Resources & Publications

Tax-Based Student Aid Quadrupled -- Largely Unnoticed -- Over the Past Decade

Mar 05, 2013

This is third 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.

From 2000 to 2010, tax-based aid grew from $7.4 billion to $32.4 billion, a more than four-fold increase. Despite making up nearly half of the nation’s investment in non-loan aid, it goes largely unnoticed both by policymakers and beneficiaries. According to Suzanne Mettler, Professor at Cornell University, almost 60 percent of individuals who claim a higher education tax credit do not realize they have received help from the government to pay for college.

One problem with this “stealth” aid – and a big reason for its invisibility – is that it doesn’t reach students and parents when they need it most — when college bills are due.  Rather, this aid, which is built into annual income tax filings, can be delayed as long as 16 months.  Moreover, students and parents may not even realize this aid is available until filing their taxes, if at all, further weakening the potential impact of this aid on college access and completion.

For a federal investment topping $34 billion annually, which rivals the Pell Grant program, shouldn’t we expect more? We can start to address these issues by simplifying and better targeting tax-based aid and piloting “real-time payment” of the American Opportunity Tax Credit (AOTC) to deliver this aid to students when they enroll, not just at tax time. Read our report for these and other policy recommendations to make our growing investment in tax-based aid work better.

Historical Spending on Tax-Based Aid

Notes: Figures are in constant dollars (2010). "Other tax benefits include other education tax benefits for postsecondary education, such as the above-the-line deduction for tuition and fees and employer-provided educational assistance.
Source: CLASP based on data from the Office of Management and Budget.

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