work_supports

Refundable Tax Credits

Income and work supports may be provided through the tax system as well as through benefit programs. The most important tax credits for low-income households are the refundable Earned Income Tax Credit and the Child Tax Credit (credits that together lifted an estimated 8.7 million people out of poverty in 2011), and the partially refundable American Opportunity Tax Credit, which reduces the cost of postsecondary education. These credits were improved by the 2009 American Recovery and Reinvestment Act, and these improvements were extended through 2018 by the American Taxpayer Relief Act of 2012.

In Focus

Large Share of Tax-Based Student Aid Goes to Higher Income Families

By Center for Postsecondary and Economic Success

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.