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Report to Congressional Committees: 

September 2002: 

Student Aid and Tax Benefits: 

Better Research and Guidance Will Facilitate Comparison of 
Effectiveness and Student Use: 

GAO-02-751: 

Contents: 

Letter: 

Results in Brief: 

Background: 

Hope and Lifetime Learning Credits Provide Benefits for a Substantial 
Portion of Undergraduate Students: 

Available Policy and Instructions Provide Clear Guidance about the 
Impact of Several, but Not All, Tax Provisions on Eligibility for Title 
IV Aid: 

Little Information Is Available to Congress on the Relative 
Effectiveness of Title IV Grants, Loans, and Hope and Lifetime Learning 
Tax Credits: 

Conclusions: 

Recommendations to the Secretaries of Education and Treasury: 

Agency Comments: 

Appendix I: Estimation of HOPE and Lifetime Learning Tax Credits and 
Title IV Student Aid: 

Appendix II: Research on the Effects of Grants, Loans, and Tax Credits: 

Appendix III: Comments from the Department of Education: 

Appendix IV: Comments from the Department of Treasury: 

Appendix V: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Staff Acknowledgments: 

Bibliography: 

Tables: 

Table 1: Selected Postsecondary Education Tax Provisions, 2002: 

Table 2: Estimated Use of Tax Credits and Title IV Aid Among All 
Undergraduates in 1999-2000: 

Table 3: Percent of All Undergraduate Students Receiving HOPE Credit: 

Table 4: Percent of All Undergraduate Students Receiving Lifetime 
Learning Credit: 

Table 5: Average Amount of HOPE Credit: 

Table 6: Average Amount of Lifetime Learning Credit: 

Table 7: HOPE Credit as a Percent of Tuition and Fees Charged and Net 
Tuition and Fees Paid by Dependent Students 37: 

Table 8: HOPE Credit as a Percent of Tuition and Fees Charged and Net 
Tuition and Fees Paid by Independent Students 38: 

Table 9: Lifetime Learning Credit as a Percent of Tuition and Fees 
Charged and Net Tuition and Fees Paid by Dependent Students: 

Table 10: Lifetime Learning Credit as a Percent of Tuition and Fees 
Charged and Net Tuition and Fees Paid by Independent Students: 

Table 11: Amount of HOPE Credit and Title IV Grant or Loan Assistance 
Received by Dependent Students Obtaining Both: 

Table 12: Amount of HOPE Credit and Title IV Grant or Loan Assistance 
Received by Independent Students Obtaining Both: 

Table 13: Amount of Lifetime Learning Credit and Title IV Grant or Loan 
Assistance Received by Dependent Students Obtaining Both: 

Table 14: Amount of Lifetime Learning Credit and Title IV Grant or Loan 
Assistance Received by Independent Students Obtaining Both: 

Figures: 

Figure 1: Estimated Use of Higher Education Tax Credits and Title IV 
Student Aid among All Undergraduates in 1999-2000: 

Figure 2: Percent of All Undergraduate Students Receiving HOPE Credit: 

Figure 3: Percent of All Undergraduate Students Receiving Lifetime 
Credit: 

Figure 4: Average Amount of HOPE Credit Received by Dependent and 
Independent Students: 

Figure 5: Average Amount of Lifetime Learning Credit Received by 
Dependent and Independent Students: 

Figure 6: HOPE Credit as a Percent of Tuition and Fees Charged and Net 
Tuition and Fees Paid by Dependent Students: 

Figure 7: HOPE Credit as a Percent of Tuition and Fees Charged and Net 
Tuition and Fees Paid by Independent Students: 

Figure 8: Lifetime Learning Credit as a Percent of Tuition and Fees 
Charged and Net Tuition and Fees Paid by Dependent Students: 

Figure 9: Lifetime Learning Credit as a Percentage of Tuition and Fees 
Charged and Net Tuition and Fees Paid by Independent Students: 

Figure 10: HOPE Credit and Title IV Grant and/or Loan Assistance, 
Dependent Students Receiving Both: 

Figure 11: HOPE Credit and Title IV Grant and/or Loan Assistance, 
Independent Students Receiving Both: 

Figure 12: Lifetime Learning Credit and Title IV Grant and/or Loan 
Assistance, Dependent Students Receiving Both: 

Figure 13: Lifetime Learning Credit and Title IV Grant and/or Loan 
Assistance, Independent Students Receiving Both: 

Abbreviations: 

AGI: adjusted gross income: 
EFC: expected family contribution: 
FAFSA: Free Application for Federal Student Aid: 
GPRA: Government Performance and Results Act of 1993: 
IRS: Internal Revenue Service: 
HEA: Higher Education Act: 
NPSAS: National Postsecondary Student Aid Study: 
SEOG: Supplemental Educational Opportunity grants: 
SOI: Statistics of Income: 

September 13, 2002: 

The Honorable Edward M. Kennedy: 
Chairman: 
The Honorable Judd Gregg: 
Ranking Minority Member: 
Committee on Health, Education, Labor, and Pensions: 
United States Senate: 

The Honorable John A. Boehner: 
Chairman: 
The Honorable George Miller: 
Ranking Minority Member: 
Committee on Education and the Workforce: 
House of Representatives: 

The federal government uses a range of policy tools to assist students 
in financing postsecondary education, including direct expenditures and 
federal tax law. Title IV of the Higher Education Act (HEA), first 
adopted in 1965, authorizes federal grant and loan programs, providing 
a total of $53 billion in assistance to 8.1 million students in fiscal 
year 1999. In the past decade, the federal government has increasingly 
relied upon another tool: the tax code. The Taxpayer Relief Act of 1997 
allowed eligible taxpayers to reduce their tax liability by receiving 
up to a $1,500 HOPE or $1,000 Lifetime Learning tax credit for tuition 
and course-related fees paid. The 2001 Economic Growth and Tax Relief 
Reconciliation Act created a new tax deduction for tuition expenses, 
and expanded many existing higher education tax provisions. For 
example, the law excluded the earnings of state-sponsored college 
savings and prepaid tuition plans from federal income taxation, 
providing they are used to meet tuition and other educational expenses, 
and it increased the annual contribution limit for Coverdell Education 
Savings Accounts. The federal investment in providing student 
assistance through the tax code has risen sharply, from an estimated 
$0.0056 billion in 1996 to $7.6 billion in 2002,[Footnote 1] more than 
80 percent of which is comprised of HOPE and Lifetime Learning tax 
expenditures. In tax year 1999, 6.4 million tax filers obtained about 
$4.8 billion dollars in higher education tax credits. In comparison, 
the federal government’s largest student aid program, the Pell grant 
program, provided 3.7 million students with $7.2 billion dollars in 
grants during the 1999-2000 academic year.

To assist Congress as it prepares for the reauthorization of HEA, we 
reviewed the title IV aid programs and higher education tax provisions 
designed to assist students and families. Our review focused on three 
questions: (1) What assistance do HOPE and Lifetime Learning tax 
credits provide, and how do credit benefits compare to the tuition and 
fees that students are charged, and to title IV aid they receive? (2) 
To what extent do available policy and instructions provide clear 
guidance about the impact of tax provisions on eligibility for title IV 
financial aid? (3) To what extent is information available to Congress 
about the relative effectiveness of title IV grants and loans and the 
HOPE and Lifetime Learning tax credits? 

To answer question one, we estimated the HOPE and Lifetime Learning tax 
credits students received on the basis of the credits’ design and on 
data in the National Postsecondary Student Aid Study (NPSAS). NPSAS 
examines how students and their families pay for education and is based 
on a nationally representative sample of students. Appendix I describes 
our estimation methodology. We also used NPSAS to estimate the title IV 
aid received by students considered to be financially dependent on 
their parents and by financially independent students.[Footnote 2] To 
answer question two, we reviewed the HEA, Internal Revenue Code, title 
IV financial aid policies and instructions developed by the Department 
of Education (Education), and interviewed Education officials. To 
answer question three, we reviewed studies of the effectiveness of 
title IV aid and the HOPE and Lifetime Learning tax credits. We focused 
on their effects on college attendance and choice, completion, and 
costs. These outcomes were chosen because they have been the focus of 
congressional concern, as expressed in committee reports, statutorily 
established study commissions, and requests for our work from Congress. 
We also interviewed Education and Department of Treasury (Treasury) 
officials about their research and evaluation concerning title IV aid 
and tax credits. Appendix II provides details about our review of the 
studies. We conducted our work from August 2001 to July 2002 in 
accordance with generally accepted government auditing standards. 

Results in Brief

In the 1999-2000 academic year, the Lifetime Learning and HOPE tax 
credits provided, we estimate, more than 4 in 10 undergraduate students 
with benefits that equaled a varying share of tuition and fees charged 
and title IV aid received. Some students did not receive the credits on 
the basis of their (or their family’s) income: those with incomes above 
$100,000 were not eligible to claim the credits, and those with incomes 
under $20,000 typically lacked a sufficient tax liability to use the 
credits. Others received the credits, but obtained less than the 
credits’ maximum value because their educational expenses were too 
small to make full use of the credits. Among all dependent students who 
received the HOPE credit, it equaled, on average, about 20 percent of 
the tuition and fees they were charged, while among all independent 
students the HOPE credit equaled 30 percent of the tuition and fees 
they were charged, according to our estimates. Some students received 
both a tax credit and title IV aid. For these students, HOPE credits 
equaled, on average, about one-fifth of the face value of the title IV 
aid they received, while the Lifetime Learning credit equaled about one-
tenth of the face value of their title IV aid. As figure 1 shows, title 
IV student aid and higher education tax credits, taken together, now 
assist more than 70 percent of undergraduate students and families in 
paying for postsecondary education. 

