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entitled 'Student Aid and Postsecondary Tax Preferences: Limited 
Research Exists on Effectiveness of Tools to Assist Students and 
Families through Title IV Student Aid and Tax Preferences' which was 
released on August 29, 2005 and reposted November 17, 2005. 

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Report to the Committee on Finance, U.S. Senate: 

July 2005: 

Student Aid and Postsecondary Tax Preferences: 

Limited Research Exists on Effectiveness of Tools to Assist Students 
and Families through Title IV Student Aid and Tax Preferences: 

This report was amended on November 17, 2005 to remove estimated median income data for households with Section 529 Qualified Tuition Program accounts or Coverdell Education Savings Accounts, due to a sample selection bias in the private sector research report that was our source. Median income estimates were removed from Table 2 and the text on page 18. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-684]: 

GAO Highlights: 

Highlights of GAO-05-684, a report to the Committee on Finance, U.S. 
Senate: 

Why GAO Did This Study: 

Federal assistance helps students and families pay for postsecondary 
education through several policy tools—grant and loan programs 
authorized by title IV of the Higher Education Act of 1965 and more 
recently enacted tax preferences. In fiscal year 2004, about $14 
billion in grants and $56 billion in loans were made under title IV 
while estimated outlay equivalents for postsecondary tax preferences 
amounted to $10 billion. In light of the relative newness and financial 
significance of tax preferences, this report examines (1) how title IV 
assistance compares to that provided through the tax code, (2) the 
extent to which tax filers effectively use postsecondary tax 
preferences, and (3) what is known about the effectiveness of federal 
assistance. 

What GAO Found: 

Title IV student aid and tax preferences provide assistance to a wide 
range of students and families in different ways. While both help 
students meet current expenses, tax preferences also assist students 
and families with saving for and repaying postsecondary costs. While 
both serve students and families with a range of incomes, some forms of 
title IV aid—grant aid, in particular—provide assistance to those whose 
incomes are lower, on average, than is the case with tax preferences. 
While both require students and families to fill out forms, tax 
preferences require more responsibility on the part of students and 
families because they must identify applicable tax preferences, 
understand complex rules concerning their use, and correctly calculate 
and claim credits or deductions. While the tax preferences are a newer 
policy tool, the number of tax filers using them has grown quickly, 
surpassing the number of students aided under title IV in 2002. 

Recipients of Title IV Assistance and Tax Filers Claiming an Education 
Tax Credit or Tuition Deduction, 1997-2002: 

[See PDF for image] 

[End of figure] 

Some tax filers do not appear to make optimal education-related tax 
decisions. For example, among the limited number of tax returns 
available for our analysis, 27 percent of eligible tax filers did not 
claim either the tuition deduction or a tax credit. In so doing, these 
tax filers failed to reduce their tax liability by $169, on average, 
and 10 percent of these filers could have reduced their tax liability 
by over $500. One explanation for these taxpayers’ choices may be the 
complexity of postsecondary tax provisions, which experts have commonly 
identified as difficult for tax filers to use. 

Little is known about the effectiveness of title IV aid or tax 
preferences in promoting, for example, postsecondary attendance or 
choice, in part because of research data and methodological challenges. 
As a result, policymakers do not have information that would allow them 
to make the most efficient use of limited federal resources to help 
students and families. 

What GAO Recommends: 

GAO does not make new recommendations in this report. In 2002, GAO 
recommended, among other things, that Education sponsor research into 
key aspects of effectiveness of title IV programs. Little progress has 
been made by Education; however, according to the Department, it is in 
the process of establishing a postsecondary research center that will 
sponsor such research. Although Education disagreed with our conclusion 
about the extent to which title IV programs have been adequately 
studied, it agreed, as it did when we issued our 2002 report, that more 
research was warranted. 

www.gao.gov/cgi-bin/getrpt?GAO-05-684. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Michael Brostek at (202) 
512-9110 or Cornelia M. Ashby at (202) 512-7215. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Tax Preferences Differ from Title IV Assistance in Timing, 
Distribution, and Students' and Families' Responsibility for Obtaining 
Benefits: 

