By John O. Fox
While millions of high school seniors recently received letters of acceptance or of rejection from the colleges to which they applied, many other qualified seniors received no letter at all. They have not applied, often because they cannot afford the costs. One reason is that they don't benefit from special tax breaks for higher education - tax breaks that make higher education even more expensive for them.
These outcomes are cruel. After all, a college degree is the surest passport out of poverty and a vital step to financial security. Over a lifetime, the gap in earnings between those with a high school diploma and those with a bachelor's degree or higher may exceed $1 million.
Since 1997, however, with the support of Democrats and Republicans, nearly all new federal subsidies for attending college are directed at middle- and upper-middle income households. These subsidies flow through the tax laws as credits, deductions and exclusions. The special tax breaks make higher education less affordable for people who don't benefit from them because colleges and universities, aware of the additional government subsidies for many applicants, raise tuition and fees across the board or reduce financial aid.
Qualified students who don't get the tax breaks thereby become double losers. They would be better off if the tax breaks didn't exist in the first place.
But even if you don't give a hoot about poor and moderate-income students, the adverse effect of the special tax breaks on them should trouble you because they don't make economic sense. Our companies need the best-educated workforce to compete successfully in the global economy. Yet, every year, about 170,000 qualified high school graduates do not attend college because of the expense.
You don't have to be a tax expert to see how poor and most moderate-income students get left out. Take the Hope scholarship and lifetime learning tax credits. The Hope credit allows a family to reduce its taxes by up to $1,500 for each member who attends the first two years of college. The lifetime credit can cut taxes by up to $2,000 for the college costs each year of only one family member, but it is available for all years of college.
These credits save taxes for millions of students. But because the credits only cut income taxes, they have no value to the millions of hard-working households who don't owe any.
Then there are tax breaks for saving for college. Coverdale Education Savings Accounts allow contributions of up to $2,000 a year for a child who is 17 years old or younger. Parents and others who want to go whole hog may donate $100,000 or more to Qualified Tuition Programs (also known as 529 Plans), which are created by states and colleges. Contributors may prepay the entire cost (at today's prices) for a child to attend a particular college, or may cover costs of a college the child will choose later. As in the case of ESAs, contributions are not deductible, but earnings within the plans, and distributions from them for these purposes, are tax-free, which can greatly magnify the value of these accounts.
To state the obvious, poor and moderate-income families cannot save for college on their own. They are hard-pressed enough to pay for rent, food, clothing, and other essentials.
On the other hand, the value of Pell Grants, which remain the principal federal subsidies for college for most low- and moderate-income students, has declined dramatically from their value 30 years ago.
What should Congress do? In theory, it should help most those who need the most help to attend college, help least those who need it least, and help not at all those who don't need any help. The most efficient and transparent way would be through the direct budget process.
At a minimum, Congress should substantially increase Pell Grants and favorable loans for low- and moderate-income students. Congress also should make Hope and lifetime learning credits "refundable." The IRS then would treat all families as if they had paid taxes equal to the credit they would be eligible to receive. If they didn't owe any tax, the IRS would send them a check "refunding" their theoretical tax payment, which could amount to an additional $1,500 or $2,000 toward their college expenses.
Vast numbers of additional, qualified students could then attend a community college or a four-year public college. And Congress could be confident that the payoff from its investments - for the students and the economy - would far exceed the cost.
John O. Fox teaches tax policy at MHC. He is author of If Americans Really Understood the Income Tax (2001), and 10 Tax Questions the Candidates Don't Want You To Ask (2004).