Figure 1: Estimated Use of Higher Education Tax Credits and Title IV 
Student Aid among All Undergraduates in 1999-2000: 

This figure is a pie chart showing estimated use of higher education 
tax credits and title IV student aid among all undergraduates in 1999-
2000. 

33%: Tax credits only; 
28%: Neither credits nor title IV aid; 
25%: Title IV aid only; 
14%: Tax credits and title IV aid. 

Note: See appendix I for our methodology used to generate credit 
estimates and the confidence intervals associated with these estimates. 

Source: GAO calculations based upon 1999-2000 NPSAS data. 

[End of figure] 

Available policy and instructions provide clear guidance about the 
impact that several, but not all, tax provisions have on title IV aid 
eligibility. For several higher education tax provisions, the HEA or 
Education’s policies and instructions make clear how the use of tax 
provisions affects aid eligibility. For some tax provisions, however, 
Education has not established a policy on how their use affects aid 
eligibility, or it has established a policy but not communicated it 
clearly to aid applicants. Specifically, Education has not decided 
whether aid applicants should report the untaxed earnings of state-
sponsored college savings plans, prepaid tuition plans, or Coverdell 
Educational Savings accounts when applying for title IV aid, as is the 
case with other types of untaxed income. As a result, those who wish to 
use these tax provisions are faced with uncertainty about how this 
income affects aid eligibility. Education has decided how assets in 
state-sponsored college savings plans, Coverdell Educational Savings 
accounts, and Savings Bonds should be reported on the title IV aid 
application form and used in calculating aid eligibility. However, the 
form provides unclear instructions about who should report the 
ownership of these assets, the student or parent. This may cause aid 
applicants to err in reporting ownership of these assets, and result in 
their eligibility for aid being miscalculated. We make recommendations 
in this report to address these problems. 

Little information is available to Congress on the relative 
effectiveness of title IV grants and loans and the HOPE and Lifetime 
Learning tax credits in promoting postsecondary attendance, choice, and 
completion, or their impact on college costs. This is due, in part, to 
the data and methodological challenges intrinsic to conducting studies 
examining their effects. Moreover, Education has conducted few 
evaluations of the title IV aid programs, while Treasury has not yet 
examined the effects of higher education tax credits. Using statistical 
techniques and research designs that respond to these data and 
methodological challenges, academic researchers have begun to produce 
findings about the impact of student financial aid. For example, most 
studies that we reviewed found that grant aid results in increased 
rates of college attendance, though estimates of its magnitude vary. 
Education has focused its analysis of title IV programs on program 
delivery, rather than impact. Lacking access to individual taxpayer 
data, Education has been unable to analyze the use of higher education 
tax credits or their effects. Treasury has access to taxpayer data but 
has not used these data as a basis for evaluating the impact of tax 
credits. In addition, Treasury does not possess data on the receipt of 
title IV aid, limiting its capacity to assess the credits’ effects. As 
a result, little information has been available to help Congress weigh 
the relative effectiveness of grants, loans, and tax credits. We 
recommend that the Secretaries of Education and Treasury take steps to 
address this lack of information. 

We provided Education and Treasury with a copy of our draft report for 
review and comment. In written comments on our draft report, Education 
and Treasury generally agreed with our reported findings and 
recommendations. Education’s and Treasury’s comments appear in appendix 
III and IV, respectively. 

Background: 

Education is the primary agency overseeing federal investments in 
support of students enrolled in postsecondary education. Education’s 
grant and loan programs are the largest source of student aid in the 
United States; however, tax provisions recently enacted by Congress 
have created new sources of support to assist students in paying for 
postsecondary education. These two sources of student assistance—grants 
and loans, and tax benefits—are intended to promote access to higher 
education and to ensure its affordability. To help track progress 
toward these and other goals, Education has developed strategic and 
performance goals in accordance with the Government Performance and 
Results Act of 1993 (GPRA).[Footnote 3] 

Title IV Aid: 

Title IV of the HEA of 1965, as amended, authorizes the federal 
government’s financial aid programs for postsecondary education. Title 
IV programs include Pell grants for low-income students, parent loans 
known as PLUS loans, and Stafford loans. Stafford loans may be either 
subsidized or unsubsidized. The federal government pays the interest 
cost on subsidized loans while the student is in school. The terms and 
conditions of unsubsidized loans are the same as those for subsidized 
loans, but the federal government does not pay the interest costs on 
the loan while the student is in school; rather, students are 
responsible for all interest costs. Title IV also authorizes programs 
funded by the federal government and administered by participating 
higher education institutions, commonly known as campus-based 
aid—Supplemental Educational Opportunity grants (SEOG), Perkins loans, 
and federal work-study aid. In academic year 1999-2000, Education 
awarded approximately $53 billion to students through the title IV 
programs. 

In order to receive title IV aid, a student must apply using the Free 
Application for Federal Student Aid (FAFSA). Information from the FAFSA 
is used to determine the amount of money—called the expected family 
contribution (EFC)—that the student and/or the family is expected to 
contribute to the student’s education. Statutory definitions establish 
the criteria that students must meet to be considered independent of or 
dependent on their parents for purposes of financial aid, and statutory 
formulas establish the share of income and assets that are expected to 
be available for the student’s education.[Footnote 4] Once the EFC is 
established, it is compared to the cost of attendance at the 
institution chosen by the student. If the EFC is greater than the cost 
of attendance, the student is not considered to have financial need for 
federal title IV aid programs. If the cost of attendance is greater 
than the EFC, then the student is considered to have financial need. 
Financial aid administrators at the student’s school then create a 
federal financial aid package that may include grants, loans, and work-
study. As part of the financial aid package students may also receive 
state, institutional, or private aid. 

In 1999-2000, about one in four undergraduates (23 percent) received 
federal Pell or SEOG grant aid. Awarded on the basis of financial need, 
these grants were highly targeted. About 75 percent of dependent 
students receiving Pell and SEOG grants had family incomes of $30,000 
or less,[Footnote 5] while three-quarters of independent students 
receiving them had incomes of $20,000 or less.[Footnote 6] Stafford 
loans were received by 28 percent of undergraduates, and served a more 
varied population. A broad range of dependent undergraduates made use 
of need-based (or subsidized) student loans. Of the unsubsidized loans 
received by dependent undergraduates, 60 percent were received by those 
with family incomes of $60,000 or above per year. Of all loans received 
by independent students— subsidized and unsubsidized—three quarters of 
their total dollar amount went to students whose incomes were less than 
$30,000 per year. 

Tax Provisions: 

In recent years Congress has enacted eight higher education tax 
provisions that are specifically designed to help individuals and 
families save for, repay, or meet the current costs of higher 
education, and accomplish this by permitting tax filers to use their 
qualified educational expenses to reduce their federal income tax 
liability (see table 1). 

Table 1: Selected Postsecondary Education Tax Provisions, 2002: 

[See PDF for image] 

Source: Internal Revenue Code, Department of Treasury, Joint Committee 
on Taxation, and Congressional Research Service. 

[A] Under the Taxpayer Relief Act of 1997, the income phase-out amounts 
are indexed to inflation. 

[End of figure] 

Source: Internal Revenue Code, Department of Treasury, Joint Committee 
on Taxation, and Congressional Research Service. 

Education's Strategic and Annual Performance Goals: 

Education has a strategic goal that is particularly relevant to its 
title IV programs, to “Enhance the Quality of and Access to 
Postsecondary Education.” To ensure its progress toward this goal, 
Education has developed annual goals that focus on (1) reducing the 
gaps in student achievement and completion among students differing by 
race, ethnicity, income, and disability; and (2) improving the 
effectiveness of its title IV funding mechanisms in terms of, among 
other things, tuition prices and borrower indebtedness.

Hope and Lifetime Learning Credits Provide Benefits for a Substantial 
Portion of Undergraduate Students: 

In the 1999-2000 academic year, more than 4 in 10 undergraduate 
students received a higher education tax credit, according to our 
estimate. On average, the HOPE tax credit equaled about 20 percent of 
the tuition and fees that were charged to dependent students, and 30 
percent of those charged to independent students. The Lifetime Learning 
credit equaled 8 percent of tuition and fees charged to dependent 
students, and 11 percent for independent students. For both groups of 
students the HOPE and Lifetime Learning credits comprised a larger 
share of the net tuition and fees they paid—that is, tuition and fees 
charged, minus all types of grant assistance. In addition to the 
credits, some students—about 14 percent—also received title IV aid. For 
these students, credit amounts ranged from 4 to 26 percent of the face 
value[Footnote 7] of the title IV aid that they received. Taken 
together, credits and title IV student aid now assist about 7 out of 10 
undergraduate students in meeting the costs of postsecondary education. 

Hope and Lifetime Learning Tax Credits Were Received by Many, but Not 
All: 

According to our estimates, more than 4 in 10 undergraduate students 
received a higher education tax credit in 1999-2000, a larger share of 
students than participated in the federal government’s title IV 
programs. About 29 percent received a Lifetime Learning tax credit, 
while 17 percent received a HOPE tax credit. Students may receive title 
IV aid and a HOPE or Lifetime Learning credit, and many did—an 
estimated 14 percent of undergraduate students received both. 