Some Tax Filers May Not Effectively Use Postsecondary Tax Preferences, 
Possibly Due to Complexity: 

Research on Effectiveness of Federal Postsecondary Assistance Is 
Incomplete: 

Concluding Observations: 

Agency Comments and Our Evaluation: 

Appendixes: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Confidence Intervals: 

Appendix III: Postsecondary-Education-Related Tax Preferences: 

Appendix IV: Comments from the Department of Education: 

Bibliography: 

Tables: 

Table 1: Description of Federal Student Aid Programs Authorized under 
Title IV of the Higher Education Act: 

Table 2: Selected Postsecondary Education Tax Preferences: 

Table 3: Comparison of Assistance by Timing of Benefit for Selected 
Programs and Tax Preferences: 

Table 4: Percentage of Aid Recipients and Dollars of Aid by Income 
Category for Dependent Students Served by Selected Title IV Programs: 

Table 5: Percentage of Aid Recipients and Dollars of Aid by Income 
Category for Independent Students Served by Selected Title IV Programs: 

Table 6: Percentage of Tax Filers Claiming Hope and Lifetime Learning 
Credits and Tuition Deduction and Tax Preference Dollars by Income 
Category, Tax Year 2002: 

Table 7: Description of Federal Student Aid Programs Authorized under 
Title IV of the Higher Education Act: 

Table 8: Selected Postsecondary Education Tax Preferences: 

Table 9: Tax Filers Claiming an Education Tax Credit or Tuition 
Deduction: 

Table 10: Percentage of Aid Recipients and Dollars of Aid by Income 
Category for Dependent Students Served by Selected Title IV Programs: 

Table 11: Percentage of Aid Recipients and Dollars of Aid by Income 
Category for Independent Students Served by Selected Title IV Programs: 

Table 12: Percentage of Tax Filers Claiming Hope and Lifetime Learning 
Credits and Tuition Deduction and Tax Preference Dollars by Income 
Category, Tax Year 2002: 

Table 13: Percentage of Form 1098-Ts with Postsecondary Expense 
Information in 2002: Point Estimates: 

Table 14: Percentage of Form 1098-Ts with Postsecondary Expense 
Information in 2002: Confidence Intervals: 

Table 15: Percentage of Taxpayers Apparently Eligible to Claim an 
Education Tax Credit or Tuition Deduction in 2002: Point Estimates: 

Table 16: Percentage of Taxpayers Apparently Eligible to Claim an 
Education Tax Credit or Tuition Deduction in 2002: Confidence 
Intervals: 

Table 17: Percentage of Apparently Eligible Taxpayers to Claim an 
Education Tax Credit or Tuition Deduction That Failed to Do So in 2002: 
Point Estimates: 

Table 18: Percentage of Apparently Eligible Taxpayers to Claim an 
Education Tax Credit or Tuition Deduction That Failed to Do So in 2002: 
Confidence Intervals: 

Table 19: Amounts by Which Apparently Eligible Taxpayers Failed to 
Reduce Their Tax Liability: Point Estimates: 

Table 20: Amounts by Which Apparently Eligible Taxpayers Failed to 
Reduce Their Tax Liability: Confidence Intervals: 

Table 21: Percentage of Apparently Eligible Taxpayers That Claimed the 
Tuition Deduction but Would Have Been Better off Claiming the Lifetime 
Learning Credit in 2002: Point Estimates: 

Table 22: Percentage of Apparently Eligible Taxpayers That Claimed the 
Tuition Deduction but Would Have Been Better off Claiming the Lifetime 
Learning Credit in 2002: Confidence Intervals: 

Table 23: Amounts by Which Apparently Eligible Taxpayers Could Have 
Reduced Their Tax Liability in 2002: Point Estimates: 

Table 24: Amounts by Which Apparently Eligible Taxpayers Could Have 
Reduced Their Tax Liability in 2002: Confidence Intervals: 

