can't rely on the grants to cover the cost of college.
Still, most experts agree that taxpayer funds are better spent providing more free money upfront to families rather than offering more, often complicated tax credits.