Federal Tax Benefits Can’t Come for Free
With more than 15 different education tax benefits and 90 pages of IRS guidance, it’s amazing anyone can navigate the tax code to access the various deductions, credits, and exemptions allowed for higher education.
Turns out it is mostly upper-income families — those with incomes in the top 20 percent — who benefit and benefit disproportionately from higher education tax breaks. It also turns out that higher education tax benefits mainly, although not exclusively, help families who plan to send their children to college whether they receive a subsidy or not. For each student that federal tax-based aid encourages to go to college, as many as 13 other students who had already planned to attend college receive tax subsidies.
Attacking the tax code’s complexity and poor targeting is at the core of the Student and Family Tax Simplification Act, marked up by the House Ways and Means Committee today. The bill, introduced by Reps. Diane Black (R-Tenn.) and Danny Davis (D-Ill.), consolidates four tax benefits into a single, permanent American Opportunity Tax Credit (AOTC) and aims to better target higher education-related benefits to true middle-class families. The Education Trust and our partners in the Consortium for Higher Education Tax Reform applauded the original Davis-Black bill for its efforts to simplify tax credits and make college more affordable for working-class families. But the Davis-Black bill still lacks a central element championed in the consortium’s recommendations and in last week’s Ed Trust Tough Love report: targeting tax benefits to institutions that meet minimum performance standards.
Let’s talk service to students first: Tough Love identified nearly 200 four-year colleges that have six-year graduation rates below 15 percent and cohort default rates above 28 percent and that year after year get tax-based aid. These college dropout factories and diploma mills shouldn’t receive any tax benefit, charitable deduction or otherwise. And students shouldn’t be encouraged to attend these schools on the federal taxpayer’s dime when they’re more likely to end up in a worse financial position following enrollment.
And then there’s service to the country: A subset of colleges are not enrolling their fair share of working-class and low-income students (at least 17 percent Pell Grant-eligible freshmen), yet they receive sizable tax breaks from the federal government. Why should Yale with a $20 billion endowment and 12 percent Pell freshman enrollment continue to receive the charitable interest deduction when it is calcifying societal inequities rather than ameliorating them?
We’ve seen wealthy colleges respond to pressure before. Six years ago, when Sen. Chuck Grassley (R-Iowa) threatened to withdraw wealthy colleges’ tax-exempt status, those colleges howled yet rushed to expand their financial aid programs.
With Reps. Black and Davis’s bill on the line, we call on the House Ways and Means Committee and the Senate Finance Committee to make it known to colleges and universities that federal tax benefits don’t come for free. We’re not the only ones making that call.
Washington should demand colleges meet minimum performance standards in return for very favorable tax treatment. We can’t afford to continue to do otherwise.