Not all undergraduates were eligible to receive a HOPE or Lifetime 
Learning tax credit. One factor that affects eligibility is income. 
Students from families with parents who filed jointly and had incomes 
above $100,000 were ineligible to receive the credits. In addition, in 
order to receive a credit, tax filers must have a positive tax 
liability. For a twoparent family with one dependent college student, 
federal income tax liability began in 2000 at about $15,750.[Footnote 
8] As shown in figures 2 and 3, a small proportion of those dependent 
students whose family incomes were below $20,000 received the credits. 

Figure 2: Percent of All Undergraduate Students Receiving HOPE Credit: 

This figure is a bar chart showing percent of all undergraduate 
students receiving HOPE credit. The X axis represents income, and the Y 
axis represents percent. 

$0-19,999: Dependent: 4; 
$0-19,999: Independent: 9. 

$20-39,999: Dependent: 27; 
$20-39,999: Independent: 18. 

$40-59,999: Dependent: 33; 
$40-59,999: Independent: 16 

$60-79,999: Dependent: 34; 
$60-79,999: Independent: 12. 

$80-99,999: Dependent: 32; 
$80-99,999: Independent: 14. 

Note: See appendix I for confidence intervals associated with these 
estimates. 

[A] Dependent income equals 1998 parental adjusted gross income (AGI); 
independent income equals 1998 student AGI and, if married, spouse’s 
AGI. 

Source: GAO calculations based upon 1999-2000 NPSAS data. 

[End of figure] 

Figure 3: Percent of All Undergraduate Students Receiving Lifetime 
Credit: 

This figure is a bar graph showing percent of all undergraduate 
students receiving lifetime credit. The X axis represents income, and 
the Y axis represents percent. 

$0-19,999: Dependent: 5; 
$0-19,999: Independent: 19. 

$20-39,999: Dependent: 29; 
$20-39,999: Independent: 46. 

$40-59,999: Dependent: 33; 
$40-59,999: Independent: 48 

$60-79,999: Dependent: 32; 
$60-79,999: Independent: 48. 

$80-99,999: Dependent: 39; 
$80-99,999: Independent: 42.

Note: See appendix I for confidence intervals associated with these 
estimates. 

[A] Dependent income equals 1998 parental AGI; independent income 
equals 1998 student AGI and, if married, spouse’s AGI. 

Source: GAO calculations based upon 1999-2000 NPSAS data. 

Figures 4 and 5 show that students who received the credits did not 
necessarily receive the full amount. Students may not have a 
sufficiently large tax liability or qualified educational expenses 
necessary to receive a tax credit’s full value. Tax filers must have 
qualified educational expenses of $2,000 per student to receive the 
maximum HOPE credit, while they must have $5,000 of qualified expenses 
(for themselves or others claimed on their return) to receive the 
maximum value of the Lifetime Learning credit. Tax filers must subtract 
the nontaxable aid they received, such as Pell grants or scholarships, 
from qualified educational expenses. The reduction of qualified 
educational expenses by nontaxable aid reduces the number of students 
who might otherwise receive the credits, and it reduces the credit 
amounts obtained, particularly, we estimate, among dependent students 
with family incomes in the $10-$50,000 range. 

Figure 4: Average Amount of HOPE Credit Received by Dependent and 
Independent Students: 

This figure is a bar graph showing the average amount of HOPE credit 
received by dependent and independent students. The X axis represents 
income, and the Y axis represents dollars. 

[See PDF for image] 

Note: See appendix I for confidence intervals associated with these 
estimates. 

[A] Dependent income equals 1998 parental AGI; independent income 
equals 1998 student AGI and, if married, spouse’s AGI.

Source: GAO calculations based upon 1999-2000 NPSAS data. 

[End of figure] 

Figure 5: Average Amount of Lifetime Learning Credit Received by 
Dependent and Independent Students: 

This figure is a bar chart showing average amount of lifetime learning 
credit received by dependent and independent students. 

[See PDF for image] 

Note: See appendix I for confidence intervals associated with these 
estimates. 

[A] Dependent income equals 1998 parental AGI; independent income 
equals student 1998 AGI and, if married, spouse’s AGI.

Source: GAO calculations based upon 1999-2000 NPSAS data. 

[End of figure] 

Credits Equaled a Varying Share of Tuition and Fees: 

For the 47 percent of all undergraduates who received a tax credit in 
1999-2000, the higher education tax credits equaled a varying share of 
the tuition and fees. On average, the HOPE tax credit equaled about 20 
percent of the tuition and fees that were charged to dependent 
students, and 30 percent of independent students’ tuition and fee 
charges. The Lifetime Learning credit equaled 8 percent of tuition and 
fees charged to dependent students, and 11 percent for independent 
students. Many students receive private, institutional, state, and 
federal grants that reduce the tuition and fee costs that they must pay 
out of their own resources. In claiming the HOPE and Lifetime Learning 
credits, tax filers must reduce their qualified educational expenses, 
tuition and fees, by these (and any other) forms of nontaxable aid. We 
calculated students’ net tuition and fees as the tuition and fees they 
were charged minus all private, institutional, state, and federal grant 
aid they received. We estimate that the HOPE credit equaled, on 
average, 28 percent of dependent students’ net tuition and fees, and 36 
percent of independent students’ net tuition and fees. The Lifetime 
Learning credit equaled about 12 percent of dependents’ net tuition and 
fees, and 15 percent of independents’ net tuition and fees. Figure 6 
compares the estimated HOPE credit to the total tuition and fees 
charged to dependent students, and to the net tuition and fees they 
paid. Figure 7 presents the same comparisons for independent students. 
Figure 8 compares the estimated Lifetime Learning credits received to 
the total tuition and fees charged to dependent students, and to the 
net tuition and fees they paid. Figure 9 presents the same comparisons 
for independent students. 

Figure 6: HOPE Credit as a Percent of Tuition and Fees Charged and Net 
Tuition and Fees Paid by Dependent Students: 

This figure is a bar graph showing Hope credit as a percent of tuition 
and fees charged and net tuition and feed paid by dependent students. 
The X axis represents the income, and the Y axis represents the 
percent. 

$0-19,999: Dependent: 6; 
$0-19,999: Independent: 12. 

$20-39,999: Dependent: 20; 
$20-39,999: Independent: 31. 

$40-59,999: Dependent: 21; 
$40-59,999: Independent: 31; 

$60-79,999: Dependent: 22; 
$60-79,999: Independent: 32. 

$80-99,999: Dependent: 12; 
$80-99,999: Independent: 15.

[See PDF for image] 

Source: GAO calculations based upon 1999-2000 NPSAS data. 

Note: See appendix I for confidence intervals associated with these 
estimates. 

[A] Dependent income equals 1998 parental AGI; independent income 
equals 1998 student AGI and, if married, spouse’s AGI.

Source: GAO calculations based upon 1999-2000 NPSAS data. 

[End of figure] 

Figure 7: HOPE Credit as a Percent of Tuition and Fees Charged and Net 
Tuition and Fees Paid by Independent Students: 

This figure is a bar graph showing HOPE credit as a percent of tuition 
and fees charged and net tuition and fees paid by independent students. 
The X axis is income, and the Y axis is percent. 

$0-19,999: Dependent: 21; 
$0-19,999: Independent: 26. 

$20-39,999: Dependent: 34; 
$20-39,999: Independent: 41. 

$40-59,999: Dependent: 39; 
$40-59,999: Independent: 43; 

$60-79,999: Dependent: 44; 
$60-79,999: Independent: 50. 

$80-99,999: Dependent: 25; 
$80-99,999: Independent: 28. 

Note: See appendix I for confidence intervals associated with these 
estimates. 

[A] Dependent income equals 1998 parental AGI; independent income 
equals 1998 student AGI and, if married, spouse’s AGI.

Source: GAO calculations based upon 1999-2000 NPSAS data. 

[End of figure] 

Figure 8: Lifetime Learning Credit as a Percent of Tuition and Fees 
Charged and Net Tuition and Fees Paid by Dependent Students: 

This figure is a bar chart showing lifetime learning credit as a 
percent of tuition and fees charged and net tuition and fees paid by 
dependent students. The X axis is the income, and the Y axis is the 
percent. 

$0-19,999: Dependent: 5 
$0-19,999: Independent: 9. 

$20-39,999: Dependent: 9; 
$20-39,999: Independent: 14. 

$40-59,999: Dependent: 9; 
$40-59,999: Independent: 13; 

$60-79,999: Dependent: 10; 
$60-79,999: Independent: 13. 

$80-99,999: Dependent: 5; 
$80-99,999: Independent: 6.

[See PDF for image] 

Note: See appendix I for confidence intervals associated with these 
estimates. 

[A] Dependent income equals 1998 parental AGI; independent income 
equals 1998 student AGI and, if married, spouse’s AGI.

Source: GAO calculations based upon 1999-2000 NPSAS data. 

[End of figure] 

Figure 9: Lifetime Learning Credit as a Percentage of Tuition and Fees 
Charged and Net Tuition and Fees Paid by Independent Students: 

This figure is a bar graph showing lifetime learning credit as a 
percentage of tuition and fees charged and net tuition and fees paid by 
independent students. The X axis is income, and the Y axis is the 
percent. 

