Higher Education: Improved Tax Information Could Help Pay for College

What GAO Found

We found that multiple Title IV programs and tax expenditures provided substantial aid to populations across income levels. In 2009, 12.8 million students received Title IV aid, and approximately 18 million tax filers claimed a higher education tax benefit for current expenses. The number of students receiving Title IV aid increased from 10.4 million to 12.8 million, or 23 percent, from 2006 to 2009. The number of tax filers benefiting from an education tax expenditure was larger, and increased from 14.4 million to 18 million, or 25 percent, from 2006 to 2009. Recent increases in both Title IV aid and tax expenditures from 2008 to 2009 may be because of enrollment increases and legislative actions, among other factors. Title IV grants tend to benefit students and families with incomes below the national median (about $52,000 from 2006 to 2010), while loans and work-study serve these students as well as students at family incomes above the median. Most tax benefits from the tuition and fees deduction and the parental exemption for dependent students went to families with incomes above $60,000, whereas the majority of benefits from the other higher education tax expenditures in our review—such as the American Opportunity Credit—went to families with lower incomes.

In our analysis of 2009 IRS data for selected returns with information on education expenses, we found that tax filers do not always choose tax expenditures that maximize their potential tax benefits. We found about 14 percent of filers (1.5 million of almost 11 million eligible returns) failed to claim a credit or deduction for which they appear eligible. On average, these filers lost a tax benefit of $466. We estimate that the total amount of tax benefits filers did not claim was approximately $726 million in 2009. We found no cases where filers’ combined state and federal tax liability would have been higher if they had claimed one of those benefits on their federal return. Taxpayers might not maximize their tax benefits because they are unaware of their eligibility for the provisions or confused about their use. IRS and Education have taken steps to provide information on these provisions, but the number of filers failing to claim a higher education tax provision suggests more could be done. For example, IRS stated that it coordinated with tax preparation software providers to provide links to relevant higher education forms, while Education’s Federal Student Aid website provides a link to IRS’s "Publication 970, Tax Benefits for Education." Developing a coordinated, comprehensive strategy to better inform eligible students could improve take-up of these tax provisions.

We also found that despite Education’s research efforts, evaluative research on the effects of federal assistance for higher education on student outcomes—such as the likelihood students will complete their education—remains limited. Researchers have examined the effects of federal assistance on a limited basis, such as only for certain states or groups of students, but these studies provide an incomplete view of the effects of federal assistance. Education’s efforts to sponsor and undertake research represent an important step, but research available at present still lacks evaluative information on the effects of federal grants, loans, and work-study. Continuing gaps in research on the effectiveness of federal assistance may be due, in part, to data and methodological challenges that have proved difficult to overcome. Recent changes in Title IV aid and tax expenditures—such as the introduction of the American Opportunity Credit in 2009—may provide opportunities for evaluative research, but Education officials told us they have not conducted such research due in part to the level of resources Education officials told us they devote to such research. In an environment of constrained budgets, evaluative research can help inform policy decisions.

Finally, we identified factors that contribute to effective and efficient higher education assistance programs to help policymakers allocate limited resources among multiple programs. These factors can be used as a policy tool for considering improvements to current programs, consolidating programs, eliminating programs, or designing features of new programs. They can be used as a framework for assessing whether a higher education program:

• achieves program goals and produces demonstrable results,

• provides appropriate incentives for targeted populations,

• facilitates beneficiaries’ use of the program,

• interacts effectively with other programs,

• minimizes costs and risks, and

• establishes monitoring and evaluation mechanisms.

Why GAO Did This Study

This testiony discusses federal assistance for higher education. The federal government provides billions of dollars in assistance each year to help millions of students and families meet the costs of higher education. This assistance is provided through federal student aid programs authorized under Title IV of the Higher Education Act of 1965, as amended, (Title IV) and through tax expenditures—reductions in federal tax liabilities that result from provisions in the tax code such as tax credits, deductions, exemptions, and tax-preferred savings programs. Providing federal financial assistance in these varied ways presents students and their families with multiple tools to help them pay higher education expenses. However, it may be difficult for families to understand and apply for higher education assistance.

For more information, contact James R. White, Director, Strategic Issues, at (202) 512-9110 or whitej@gao.gov, or George A. Scott at (202) 512-7215 or scottg@gao.gov.