Table 25: Percentage of Apparently Eligible Taxpayers That Claimed the 
Lifetime Learning Credit but Would Have Been Better off Claiming the 
Tuition Deduction in 2002: Point Estimates: 

Table 26: Percentage of Apparently Eligible Taxpayers That Claimed the 
Lifetime Learning Credit but Would Have Been Better off Claiming the 
Tuition Deduction in 2002: Confidence Intervals: 

Table 27: Amounts by Which Apparently Eligible Taxpayers Could Have 
Reduced Their Tax Liability in 2002: Point Estimates: 

Table 28: Amounts by Which Apparently Eligible Taxpayers Could Have 
Reduced Their Tax Liability in 2002: Confidence Intervals: 

Table 29: Percentage of Apparently Eligible Taxpayers That Claimed a 
Hope Credit but Would Have Been Better off Claiming a Lifetime Learning 
Credit in 2002: Point Estimates: 

Table 30: Percentage of Apparently Eligible Taxpayers That Claimed a 
Hope Credit but Would Have Been Better off Claiming a Lifetime Learning 
Credit in 2002: Confidence Intervals: 

Table 31: Percentage of Suboptimal Choices Made by Paid Tax Preparers: 
Point Estimates: 

Table 32: Percentage of Suboptimal Choices Made by Paid Tax Preparers: 
Confidence Intervals: 

Figure: 

Figure 1: Recipients of Title IV Assistance and Tax Filers Claiming an 
Education Tax Credit or Tuition Deduction, 1997-2002: 

Letter July 29, 2005: 

The Honorable Charles E. Grassley: 
Chairman: 
The Honorable Max Baucus: 
Ranking Minority Member: 
Committee on Finance: 
United States Senate: 

In recent decades, Congress has provided billions of dollars in 
assistance each year to help the nation's students and families meet 
the costs of postsecondary education. In the past, this assistance has 
primarily been provided through student grant and loan programs 
authorized under title IV of the Higher Education Act of 1965, as 
amended. Much of this aid, called need-based aid, has been provided on 
the basis of the difference between a student's cost of attendance and 
an estimate of the ability of the student and the student's family to 
pay these costs, called the expected family contribution. More 
recently, however, postsecondary assistance has also been provided 
through a range of tax preferences,[Footnote 1] including postsecondary 
tax credits, tax deductions, and tax-exempt savings programs. For 
example, the Taxpayer Relief Act of 1997 allows eligible tax filers to 
reduce their tax liability by receiving, for tax year 2005, up to a 
$1,500 Hope tax credit and/or a $2,000 Lifetime Learning tax credit for 
tuition and course-related fees paid. Furthermore, the 2001 Economic 
Growth and Tax Relief Reconciliation Act created a new tax deduction 
for tuition expenses, which eligible tax filers may use to deduct, in 
tax year 2005, up to $4,000 from their taxable income for tuition and 
course-related fees paid.[Footnote 2]

Providing federal financial assistance in these varied ways presents 
students and their families with an array of tools that may help them 
pay postsecondary education expenses. There is concern, however, that 
the postsecondary tax preferences create opportunities that are 
difficult for families to understand and use correctly. Additionally, 
Congress has been provided with little evidence concerning the 
effectiveness of assistance provided under title IV or through tax 
preferences, such as whether student assistance increases the rate at 
which students enroll in postsecondary education or whether assistance 
increases the likelihood that students will either earn a degree or 
continue their education (often referred to as persistence). 

You asked us to explain how the federal government assists students and 
families in meeting the costs of postsecondary education, and to 
examine the opportunities and challenges associated with these 
policies. To address your interests, we answered the following 
questions: (1) How does title IV grant and loan assistance compare with 
that provided through the tax code? (2) To what extent are tax filers 
effectively using the opportunities presented by postsecondary tax 
preferences? (3) What is known about the effectiveness of federal 
assistance in promoting college attendance, providing students with a 
wider range of choices among postsecondary institutions, or encouraging 
students to persist in their studies?