[See PDF for image] 

Note: See appendix I for confidence intervals associated with these 
estimates. 

[A] Dependent income equals 1998 parental AGI; independent income 
equals 1998 student AGI and, if married, spouse’s AGI.

Source: GAO calculations based upon 1999-2000 NPSAS data. 

[End of figure] 

For Title IV Recipients, Higher Education Tax Credits Equaled in a 
Varying Share of Their Aid: 

Approximately 14 percent of undergraduate students received both title 
IV aid and a higher education tax credit in 1999-2000; for these 
students, the HOPE and Lifetime Learning tax credits equaled a varying 
share of the face value of the title IV aid they received. The HOPE 
credit equaled, on average, about one-fifth of the average title IV aid 
received by students. The Lifetime Learning tax credit provided a 
smaller benefit relative to title IV aid than the HOPE credit, 
equaling, on average, about one-tenth of the title IV aid received by 
dependent and independent students. For dependent students with family 
incomes of $20,000-$40,000, we estimate that the average HOPE credit 
($924) was larger than the average title IV grant award ($569). For 
students with family incomes of $40,000-$80,000, who typically do not 
receive grant aid, the HOPE credit provides a significant benefit in 
comparison to the face value of their federal loan assistance. Figures 
10 and 11 show, for dependent and independent students, the estimated 
HOPE credit and title IV grant and loan aid amounts received. Figures 
12 and 13 compare the estimated Lifetime Learning credit and title IV 
grant and loan aid amounts received by dependent and independent 
students. 

Figure 10: HOPE Credit and Title IV Grant and/or Loan Assistance, 
Dependent Students Receiving Both: 

This figure is a shaded bar chart showing HOPe credit and Title IV 
grant and/or loan assistance, dependent students receiving both. The X 
axis is income, and the Y axis is dollars. Mean credit, mean loan, and 
mean grant are represented in the graph. 

Notes: These calculations report the face value of loans, rather than 
their economic subsidy value to the student. Recent estimates of the 
economic subsidy value of title IV student loans put the value at about 
15 to 30 percent of the face value of the loan, depending upon the type 
of loan. 

See appendix I for confidence intervals associated with these 
estimates. 

[A] Dependent income equals 1998 parental AGI. 

Source: GAO calculations based upon 1999-2000 NPSAS data. 

Figure 11: HOPE Credit and Title IV Grant and/or Loan Assistance, 
Independent Students Receiving Both: 

This figure is a bar graph showing HOPE credit and Title IV and/or loan 
assistance, independent students receiving both. The X axis is income, 
and the Y axis is dollars. Mean credit, mean loan, and mean grant are 
represented in the graph. 

[See PDF for image] 

Notes: These calculations report the face value of loans, rather than 
their economic subsidy value to the student. Recent estimates of the 
economic subsidy value of title IV student loans put the value at about 
15 to 30 percent of the face value of the loan, depending upon the type 
of loan. 

See appendix I for confidence intervals associated with these 
estimates. 

[A] Independent income equals 1998 student AGI and, if married, 
spouse’s AGI. 

Source: GAO calculations based upon 1999-2000 NPSAS data. 

[End of figure] 

Figure 12: Lifetime Learning Credit and Title IV Grant and/or Loan 
Assistance, Dependent Students Receiving Both: 

This figure is a bar graph showing lifetime learning credit and Title 
IV grant and/or loan assistance, dependent students receiving both. The 
X axis is the income, and the Y axis is dollars. Mean credit, mean 
loan, and mean grant are represented in the graph. 

[See PDF for image] 

Notes: These calculations report the face value of loans, rather than 
their economic subsidy value to the student. Recent estimates of the 
economic subsidy value of title IV student loans put the value at about 
15 to 30 percent of the face value of the loan, depending upon the type 
of loan. 

See appendix I for confidence intervals associated with these 
estimates. 

[A] Dependent income equals 1998 parental AGI; independent income 
equals 1998 student AGI and, if married, spouse’s AGI.

Source: GAO calculations based upon 1999-2000 NPSAS data. 

[End of figure] 

Figure 13: Lifetime Learning Credit and Title IV Grant and/or Loan 
Assistance, Independent Students Receiving Both: 

This figure is a bar graph showing lifetime learning credit and Title 
IV grant and/or loan assistance, independent students receiving both. 
Mean credit, mean loan, and mean grant are represented in the graph. 

[See PDF for image] 

Notes: These calculations report the face value of loans, rather than 
their economic subsidy value to the student. Recent estimates of the 
economic subsidy value of title IV student loans put the value at about 
15 to 30 percent of the face value of the loan, depending upon the type 
of loan. 

See appendix I for confidence intervals associated with these 
estimates. 

[A] Dependent income equals 1998 parental AGI; independent income 
equals 1998 student AGI and, if married, spouse’s AGI.

Source: GAO calculations based upon 1999-2000 NPSAS data. 

[End of figure] 

For Students Who Did Note Receive Title IV Aid, Credits Equaled, on 
Average, from One-Tenth to One-Half of the Tuition and Feed They Were 
Charged: 

About 6 out of 10 undergraduates did not receive title IV student 
assistance in 1999-2000. We estimate that slightly more than half of 
these students received a higher education tax credit. Among those 
dependent students who received no federal financial aid, the HOPE tax 
credit equaled about 25 percent of the tuition and fees they were 
charged, while among independents this share was nearly 50 percent. The 
Lifetime Learning tax credit equaled a smaller share of tuition and 
fees charged to both, 10 percent and 14 percent, respectively. 

Available Policy and Instructions Provide Clear Guidance about the 
Impact of Several, but Not All, Tax Provisions on Eligibility for Title 
IV Aid: 

Available policy and instructions provide clear guidance about the 
impact of several higher education tax provisions on eligibility for 
title IV aid, but in a few instances they do not. Education has not 
established a policy on how the income that students and parents report 
as part of the expected family contribution is affected by the tax-free 
earnings of state savings plans, prepaid tuition plans, and Coverdell 
accounts. As a result, those who wish to use these provisions are faced 
with uncertainty about how using them affects title IV aid eligibility. 
Although Education has established policies about the ownership of 
these assets for the purpose of calculating the EFC, these policies 
have not been clearly communicated to aid applicants. Specifically, 
families who choose to use state savings plans, Coverdell accounts, and 
Series EE Savings Bonds receive unclear instructions on the FAFSA form 
about who should claim these assets, the student or parent(s). As a 
result, they may err when reporting these assets, and their eligibility 
for aid may be miscalculated. 

For many of the higher education tax provisions that we reviewed, the 
HEA or Education’s guidance make clear how their use affects aid 
eligibility. The HEA prohibits including HOPE and Lifetime Learning tax 
credits as income or assets in the computation of EFC.[Footnote 9] In 
contrast, the act specifies that assets in a tuition prepayment plan do 
reduce students’ eligibility for title IV aid because they reduce 
students’ cost of attendance.[Footnote 10] In specifying how federal 
taxation affects the EFC, the HEA also accounts for the effects of two 
other tax provisions: the student loan interest deduction and the 
higher education tax deduction. Under the rules of the federal 
financial aid methodology, aid applicants reduce their reported income 
by federal income and payroll taxes, and by an allowance for state 
taxes. The use of these tax provisions lowers an applicant’s tax 
liability and their adjusted gross income, reducing their EFC and 
increasing their aid eligibility.[Footnote 11] The HEA also specifies 
that interest on tax-free bonds, including Savings Bonds, must be 
reported as part of the untaxed income included in the EFC. As a 
result, the HEA makes clear that the use of Series EE Savings Bonds 
increases an aid applicant’s EFC, and reduces their aid eligibility.

In a few instances, neither the HEA’s financial aid methodology nor 
Education’s policies establish how parents’ and students’ use of 
certain tax provisions—state savings plans, prepaid tuition plans, and 
Coverdell accounts—affects their eligibility for title IV aid. Before 
January 2002, the earnings portion of prepaid tuition and state savings 
plans was taxable upon distribution. As part of the student’s taxable 
income, it was reported on the FAFSA form and included in the 
calculation of the EFC. After January 2002, in accordance with the 
Economic Growth and Tax Relief Reconciliation Act, the earnings of 
these plans were no longer subject to federal taxation. Education has 
not yet determined whether interest earned on prepaid tuition plans, 
savings plans, or Coverdell accounts should be reported on the FAFSA 
form and included in the calculation of EFC as a type of untaxed 
income.[Footnote 12] As a result, those who use either tax provision 
cannot predict whether interest earnings from these plans will increase 
the income that they report on the FAFSA, thereby increasing their EFC 
and reducing eligibility for most title IV aid. 

For state savings plans and Coverdell accounts, as well as Series EE 
Saving Bonds, the FAFSA form does not provide clear instructions for 
reporting to whom these assets belong, the student or parent. The FAFSA 
has a single set of instructions directing parents and students to 
report their assets, including state savings plan assets, bonds, and 
Coverdell accounts. However, the instructions do not indicate who 
should claim which assets.[Footnote 13] As a result, parents may claim 
assets that should be reported as student assets, or vice versa. A 
mistake of this type has consequences because the HEA specifies that a 
larger share of student assets is to be included in the EFC than 
parental assets.[Footnote 14] Errors in reporting of these assets on 
the FAFSA may result in a miscalculation of the EFC, and students 
receiving more or less aid than they would if the assets were correctly 
reported. 

