Are Education Tax Credits Making College More Affordable?

Taxes and Investments

November 2014GarzaHarris.com

The income gap between college graduates and individuals without a college education has never been wider. According to one estimate, A college educated person stands to earn $570,000 more throughout their lifetime than an individual with only a high school diploma. The Bureau of Labor Statistics recently reported that the unemploy-ment rate for 25-year-olds without a degree is more than double the unemployment rate for college graduates of the same age. But in order to reap the economic rewards of a college education, many Americans must first find a way to afford one. That means working through a system of educational tax credits and student loans. But is this system really achieving it’s goal of making college more acces-sible?

Since 1997, the method the Federal government has employed to encourage more students to attend college is by issuing education tax credits to offset the large (and growing) cost of obtaining a de-gree. This system was then expanded upon 2009 with the American Opportunity Tax Credit to include people of higher income back-grounds and incorporated refundable tax credits. With more indi-viduals earning college degrees than ever before, this system of tax credits seems to be working at first glance. Are tax credits actually making a college education attainable for people who could other-wise not afford it? The numbers suggest they they are doing the op-posite.

A System of Education Tax Credits

The goals of the current tax credits system aims to boost college en-rollment for lower-income students in particular. In 2010, the first year of the amended system, only 20 percent of the claimed federal educational tax credit went to people earning $30,000 or less per year. By contrast, 30 percent of the credits went to those earning more than $100,00 per year and an additional 18 percent to those earning $75,000 per year.

The current tax credit program is missing it’s intended mark, the lower-income student who otherwise cannot afford college.

The Increasing Cost of a Higher-EducationThe cost of obtaining a college degree has never been higher. In the last decade alone the cost of tuition plus room and board has in-creased 70 percent. This far outpaces the rate of inflation (27%) and growth of median household income (17%) over the same decade. Students are taking out larger loans to meet the growing cost of col-lege leading to $1 trillion worth of student debt. This skyrocketing cost of attending college is, at least in part, a product of the same tax credit intended to bring education to more people for two specific reasons.

Students have more access to loans, financial aid, and federal tax credit than ever before. From a supply and demand standpoint, this means are more students competing for admission to the essentially the same number of major universities. But to compound the al-ready unforgiving laws of supply and demand, universities are in the unique position of knowing exactly what a student can pay due to their (required) intimate knowledge of a student’s financial situation.

With this financial knowledge, coupled with the power to admit whomever they choose, universities are able to adjust the price to cap-ture the maximum amount of tax credit money from each student. Rather than enabling more students to afford college, these Federal tax credits have been a boon for universities budgets. Meanwhile, stu-dents are saddled with an unprecedented amount of debt.

One study by the Washington DC based think tank Tax Foundation suggests removing the educational tax credits all together. They proj-ect that the saved assets could be used to cut marginal tax rates across the board by 0.9% which would add $19 billion to GDP and create an estimated 121,000 full-time jobs. The study also points out how the IRS has taken on aspects of the educational and welfare system that it was never designed to handle creating an extra financial burden on the tax system.

A less drastic solution would be a system that fosters pre-payment arrangements for tuition. These types of savings plans are already in place in seventeen states and allow for people to pre-pay tuition based on a fixed cost, as far as 18 years in the future. This gives families a degree of certainty and requires colleges to control their costs. For the lower-income student, a renewed focus on Pell Grants would be a more targeted solution than the current tax credit system.

Alternative Solutions to Make More College Affordable