To compare title IV federal grant and loan assistance with that 
provided through the tax code, we used Department of Education 
(Education) and Internal Revenue Service (IRS) data, as well as agency 
documents and statutory provisions describing federal student financial 
assistance programs and tax preferences related to student financial 
assistance for postsecondary education. For the purpose of this review, 
we focused on federal grant and loan programs or tax preferences that 
served 500,000 or more students and families. We also used two data 
sets, the 2003-2004 National Postsecondary Student Aid Study (NPSAS) 
from Education and IRS's 2002 Statistics of Income (SOI) individual tax 
file.[Footnote 3] We analyzed SOI data to determine, among other 
things, whether tax filers made effective use of the Hope and Lifetime 
Learning tax credits and the tuition deduction. However, information 
required to analyze whether tax filers made effective use of the tax 
credits and deduction was not consistently available for tax filers 
included in the SOI data. Educational institutions must provide IRS and 
students with Forms 1098-T, which document students' enrollment status 
at the institution. Educational institutions may also, but are not 
required to, report on students' qualified tuition and related 
expenses, scholarships, and grants. Consequently, our analysis of SOI 
data for this purpose was limited to the approximately 1.8 million tax 
filers for whom Forms 1098-T reported such information. We were unable 
to determine whether these tax filers were representative of the 
approximately 12.4 million tax filers for whom such information was 
unavailable. To address issues of complexity as students and families 
use postsecondary tax preferences, we reviewed relevant statutes, 
regulations, and IRS documents, government reports, and academic 
research. We assessed the reliability of NPSAS and SOI data sets in 
light of our data reliability standards and found them to be useful for 
the purpose of this review. Details of our data reliability assessment 
and other aspects of our scope and methodology can be found in appendix 
I. To learn what is known about the effectiveness of federal grant and 
loan programs and tax preferences, we reviewed the academic literature 
on financial aid and education-related tax preferences. We conducted 
our review from May 2004 through June 2005 in accordance with generally 
accepted government auditing standards. 

Results in Brief: 

In general, assistance is provided to a wide range of students and 
families under both title IV programs and through several tax 
preferences, but three key differences exist when comparing the two 
sources of aid. First, while title IV aid and tax preferences focus 
primarily on helping students meet current expenses, tax preferences 
also assist students and families with saving for and repaying 
postsecondary costs. Second, while student aid programs and tax 
preferences serve students and families across a wide range of income 
groups, some title IV programs--particularly the Pell Grant program--
provide much of their financial assistance to students and families 
whose incomes are lower, on average, than students and families who 
receive student loans, tax credits and deductions, or who make use of 
tax-exempt saving vehicles. Last, while both title IV aid and tax 
preferences require students and families to fill out forms, tax 
preferences require more responsibility on the part of students and 
families for obtaining benefits because they must identify applicable 
tax preferences, understand complex rules concerning their use, and 
correctly calculate and claim credits or deductions on their returns. 

Some tax filers do not appear to be making the most effective use of 
certain postsecondary tax preferences and, as a result, fail to 
minimize their federal income tax liabilities. Among tax filers 
included in the 2002 SOI data set for whom information indicating 
eligibility for an education tax credit or tuition deduction was 
available, 27 percent failed to claim either (1) a Hope or Lifetime 
Learning tax credit or (2) the tuition deduction. By not claiming an 
education tax credit or tuition deduction, we estimate that these tax 
filers failed to reduce their tax liabilities by $169, on average. 
Furthermore, we estimate that 10 percent of these apparently eligible 
tax filers failed to reduce their tax liabilities by more than $500. We 
also found that 21 percent of tax filers who claimed the tuition 
deduction would have reduced their tax liabilities by an additional 
$83, on average, had they chosen to claim the Lifetime Learning tax 
credit rather than the tuition deduction. While tax filers' suboptimal 
choices may arise due to many factors, one reason may be the complexity 
of these tax provisions. Experts commonly identify postsecondary tax 
preferences as complex for tax filers to use because many of these 
preferences have similar objectives, dissimilar definitions, and rules 
that require extensive record keeping. Moreover, tax preferences can 
interact with title IV aid in a manner that affects the net amount of 
federal assistance received, adding to the complexity facing students 
and families. Students and families may make costly mistakes to the 
extent that they find using tax preferences to be difficult. 