Little Information Is Available to Congress on the Relative 
Effectiveness of Title IV Grants, Loans, and Hope and Lifetime Learning 
Tax Credits: 

Little information is available to Congress on the relative 
effectiveness of title IV grants and loans and the HOPE and Lifetime 
Learning tax credits in promoting postsecondary attendance, choice, and 
completion, or their impact on college costs. Data and methodological 
challenges make it difficult to isolate the impact of grants, loans, 
and tax credits. Some academic research has addressed these challenges, 
and developed evidence about the effects of student assistance, chiefly 
grant aid. Our review of research found little work undertaken by 
Education to assess the effectiveness of title IV programs. Treasury 
has studied the impact of some tax provisions, but has not yet done so 
for the HOPE or Lifetime Learning tax credits. As a result, Congress 
has little information to help it weigh the relative effectiveness of 
these policy tools. 

Identifying Impact of Grants, Loans, and Tax Credits Is Difficult, and 
Little is Known Beyond the Effect of Grants on Attendance: 

Data and methodological challenges make it difficult to identify the 
impact of grants, loans, and tax credits on college attendance and 
choice, completion, or costs. Many factors in addition to financial aid 
may influence college-going decisions, including academic preparation, 
family income and wealth, and the expected costs and benefits of 
college attendance. To isolate the effect of financial aid on college 
attendance, for example, researchers need data about each of these 
factors—both for those who chose to attend college and those who did 
not. National surveys do not contain complete data on all of these 
factors for those who attend and do not attend college.[Footnote 15]  
Moreover, researchers have little evidence about how postsecondary 
institutions respond to changes in the availability of federal aid. 
Despite such challenges, researchers have begun to establish a body of 
findings about the effects of federal aid, much of it focusing on the 
effects of grant aid. They have done so by using a variety of 
statistical techniques and research designs[Footnote 16] that mitigate 
these challenges. 

Much of the research we identified examined the impact of grants on 
attendance. While some studies conclude that grants have not had a 
large effect on college attendance,[Footnote 17] most indicate that 
grants have a positive impact on attendance, though their estimates of 
its magnitude vary. Recent research by Dynarski (2001) and Seftor and 
Turner (2002) found that changes in grant aid significantly increased 
the probability that recipients would attend college.[Footnote 18] 

Little is known about the effects of the higher education tax credits 
on college attendance and choice, completion or costs. No studies we 
identified used individual taxpayer data, collected after the credits 
were enacted, to estimate any of these effects. A few researchers have 
simulated the effects of the HOPE tax credit on rates of college 
attendance. One simulation estimated that 90 percent of the cost of the 
HOPE credit is received by students who would have attended college in 
its absence.[Footnote 19] None of the studies that we reviewed examined 
whether the credits have influenced the type of institution that 
students choose to attend or their rates of college completion. 
Moreover, none examined whether the credits have made college more 
affordable for recipients or have led instead to offsetting tuition 
increases or reductions in institutional aid to credit recipients. 

Education and Treasury Have Not Focused on Impact of the Federal 
Grants, Loans, and Higher Education Tex Credits: 

Education is authorized to conduct studies on the impact of title IV 
programs; however, it has focused primarily on customer service and 
program delivery for two reasons. First, Congress has consistently 
expressed concern about the management and financial integrity of the 
title IV programs.[Footnote 20] A second reason, according to 
Education, is that it is difficult to “isolate the behavioral effects 
of title IV aid programs.” Therefore, Education has chosen to “assess 
the effectiveness of the student aid programs without attempting to 
establish a causal link between program funding and achievement of 
specific outcomes.”[Footnote 21] As discussed earlier, academic 
researchers facing the same methodological challenges have begun to 
produce a body of findings. 

Because it lacks reliable data on the individuals using higher 
education tax credits, Education is unable to determine how tax credits 
affects college attendance and choice, completion, and costs. Section 
6103(a) of the Internal Revenue Code prohibits the Internal Revenue 
Service, without congressional authorization, from sharing individual 
taxpayer data with Education. Education has attempted to collect 
information on the use of tax provisions by incorporating questions 
about their use into the student survey component of the NPSAS. 
Dependent students are often unfamiliar with how their parents use tax 
benefits and, as a result, the information they provide on surveys is 
unreliable. 

Treasury has access to individual taxpayer information, from which data 
on the use of higher education tax provisions can be calculated. 
Although Treasury has studied the effects of other tax credits, it has 
not examined the HOPE or Lifetime Learning credits since their 
implementation in 1998.[Footnote 22] Treasury does not possess data on 
the receipt of title IV aid for those tax filers who use higher 
education tax credits, limiting its capacity to assess the credits’ 
effects. Treasury has indicated that its primary evaluation priority is 
the impact of tax provisions on rates of saving. It has no work 
underway, or scheduled, to evaluate the impact of higher education tax 
credits. 

Conclusions: 

Higher education tax provisions are an important new tool in helping 
many students and families meet the costs of postsecondary education. 
Millions now receive higher education tax credits, and millions are now 
saving for college using a variety of other tax provisions. In the 
future a growing share of students and families may be making combined 
use of tax credits, other tax provisions and title IV aid. Although 
many of these tax provisions have clear consequences for title IV aid 
eligibility, some do not. Lacking clear guidance about the impact of 
some tax provisions on aid eligibility, some families may find it 
difficult to plan how they will pay for college. Faced with unclear 
instructions about reporting their use of tax provisions, some students 
may make errors that result in inaccurate awards of aid. As an 
increasing share of students use both aid and tax provisions, more 
families will be faced with uncertainty about aid eligibility and 
potential errors in aid awards. Education has the capacity to address 
both of these problems. 

The adoption of higher education tax provisions creates new 
opportunities and choices for federal policymakers, providing them with 
a range of tools to accomplish their objectives. For Congress to weigh 
the relative effectiveness of these policy tools, it must receive 
information about who these tools serve and their impact. Congress does 
not yet have this information available to it. Several questions likely 
to be important to Congress remain to be fully addressed, including: 

Does the provision of student assistance—grants, loans, or tax 
credits—result in levels of postsecondary attendance greater than would 
otherwise occur, and are some forms of assistance more effective at 
promoting attendance than others? 

Do changes in the availability of student assistance influence the 
types of institutions that students choose to attend? 

Do changes in the availability of student assistance affect whether 
students complete their postsecondary education? How do postsecondary 
institutions respond to the changes in the availability of federal 
student assistance? Have grant and loan increases, or the introduction 
of tax credits, resulted in tuition increases or reductions in 
institutional aid to grant, loan and credit recipients and, if so, to 
what degree? 

Noting the difficulty of showing the link between title IV spending and 
outcomes, Education has undertaken little work identifying the impact 
of its grant and loan programs. As a result, it cannot fully assess its 
progress in achieving its strategic goal to “Enhance the Quality of And 
Access to Postsecondary Education.” Moreover, Treasury and Education 
have not collaborated to provide Congress with evidence about the 
impact of higher education tax credits and title IV student aid. 
Determining whether there is a causal link between program and tax 
expenditures and desired outcomes is difficult, but not impossible. 
Given an annual investment of billions of dollars—in outlays and 
revenues foregone—studying their effectiveness is warranted.

Recommendations to the Secretaries of Education and Treasury: 

To ensure that students and families understand how using tax 
provisions will affect their eligibility for title IV financial aid, we 
recommend that the Secretary of Education develop a policy specifying 
whether the tax-free earnings of state-sponsored college savings plans, 
tuition prepayment plans, and Coverdell Education Savings Accounts 
should be included in the calculation of the EFC and, therefore, 
reported by aid applicants as untaxed income on the FAFSA form. In 
addition, we recommend that the Secretary clarify FAFSA instructions, 
clearly explaining who should report ownership of the assets held in 
state-sponsored savings plans, Coverdell education savings accounts, 
and Series EE Savings Bonds. 

In order to provide Congress with information about the effectiveness 
of its title IV programs as well as to ensure its programs are 
achieving results, we recommend that the Secretary of Education sponsor 
research on the impact of title IV programs on postsecondary education 
attendance and choice, completion, and costs. 

In order to provide Congress with information about the relative 
effectiveness of Education’s direct expenditure programs and Treasury’s 
higher education tax provisions, we recommend that the Secretaries of 
Education and Treasury collaborate in studying the impact of tax 
credits and title IV student aid programs on college attendance and 
choice, completion, and costs. As a first step, the Secretaries will 
need to identify opportunities for, and limits to, the sharing of data, 
and develop a plan to address them. 

Agency Comments: 

In their written comments, Education and Treasury noted that the report 
was useful and informative, and generally agreed with our findings and 
recommendations. In response to our recommendation that Education 
develop policy and clarify instructions on how the use of certain tax 
provisions affect title IV aid eligibility, Education stated that it 
would take advantage of the opportunity provided by the upcoming HEA 
reauthorization to comprehensively review how families now pay for 
college and, consequently, the title IV student aid eligibility 
formulas. Regarding our recommendation that Education sponsor research 
on the effectiveness of title IV programs, Education indicated that it 
would identify opportunities to sponsor such research, including how 
the federal investment affects students’ postsecondary education 
attendance and completion as well as institutions’ tuition and 
financial aid behavior. In response to our recommendation that 
Education and Treasury collaborate in studying the impact of tax 
credits and title IV student aid programs, Treasury said that such an 
effort would be beneficial. Treasury also noted that it would take time 
and staff resources to develop a useful longitudinal database, and that 
the confidentiality of individuals’ tax return information must always 
be protected. Education noted that it recently collaborated with 
Treasury in developing a legislative proposal that would allow the 
agencies to match income information contained on tax returns with 
title IV student aid application data for the purpose of reducing 
erroneous payments to individuals participating in the title IV 
programs. Education said it looked forward to future collaborations 
with Treasury. 

