A New Look at Tuition Tax Benefits

Posted by New America Foundation on November 23, 2015

Federal Tuition Tax Benefits

Does subsidizing the costs of higher education through tax benefits provide a real advantage to students, and do these benefits encourage people to continue their education? A recent report, titled A New Look at Tuition Tax Benefits, from the Education Policy Program division at New America highlights the effects of policy changes through tax benefits.

Early in his first term, President Obama signed the American Opportunity Tax Credit (AOTC) proposal into law. This was one of his first campaign pledges – to create a $4,000 tuition tax benefit that would “make college affordable for all Americans.” The AOTC is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you. The AOTC continued a trend in federal policy that started in 1997, when Congress first created two tax credits for students and families who pay college tuition and fees.

In the full report, the authors Jason Delisle and Kim Dancy expand on their analysis of AOTC results to date. Two key findings from their article are (1) About 40 percent of undergraduate students are ineligible for any tuition tax benefit because they do not pay tuition or do not file taxes. Low-income students are less likely to owe any federal taxes and more likely to receive need-based financial aid. This aid often reduces tuition to the point that students can no longer claim a credit. And (2) Students attending more expensive schools are able to claim a larger tax benefit than those in other sectors. In general, students at schools that charge higher prices, particularly for-profit and nonprofit private schools, tend to qualify for larger tax benefits. This is because schools with lower prices, like community colleges, tend to have more students whose tuition expenses are largely, if not fully, covered through other aid such as grants and tuition discounts.


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