Little is known about the effectiveness of federal grant and loan 
programs and education-related tax preferences in promoting attendance, 
choice, and persistence. Many programs and tax preferences have not 
been studied, and even among those that have, important aspects of 
their effectiveness remain unexamined. When research exists, it 
suggests that federal programs and tax preferences have a range of 
results, from no measurable effects to modestly positive impacts on 
college attendance and persistence. Data and methodological challenges 
limit the certainty with which the effects of title IV programs and tax 
preferences, especially the latter, can be identified, and result in 
widespread gaps in knowledge of their effectiveness. Without this 
information, federal policy makers cannot weigh the relative 
effectiveness of postsecondary assistance provided through title IV and 
tax preferences. In 2002 we recommended, among other things, that 
Education sponsor research into the impact of title IV programs on 
postsecondary attendance and choice, completion, and college costs. 
Little progress has been made by Education; however, according to the 
department, it is in the process of establishing a postsecondary 
research center that will sponsor such research. 

In commenting on a draft of this report, Education agreed overall that 
more research should be done on various federal programs that assist 
students enrolled in postsecondary education, but disagreed with our 
finding on the extent that title IV programs have been studied. 
Education also said that we should have included its research in our 
description of available program effectiveness research, including a 
particular study of the Pell Grant program. In general, while 
Education's research efforts--both the data collections conducted 
regularly by the agency and studies based upon those data--provide 
useful descriptive information, the data collections and related 
studies do not include information on those who do not receive 
postsecondary education and are therefore of limited use in 
establishing the effectiveness of title IV programs. Education's letter 
is reprinted in appendix IV. Also, IRS provided technical comments 
which we incorporated where appropriate. 

Background: 

The federal government helps students and families save, pay for, and 
repay the costs of postsecondary education through grant and loan 
programs authorized under title IV of the Higher Education Act of 1965, 
and through tax preferences--reductions in federal tax liabilities that 
result from preferential provisions in the tax code, such as exemptions 
and exclusions from taxation, deductions, credits, deferrals, and 
preferential tax rates. In fiscal year 2004, Education made 
approximately $14 billion in grants and provided another $56 billion in 
loan assistance (face value) through the title IV programs. The fiscal 
year 2004 outlay equivalent cost of the postsecondary tax preferences 
reviewed in this study was estimated to be $10 billion. 

Federal Grant and Loan Assistance to Postsecondary Students: 

Assistance provided under title IV programs include Pell Grants for low-
income students, parent loans known as PLUS loans, and Stafford 
loans.[Footnote 4] While Pell Grants reduce the price paid by the 
student, student loans help to finance the remaining costs and are to 
be repaid according to varying terms. Stafford loans may be either 
subsidized or unsubsidized. The federal government pays the interest 
cost on subsidized loans while the student is in school, and during a 6-
month period known as the grace period, after the student leaves 
school. For unsubsidized loans, students are responsible for all 
interest costs.[Footnote 5] Stafford and PLUS loans are provided to 
students through both the Federal Family Education Loan Program (FFELP) 
and the William D. Ford Direct Loan Program (FDLP). The federal 
government's role in financing and administering these two loan 
programs differs significantly. Under FFELP, private lenders, such as 
banks, provide loan capital and make loans, and the federal government 
guarantees FFELP lenders a minimum yield on the loans they make and 
repayment if borrowers default. Under FDLP, federal funds are used as 
loan capital and loans are provided through participating schools. The 
Department of Education and its private-sector contractors jointly 
administer the program. Title IV also authorizes programs funded by the 
federal government and administered by participating higher education 
institutions, including the Supplemental Educational Opportunity Grant 
(SEOG), Perkins loans, and federal work-study aid, collectively known 
as campus-based aid. 