We are sending copies of this report to the Secretaries of Education 
and Treasury and other interested parties. We will also make copies 
available to others upon request. In addition, this report will be 
available at no charge on the GAO Web site at [hyperlink, 
http://www.gao.gov]. 

If you have any questions about this report, please contact me on (202) 
512-8403. Other contacts and acknowledgments are listed in appendix V.

Signed by: 

Cornelia M. Ashby: 

Director, Education, Workforce, and Income Security Issues: 

Appendix I: Estimation of HOPE and Lifetime Learning Tax Credits and 
Title IV Student Aid: 

All estimates of title IV student financial aid are based upon the 1999-
2000 National Postsecondary Student Aid Study (NPSAS). NPSAS is a 
comprehensive study that examines how students and their families pay 
for postsecondary education. It includes nationally representative 
samples of 50,000 undergraduates, and 12,000 graduate and first-
professional students enrolled at approximately 1,000 postsecondary 
institutions during the 1999-2000 academic year. The data are based on 
student interviews and administrative records, and NPSAS contains both 
students who received financial aid and those who did not. Title IV 
financial aid included Pell and SEOG grants, Stafford loans, PLUS 
loans, and federal work-study assistance. In reporting on title IV 
loans, we indicate the face amount of the loans received.

We computed estimates of the HOPE and Lifetime Learning credits 
received by students using data from NPSAS. NPSAS data are collected at 
the individual student level, and cannot be aggregated into families or 
linked to tax filing status. Therefore, our analysis treated individual 
students as if they were the credit claimants and recipients. Credit 
amounts for each student in NPSAS were computed by calculating a 
completed Internal Revenue Service (IRS) form 8863, the form used by 
tax filers to claim the credits, for each student in the NPSAS sample. 
We determined a student’s eligibility for the HOPE credit on the basis 
of enrollment status and year in school. We subsequently assumed that 
all students not eligible for the HOPE credit were potentially eligible 
for the Lifetime Learning credit.

After establishing eligibility for students in the database, we 
determined the maximum tax credit each student could receive using the 
formulas contained in the IRS form 8863, applying the income 
eligibility requirements associated with these credits. Form 8863 uses 
adjusted gross income (AGI) for these measures, which is all income 
minus exclusions from income such as student-loan interest and IRA 
contributions. For one-half of students in the NPSAS database who filed 
a Free Application for Federal Student Aid (FAFSA), NPSAS reports the 
adjusted gross income for the student (and spouse) if they are 
independent, or the parents (if the student is a dependent). For the 
other half of students, income is based on a computer-assisted 
telephone interview, and/or stochastic imputation.

In addition to income, the amount of credit allowed is limited by the 
amount of tax liability reduced by amounts of dependent care and the 
elderly and disabled credits claimed. Generally speaking, tax liability 
is tax owed on a filer’s taxable income, which is their AGI minus 
personal exemptions and either the standard deduction or the sum of 
itemized deductions such as mortgage interest or property taxes. 
Without tax data we had no means of estimating potential itemized 
deductions, so we assumed that all tax filers used the standard 
deduction. We calculated the amount of liability owed using the 
standard tax tables provided by the IRS. There is no information in 
NPSAS about the amount claimed for dependent care and the elderly and 
disabled tax credits. We therefore assumed that these returns only had 
education tax credits. 

The steps above allowed us to calculate a tax credit for every student 
in the NPSAS sample. We estimated that approximately 90 percent of the 
students in the NPSAS sample who were eligible to claim the credits did 
so. We had no reliable evidence about different rates of tax credit use 
across family income or student type; therefore, we randomly selected a 
90 percent sample of those students who had a non-zero credit to be the 
population of credit recipients used to calculate our tax credit 
estimates. 

The results of our estimation were compared to data on credits claimed 
and allowed, computed from the Statistics of Income (SOI) and provided 
to us by the IRS. Our estimate of the net value of HOPE and Lifetime 
credits allowed was 94 percent of the SOI estimate. Our estimates of 
HOPE credits claimed was significantly lower than the SOI estimate, 
while our estimate of Lifetime Learning credits claimed was 
significantly higher than the SOI estimate.

Limitations of Our Analysis: 

Some aspects of our methodology tend to overstate the credit amounts 
claimed, while others aspects of the methodology have the opposite 
effect. Tax filers who had more than one family member enrolled in 
postsecondary education were able to apply the qualified education 
expenses of each to the Lifetime Learning tax credit, up to a $5,000 
per household limit. NPSAS data do not allow individual student records 
to be linked into households. Therefore, we were unable to adjust our 
estimates of students’ qualified educational expenses to reflect this 
feature of the credit. Our estimates of total Lifetime Learning credit 
amounts were larger than those estimated from the SOI; some of this 
overestimation may have resulted from this limitation. 

Tax filers using either the HOPE or Lifetime Learning credit may find 
that they are unable to obtain the full value of the credit because 
they lack sufficient tax liability to do so. Our methodology assigns 
the tax liability of each family to one student, regardless of the 
number of family members actually enrolled. For those families that had 
more than one student enrolled, our methodology may overestimate the 
tax liability available to the student and thus overestimate the credit 
received. 

We assumed that all tax filers used the standard deduction. Our 
estimates of pre-credit tax liability among those with adjusted gross 
incomes of $20-30,000 were 17 percent lower than SOI’s, and 8 percent 
lower for tax filers with adjusted gross incomes of $30-$40,000. Our 
estimates of tax liability were slightly higher than those of SOI at 
AGIs above $75,000. This may result in an underestimation of the 
credits claimed by tax filers with adjusted gross incomes below 
$40,000. 

Some individuals who are eligible to claim the credit may not do so. 
There are no reliable data on the rate at which eligible tax filers 
claim the HOPE and Lifetime Learning credits. Our methodology estimated 
that 90 percent of the students in the NPSAS sample who were eligible 
to claim the credits did so. We first calculated a credit amount for 
all students. Lacking any empirical basis for establishing different 
rates of credit usage among students, we randomly selected a 90 percent 
sample of students who had a non-zero credit to be the population of 
credit recipients used to calculate our tax credit estimates. To the 
extent that the rate of usage varies across student populations by 
income or dependency status, our estimates of credit amounts will be 
too small for some populations, and too large for others.

Data limitations may also affect the quality of tax credit estimates. 
Our estimates of tax credits may be lower than those obtained from the 
SOI because SOI data represent pre-audited amounts, and tax filers may 
have over claimed the credits. While income data for those students who 
did apply for federal financial aid is reported by NPSAS to be very 
precise, for the other half of students the income information is 
acknowledged by NPSAS to be much less reliable. This lack of 
reliability in the measurement of income may result in imprecise 
estimates of credit usage and credit amounts received.

Because our estimates come from a sample of the larger population, 
NPSAS, there is some sampling error associated with them. Moreover, 
taking a 90 percent sample of those data introduces additional sampling 
errors. In calculating sampling errors and confidence intervals, we 
took into account this complex sample design. Sampling errors are often 
represented as a 95 percent confidence interval: an interval that 95 
times out of a 100 will contain the true population value. The upper 
and lower bounds of the 95 percent confidence intervals for each 
estimate are presented in the following tables. 

Table 2: Estimated Use of Tax Credits and Title IV Aid Among All 
Undergraduates in 1999-2000; 

[See PDF for image] 

Source: GAO calculations based upon 1999-2000 NPSAS data. 

[End of table] 

Table 3: Percent of All Undergraduate Students Receiving HOPE Credit 
(In percentages): 

[See PDF for image] 

Source: GAO calculations based upon 1999-2000 NPSAS data. 

[End of table] 

Table 4: Percent of All Undergraduate Students Receiving Lifetime 
Learning Credit (In percentages): 

[See PDF for image] 

Source: GAO calculations based upon 1999-2000 NPSAS data. 

[End of table] 

Table 5: Average Amount of HOPE Credit: 

[See PDF for image] 

Source: GAO calculations based upon 1999-2000 NPSAS data. 

[End of table] 

Table 6: Average Amount of Lifetime Learning Credit: 

[See PDF for image] 

Source: GAO calculations based upon 1999-2000 NPSAS data. 

[End of table] 

Table 7: HOPE Credit as a Percent of Tuition and Fees Charged and Net 
Tuition and Fees Paid by Dependent Students: 

[See PDF for image] 

Source: GAO calculations based upon 1999-2000 NPSAS data. 

[End of table] 

Table 8: HOPE Credit as a Percent of Tuition and Fees Charged and Net 
Tuition and Fees Paid by Independent Students: 

[See PDF for image] 

Source: GAO calculations based upon 1999-2000 NPSAS data. 

[End of table] 

Table 9: Lifetime Learning Credit as a Percent of Tuition and Fees 
Charged and Net Tuition and Fees Paid by Dependent Students: 

[See PDF for image] 

Source: GAO calculations based upon 1999-2000 NPSAS data. 

