Large Share of Tax-Based Student Aid Goes to Higher Income Families
Mar 14, 2013
This is fourth in a five-part series highlighting work from CLASP’s recent publication, Reforming Student Aid: How to Simplify Tax Aid and Use Performance Metrics to Improve College Choices and Completion. The paper was written as part of the Bill & Melinda Gates Foundation project Reimagining Aid Design and Delivery.
To maximize the nation’s investment in student aid, we must target resources to low- and modest-income families (those most likely to respond to incentives to enroll in and complete college). Unfortunately, tax-based student aid provides substantial support to individuals who are already highly likely to attend college and so may have little effect on access or completion for these students. In 2013, the Tax Policy Center estimates that 25 percent of the benefits of American Opportunity Tax Credit (AOTC) will go to families making more than $100,000 per year; 29 percent of the benefits of the Lifetime Learning Credit (LLC) will go to families making more than $75,000; and almost half of the benefits of the Tuition and Fees Deduction will go to households with annual incomes of $100,000 or more.
According to the National Center for Education Statistics, in 2010, the immediate college enrollment rate—the percentage of high school completers who enroll in two- or four-year colleges in the fall immediately after completing high school—was 52 percent for low-income families (bottom 20 percent of income), 67 percent for middle-income families (middle 60 percent of income), and 82 percent for high-income families (top 20 percent of income, approximately $100,000 for all tax units).
We can do better. By simplifying and better targeting tax-based student aid--and delivering it in “real time” instead of just when taxes are due--we can make tax aid more like grant aid, which has been shown to increase college enrollment by low- and moderate-income students and reduce their chances of dropping out. See our recent report for these and other policy recommendations on how to reform student aid.
Figure 1: Distribution of Tax-Based Aid Versus Pell Grants
Source: CLASP, based on data from the Tax Policy Center.