To receive title IV aid, students (along with parents, in the case of 
dependent students) must complete a Free Application for Federal 
Student Aid (FAFSA) form. Information from the FAFSA, particularly 
income and asset information, is used to determine the amount of money-
-called the expected family contribution (EFC)--that the student and/or 
family is expected to contribute to the student's education. Statutory 
definitions establish the criteria that students must meet to be 
considered independent of their parents for the purpose 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 
6] Once the EFC is established, it is compared with the cost of 
attendance at the institution chosen by the student. The cost of 
attendance comprises tuition and fees; room and board; books and 
supplies; transportation; miscellaneous personal expenses; and, for 
some students, additional expenses.[Footnote 7] If the EFC is greater 
than the cost of attendance, the student is not considered to have 
financial need, according to the federal aid methodology. If the cost 
of attendance is greater than the EFC, then the student is considered 
to have financial need. Title IV assistance that is made on the basis 
of the calculated need of aid applicants is called need-based aid. Key 
characteristics of title IV programs are summarized in table 1, below. 

Table 1: Description of Federal Student Aid Programs Authorized under 
Title IV of the Higher Education Act: 

Title IV student aid program: Pell Grant; 
Program details: Grants are made on the basis of difference between the 
EFC and the maximum Pell award or the student's cost of attendance, 
whichever is less. Grants are not available for postgraduate study; 
Annual award amounts: $400 to $4,050 for school year 2004-2005; 
Number and characteristics of beneficiaries: Dependent students: About 
2.1 million grants were awarded in school year 2003-2004, totaling $5.3 
billion. The average grant award was $2,573; the median income of 
recipients was $24,576; 
Independent students: About 3 million grants were awarded in school 
year 2003-2004, totaling $7.4 billion. The average grant award was 
$2,436; the median income of recipients was $12,925. 

Title IV student aid program: Supplemental Educational Opportunity 
Grant; 
Program details: Schools administer grant funds, which are made to 
undergraduates with exceptional financial need; priority is given to 
Pell Grant recipients. Institutions must match a portion (at least 25%) 
of the federal funds allocated; 
Annual award amounts: $100 to $4,000; 
Number and characteristics of beneficiaries: Dependent students: About 
554,000 grants were awarded in school year 2003-2004, totaling $494.2 
million. The average grant award was $892; the median income of 
recipients was $22,827; 
Independent students: About 715,000 grants were awarded in school year 
2003-2004, totaling $391.9 million. The average grant award was $548; 
the median income of recipients was $11,040. 

Title IV student aid program: Federal Work-Study; 
Program details: Schools administer funds, which are used to provide 
part-time jobs for undergraduate and graduate students with financial 
need. Participating schools or nonprofit employers generally contribute 
at least 25% of student's earnings (50% in the case of for-profit 
employers); 
Annual award amounts: No annual minimum or maximum award amounts; 
Number and characteristics of beneficiaries: Dependent students: About 
1.1 million awards were awarded in school year 2003-2004, totaling $2 
billion. The average award was $1,901; the median income of recipients 
was $46,441; 
Independent students: About 438,000 awards were awarded in school year 
2003-2004, totaling $1 billion. The average award was $2,303; the 
median income of recipients was $10,561. 

Title IV student aid program: Federal Perkins Loan; 
Program details: Schools administer funds, comprised of federal capital 
contributions and school matching funds (at least 1/3 of federal 
contributions), to make low-interest (5 percent) loans for both 
undergraduate and graduate students with exceptional financial need. 
Borrower repayments are owed to the school; 
Annual award amounts: $4,000 maximum for undergraduate students and 
$6,000 for graduate students; no minimum award amount. (Aggregate 
limits: $8,000 for undergraduates who have not completed 2 academic 
years; $20,000 for undergraduates who have completed 2 years; and, 
$40,000 for graduate students, including loans borrowed as an 
undergraduate.); 
Number and characteristics of beneficiaries: Dependent students: About 
495,000 loans were made in school year 2003-2004, totaling $956 
million. The average loan amount was $1,932; the median income of 
recipients was $39,175; 
Independent students: About 329,000 loans were made in school year 2003-
2004, totaling $905.3 million. The average loan amount was $2,752; the 
median income of recipients was $10,277. 