[End of table] 

Table 10: Lifetime Learning Credit as a Percent of Tuition and Fees 
Charged and Net Tuition and Fees Paid by Independent Students: 

[See PDF for image] 

Source: GAO calculations based upon 1999-2000 NPSAS data. 

[End of table] 

Table 11: Amount of HOPE Credit and Title IV Grant or Loan Assistance 
Received by Dependent Students Obtaining Both: 

[See PDF for image] 

[A] No value calculated. 

Source: GAO calculations based upon 1999-2000 NPSAS data. 

[End of table] 

Table 12: Amount of HOPE Credit and Title IV Grant or Loan Assistance 
Received by Independent Students Obtaining Both: 

[See PDF for image] 

[A] No value calculated. 

Source: GAO calculations based upon 1999-2000 NPSAS data. 

[End of table] 

Table 13: Amount of Lifetime Learning Credit and Title IV Grant or Loan 
Assistance Received by Dependent Students Obtaining Both: 

[See PDF for image] 

[A] No value calculated. 

Source: GAO calculations based upon 1999-2000 NPSAS data. 

[End of table] 

Table 14: Amount of Lifetime Learning Credit and Title IV Grant or Loan 
Assistance Received by Independent Students Obtaining Both: 

[See PDF for image] 

[A] No value calculated. 

Source: GAO calculations based upon 1999-2000 NPSAS data. 

[End of table] 

Appendix II: Research on the Effects of Grants, Loans, and Tax Credits: 

To identify available information on the relative effectiveness of 
title IV aid and the HOPE and Lifetime Learning tax credits, we 
reviewed studies of the factors that affect college attendance and 
choice, completion, and costs. These outcomes were chosen because they 
have been the focus of congressional concern, as expressed in committee 
reports, statutorily established study commissions, and requests for 
our work from Congress. We examined studies that appeared in books, 
refereed journals, working papers, dissertations, or government 
reports. Some of these studies were excluded from further assessment 
because they did not undertake original data analysis that could 
identify the effectiveness of federal financial aid programs. Studies 
that provided an original empirical analysis (or, in the case of tax 
credits, a simulation methodology) were subsequently assessed according 
to professional standards of econometric analysis for their 
methodological rigor. Some of these studies explicitly estimated the 
effects of federal aid programs. Others estimated how sensitive student 
attendance, completion, or choice decisions are to changes in the net 
cost of college. The studies are listed in the bibliography. The 
results of studies that were judged to contain acceptably identified 
statistical estimates formed the basis for our findings about the 
availability of information concerning the relative effectiveness of 
title IV grants and loans and HOPE and Lifetime Learning tax credits. 

Appendix III: Comments from the Department of Education: 

United States Department of Education: 
400 Maryland Ave., S.W., Washington, D.C. 20202-0500: 
[hyperlink, http://www.ed.gov]: 

The Deputy Secretary: 

September 6, 2003: 

Ms. Cornelia M. Ashby: 
Director, Education, Workforce, and Income Security Issues: 
United States General Accounting Office: 
Washington, D.C. 20548: 

Dear Ms. Ashby: 

Thank you for the opportunity to review and comment on your draft 
report, "Student Aid and Tax Benefits: Better Research and Guidance 
Will Facilitate Comparison of Effectiveness and Student Use." I am 
confident that members of Congress will find this report as useful and 
informative as we in the Department have. 

We appreciate your examining the wide range of federal efforts to help 
students and their families pay postsecondary education expenses, and 
providing useful information and suggestions. We also appreciate the 
bibliography of publications and working papers that you have included 
in the report, which will be useful ad we work toward strengthening the 
quality of educational research and increasing its relevance to meet 
the needs of our customers. My staff had previously shared our 
technical comments with our office that, we think, would help the 
reader understand both the direct and tax expenditure programs that 
comprise the federal effort to help make college affordable for all. 

The formulas that are used to determine a student's eligibility for 
federal student aid were codified in the 1986 amendments to the Higher 
Education Act of 1965 (HEA). The "expected family contribution" (EFC), 
the amount that a student and his or her family can be reasonable 
expected to contribute toward postsecondary expenses, is derived from 
an assessment of the family's financial (income and assets) and 
household circumstances. The HEA defines income for this purpose and 
includes both taxable (adjusted gross income as reported on the federal 
income tax return) and untaxed income. 

Since 1986, a number of new tax preferences and benefits related to 
financing higher education have been made available to families, 
including federal and state ta credits and deductions as well as 
specialized savings plan. Typically, the Department responded in a 
piece meal fashion by adjusting the EFC calculation through legislation 
or policy guidance. The upcoming HEA reauthorization will provide the 
opportunity for a comprehensive review of the ways in which families 
now pay for college and, consequently, the student eligibility 
formulas. We play to take advantage of this opportunity. 

Consistent with our Strategic Plan, we agree with your recommendation 
that we ensure our programs are achieving their intended results, and 
this report can hep guide our research and evaluation agenda in support 
if the Strategic Plan's goals for postsecondary education. We look 
forward to identifying opportunities for sponsoring evaluations of 
Title IV programs, including how the federal investment affects 
students' postsecondary attendance and completion as well as 
institutions' tuition and financial aid behavior. 

Earlier this summer the Administration, in a joint letter signed by 
Treasury Secretary O'Neill, Office of Management and Budget Director 
Daniels, and Secretary Paige, forwarded a legislative proposal to the 
Congress that would allow the Treasury and Education Departments to 
match income information reported on tax returns and federal student 
aid applications, This legislation will help reduce erroneous payments 
to individuals participating in the federal student aid programs and 
ensure that the right people receive the right amount of federal funds. 
We look forward to future collaborations with the Treasury Department. 

Again, we appreciate the opportunity to comment on the draft report. 

Sincerely, 

Signed by: 

William D. Hansen: 

[End of section] 

Appendix IV: Comments from the Department of Treasury: 

Department of the Treasury: 
Washington, D.C. 20220: 

August 29, 2002: 

Ms. Cornelia M. Ashby: 
Director Education, Workforce, and Income Security Issues: 
General Accounting Office: 
Washington, D.C. 20548: 

Thank you for your letter of August 16th to Secretary O'Neill 
soliciting the comments of the Treasury Department on your draft 
report, Student Aid and Tax Benefits: Better Research and Guidance Will 
Facilitate Comparison of Effectiveness and Student Use. The Secretary 
has asked the Office of Tax Policy, which carried out the Department's 
responsibilities regarding tax-related research, to review the draft 
report. We found it to be a useful and informative report on the 
interactions between various tax code provisions and Department of 
Education grant and loan programs directed toward the policy goals of 
increasing enrollments in higher education through enhanced 
affordability. 

We are in agreement with the report's recommendation regarding the 
potential benefits of collaborative research on the part of the 
Departments of Education and the Treasury. Most of the tax provisions 
discussed in the report are relatively new. Developing a useful 
longitudinal data base regarding these provisions will take some time 
and will be subject to the limited staff resources of the Office of Tax 
Policy and the Internal Revenue Service. In addition, the 
confidentiality of information from individual tax returns must always 
be projected, which would limit the data that could be shared with the 
Department of Education in joint research. 

We appreciated the opportunity our staff was given to consult with the 
authors of the report during various stages of its development and to 
provide a number of minor and technical comments. Thank you again for 
those opportunity to make these comments. 

Sincerely, 

Signed by: 

Andrew B. Lyon: 

[End of section] 

Appendix V: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 
Jeff Appel (202) 512-9915; 
Thomas Weko (202) 512-8796. 

Staff Acknowledgments: 
In addition to those named above, the following people also made 
significant contributions to this report: Paul L. Posner, Managing 
Director, Federal Budget Issues, Strategic Issues; Michael Brostek, 
Director, Tax Issues; and Patrick di Battista, Malcolm Drewery, Bryon 
Gordon, John Mingus, Edward Nannenhorn, Linda Stokes, Andrea Romich 
Sykes, and James Wozny. 

[End of section] 

Bibliography: 

Cameron, Stephen V., and James J. Heckman. “Can Tuition Policy Combat 
Rising Wage Inequality?” Kosters, Marvin H. (ed) Financing College 
Tuition: Government Policies and Educational Priorities. Washington, 
D.C.: The American Enterprise Institute, 1999. 

Cameron, Stephen V., and James J. Heckman. “The Dynamics of Educational 
Attainment for Black, Hispanic, and White Males.” Journal of Political 
Economy, 109, no. 3, (2001): 455-499. 

Cronin, Julie-Anne. “The Economic Effects and Beneficiaries of the 
Administration’s Proposed Higher Education Tax Subsidies” National Tax 
Journal 50 no. 3 (September 1997): 519-540. 

Dynarski, Susan. “Hope for Whom? Financial Aid for the Middle Class and 
Its Impact on College Attendance.” National Tax Journal 53, no.3, part 
2 (September 2000): 629-661. 

Dynarski, Susan. “Does Aid Matter? Measuring the Effect of Student Aid 
on College Attendance and Completion.” John F. Kennedy School of 
Government, Harvard University Working Paper (RWP01-034), September 
2001. 

