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Tax-Based Student Aid Accounts for Nearly Half of Non-Loan Federal Aid, Rivals Pell Grants

Mar 21, 2013

This is the fifth installment of our 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.

Tax-based student aid has grown rapidly over the past decade and now represents nearly half of our nation’s investment in non-loan federal aid. The Office of Management and Budget estimates that tax-based aid programs will cost more than $34 billion in FY12 through reduced federal revenues. Similarly, Pell Grant outlays are expected to total $35.6 billion in FY12.

In previous posts, we discussed the rising cost of college and its effect on completion, as well as charted the dramatic growth and distribution of tax-based aid. Because tax-based student aid provides little benefit to the lowest-income students, is complex, and doesn’t deliver aid at the time of enrollment, it has little effect on college access or completion. And, as currently structured, it is an inefficient use of federal dollars. According to one estimate, for each student prompted by tax-based aid to enroll or increase courses taken, as many as 13 other students receive college tax subsidies without that aid changing their enrollment decisions. By contrast, Pell Grants are very well targeted to low- and modest-income students, who have been most affected by rising college costs and for whom grant aid has been shown to increase enrollment and persistence.

While some of these problems are inherent in delivering aid through the tax system, many are the result of poor design.  By adopting key reforms, such as increasing the refundability rate of the American Opportunity Tax Credit and piloting “real time payment” of tax aid, policymakers can target aid to those most likely to respond to a financial incentive to enroll and persist in college. They could also use savings from simplifying tax-based aid to shore up long-term funding for Pell Grants. See our recent paper, Reforming Student Aid: How to Simplify Tax Aid and Use Performance Metrics to Improve College Choices and Completion, for the details.

Figure: Tax-Based Student Aid Accounts for Nearly Half of Non-Loan Federal Aid, Rivals Pell Grants

Source: CLASP, based on data from the Office of Management and Budget

 

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