Ellwood, David T., and Thomas J. Kane. “Who Is Getting a College 
Education? Family Background and the Growing Gaps in Enrollment” in 
Danziger, Sheldon, and Jane Waldfogel (eds). Securing the Future: 
Investing in Children from Birth to College. New York: Russell Sage 
Foundation, 2000. 

Gravelle, Jane, and Dennis Zimmerman. “Tax Subsidies for Higher 
Education: An Analysis of the Administration’s Proposal.” Congressional 
Research Service: Report 97-581E, May 1997. 

Heckman, James J., Lance Lochner, and Christopher Taber. “General- 
Equilibrium Treatment Effects: A Study of Tuition Policy.” The American 
Economic Review, 88 no. 2 (1998): 381-386. 

Kane, Thomas J. “Rising Public College Tuition and College Entry: How 
Well Do Public Subsidies Promote Access to College?” National Bureau of 
Economic Research Working Paper no. 5164 (July 1995). 

Kane, Thomas J. The Price of Admission. Washington, D.C., and New York, 
N.Y.: The Brookings Institution and the Russell Sage Foundation, 1999. 

Li, Judith. “Estimating the Effect of Federal Financial Aid on Higher 
Education: A Study of Pell Grants.” (Ph.D. diss., Harvard University, 
1999). 

Manski, Charles, and David Wise. College Choice in America. Cambridge, 
Massachusetts: Harvard University Press, 1983. 

McPherson, Michael S. and Morton Owen Schapiro. Keeping College 
Affordable Washington, D.C.: The Brookings Institution, 1991. 

Oberg, Jon H. “Testing Federal Student-Aid Fungibility in Two Competing 
Versions of Federalism.” Publius: The Journal of Federalism 27:1 
(Winter 1997): 115-134. 

Reyes, Suzanne. “Education Opportunities and Outcomes: The Role of the 
Guaranteed Student Loan.” (Ph.D. diss., Harvard University, 1995). 

Rouse, Cecilia Elena. “What to Do after High School: The Two-Year 
versus Four-Year College Enrollment Decision” in Ronald G. Ehrenberg 
(ed). Choices and Consequences: Contemporary Policy Issues in 
Education. Ithaca, N.Y.: ILR Press, 1994. 

Schwartz, J. Brad. “Wealth Neutrality in Higher Education: The Effects 
of Student Grants.” Economics of Education Review 5, no. 2 (1986): 107-
117. 

Seftor, Neil S., and Sarah E. Turner. “Back to School: Federal Student 
Aid Policy and Adult College Enrollment.” The Journal of Human 
Resources 37 (2002): 336-352. 

Turner, Sarah E. “Does Federal Aid Affect the Price Students Pay for 
College? Evidence from the Pell Program.” mimeo (1998). 

[End of section] 

[1] Cost is measured in estimated revenues foregone, and expressed in 
constant 2002 dollars. Total costs are calculated on the basis of eight 
tax provisions that aim to help students and families save, pay for, or 
repay the costs of higher education, and do this by permitting tax 
filers to reduce their income tax liability through the use of 
qualified educational expenses. See table 1. 

[2] To be classified as an independent student in the title IV 
financial aid process, students must meet one of the following criteria 
in academic year 2002-03: (1) veteran of armed services; (2) born 
before January 1, 1979; (3) married; (4) enrolled in a graduate or 
professional educational program; (5) have legal dependents other than 
a spouse; or (6) be an orphan or ward of the court. Financial aid 
administrators may also classify students as independents through the 
exercise of their professional judgment. 

[3] GPRA seeks to improve the efficiency, effectiveness, and public 
accountability of federal agencies as well as to improve congressional 
decision-making. To do so, the act outlines a series of steps in which 
agencies are required to identify their goals, measure performance, and 
report on the degree to which those goals were met. 

[4] For students classified as financially dependent on their parents, 
the EFC is based on the income and assets of the student and parents. 
The student and parent EFC are computed separately and then summed. For 
independent students with dependents, the EFC calculation is similar to 
that of a parent of a dependent student. For independent students 
without dependents, the EFC is based on a portion of their income and 
assets. 

[5] Dependent students’ income is measured by parental income for 1998. 
If students applied for financial aid, parental income was measured as 
adjusted gross income. See appendix I for additional information on 
income measurement in NPSAS. 

[6] The income of independent students is that of the student and, if 
married, that of their spouse, for 1998. 

[7] We report the face value of title IV loans awarded, rather than 
their economic subsidy value to the student. Although title IV loans 
must be repaid, they can provide a subsidy by offering funds to 
students who could not otherwise find lenders, and by offering lower 
interest rates than are available in the non-title IV private loan 
market. In contrast to grants and tax credits, which provide subsidies 
that are equal to their face values, loans provide subsidies that are 
considerably less, on average, than their face values. Dynarski 
(“Loans, Liquidity, and Schooling Decisions,” February 2002) calculates 
that the subsidy for loans of average riskiness is equal to about 30 
percent of the face value for subsidized Stafford loans and about 15 
percent for unsubsidized Stafford loans. Cameron and Heckman (1999) put 
the subsidy value at about a third of the amount of loans disbursed. 

[8] Assuming the family filed a joint return and used a standard 
deduction. 

[9] The act also prohibits including the credits as financial 
assistance in the award of title IV aid. 

[10] Each dollar of qualified educational expenses paid from a prepaid 
tuition plan reduces the student’s cost of attendance by the same 
amount. This results in a reduction in the student’s calculated 
financial need and aid eligibility. 

[11] Both tax deductions reduce an applicant’s tax liability and AGI. 
The first of these changes increases the EFC, while the second reduces 
it. The net effect of these two changes is to reduce the applicant’s 
EFC. 

[12] HEA’s financial aid methodology includes some forms of untaxed 
income in the calculation of the EFC, such as tax-exempt interest 
income (from IRS 1040, line 8b) and a variety of governmental payments 
(worker’s compensation, untaxed portions of railroad retirement 
benefits, and Black Lung benefits). 

[13] Education’s Web-based instructions in support of the FAFSA form 
do, however, provide clear guidance about the ownership of state 
savings plan assets. The instructions are available at [hyperlink, 
http://www.ed.gov/prog_info/SFA/FAFSA/instr02-03/step4_4.html] 

[14] If reported as the asset of a dependent student, 35 percent of net 
state savings plan assets would be counted toward the EFC; if reported 
as a parental asset, between 2.64 percent and 5.64 percent of their net 
value would be counted toward the EFC. Incorrectly reporting this asset 
as a student asset would result in an EFC that is larger than it should 
be, and an erroneously small estimate of financial need. 

[15] Surveys that focus on educational choices and outcomes have sparse 
information on potential students’ parental resources and academic 
ability. See Sarah E. Turner, “Federal Financial Aid: How Well Does It 
Work?”, John C. Smart (ed), Higher Education: Handbook of Theory and 
Research, vol. XVI (New York: Agathon Press, 2001. 

[16] For example, several recent studies use a quasi-experimental 
design attempting to isolate the effects of financial aid policy 
changes. See Susan Dynarski, “Does Aid Matter? Measuring the Effect of 
Student Aid on College Attendance and Completion.” John F. Kennedy 
School of Government, Harvard University Working Paper (RWP01-034), 
September 2001; and Neil S. Seftor and Sarah E. Turner, “Back to 
School: Federal Student Aid Policy and Adult College Enrollment,” The 
Journal of Human Resources 37 (2002): 336-352. Other studies explicitly 
model student college attendance decisions to correct for potential 
bias from incomplete data. See Stephen V. Cameron and James J. Heckman, 
“The Dynamics of Educational Attainment for Black, Hispanic, and White 
Males.” Journal of Political Economy, 109, no. 3 (2001): 455-499. 
Charles Manski and David Wise, College Choice in America. Cambridge, 
Massachusetts: Harvard University Press, 1983. 

[17] See Kane (1999). Cameron and Heckman (2001) estimate that “a 
$1,000 increase in Pell grant entitlements produces less than a 1 
percent increase in enrollments…” 

[18] Dynarski studied the effects of the elimination of the Social 
Security student benefit program in 1982, and concluded that the offer 
of a $1,000 grant (year 2000 dollars) would increase the probability of 
attending college by 3.6 percentage points. Seftor and Turner find that 
changes in the availability of Pell grants had sizeable effects on the 
college enrollment of older, independent students. 

[19] Cameron and Heckman’s simulation leads them to conclude, “The 
estimated enrollment response to the HOPE program is a 4.2 percentage 
point increase in two-year enrollments and a 0.9 percentage point 
decrease in four-year enrollments (3.3 increase for both categories 
combined).” 

[20] Over the last several years, we have frequently reported to 
Congress on these issues. See, for example, U.S. General Accounting 
Office, Major Management Challenges and Program Risks: Department of 
Education, GAO-01-245 (Washington D.C.: January 2001). 

[21] U.S. Department of Education, Planning, and Evaluation Service, 
Biennial Report, 1995-96. (As of 2002, this continued to be Education’s 
position.) 

[22] Treasury was mandated by P.L. 104-188 to “study the effect on 
adoptions” of the two adoption tax provisions: a tax credit for 
qualified adoption expenses and an exclusion for employer-paid or 
reimbursed adoption expenses. The study was prepared in consultation 
with the Department of Health and Human Services, and released in 
October 2000. Report to the Congress on Tax Benefits for Adoption, 
[hyperlink, http://www.treas.gov/taxpolicy/library/adoption.pdf]. 

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