Title IV student aid program: Subsidized FFEL or Direct Stafford Loan; 
Program details: Loans made on the basis of financial need to 
undergraduate and graduate students who are enrolled at least half-
time. The federal government pays the interest costs on subsidized 
loans while the student is in school, for the first 6 months after the 
student leaves school, and during a period of deferment; 
Annual award amounts: $2,625 to $8,500 depending upon year of 
schooling. Aggregate limits are $23,000 for undergraduates and $65,500 
for graduate students; 
Number and characteristics of beneficiaries: Dependent students: About 
2.6 million loans were made in school year 2003-2004, totaling $8.1 
billion. The average loan amount was $3,188; the median income of 
recipients was $44,678; 
Independent students: About 3.8 million loans were made in school year 
2003-2004, totaling $16.3 billion. The average loan amount was $4,340; 
the median income of recipients was $19,430. 

Title IV student aid program: Unsubsidized FFEL or Direct Stafford 
Loan; 
Program details: Loans made to undergraduate and graduate students who 
are enrolled at least half-time. Unlike subsidized loans, the federal 
government does not pay the interest costs on subsidized loans while 
the student is in school, for the first 6 months after the student 
leaves school, and during a period of deferment. Otherwise, the terms 
and conditions of unsubsidized loans are the same as those for 
subsidized loans; 
Annual award amounts: $2,625 to $18,500 depending on year of schooling 
(including any subsidized loan amounts received for the same period). 
Aggregate limits are $23,000 for dependent undergraduates, $46,000 for 
independent undergraduates, and $138,500 for graduate students; 
Number and characteristics of beneficiaries: Dependent students: About 
1.6 million loans were made in school year 2003-2004, totaling $5.3 
billion. The average loan amount was $3,293; the median income of 
recipients was $75,835; 
Independent students: About 3.3 million loans were made in school year 
2003-2004, totaling $18.5 billion. The average loan amount was $5,671; 
the median income of recipients was $22,108. 

Title IV student aid program: FFEL or Direct PLUS Loan; 
Program details: Loans made to parents on behalf of dependent 
undergraduate students enrolled at least half-time. Borrowers are 
subject to a credit check for adverse credit history and may be denied 
a loan; 
Annual award amounts: Maximum loan amounts are limited to cost of 
attendance less other federal, state, private, and institutional aid 
received for the period of enrollment; 
Number and characteristics of beneficiaries: About 634,000 loans were 
made in school year 2003-2004, totaling $5.7 billion. The average loan 
amount was $9,019; the median income of recipients was $71,397. 

Source: GAO analysis of school year 2003-2004 NPSAS data. 

[End of table]

Tax Preferences: 

Prior to the 1990s, virtually all major federal initiatives to assist 
students with the costs of postsecondary education were provided 
through grant and loan programs authorized under title IV of the Higher 
Education Act. Since the 1990s, however, federal initiatives to assist 
families and students in paying for postsecondary education have 
largely been implemented through the federal tax code. The federal tax 
code now contains a range of tax preferences that may be used to assist 
students and families in saving for, paying, or repaying the costs of 
postsecondary education. These tax preferences include credits and 
deductions, both of which allow tax filers to use qualified higher 
education expenses to reduce their federal income tax liability. The 
tax credits reduce the tax filers' income tax liability on a dollar-for-
dollar basis but are not refundable. Tax deductions permit qualified 
higher education expenses to be subtracted from income that would 
otherwise be taxable. To benefit from a higher education tax credit or 
tuition deduction, a tax filer must use tax form 1040 or 1040A, have an 
adjusted gross income below the provisions' statutorily specified 
income limits, and have a positive tax liability after other deductions 
and credits are calculated, among other requirements. 

Tax preferences also include tax-exempt savings vehicles. Section 529 
of the tax code makes tax free the investment income from qualified 
tuition programs. There are two types of qualified tuition programs: 
savings programs established by states, and prepaid tuition programs 
established either by states or by one or more eligible educational 
institutions.[Footnote 8] Another tax-exempt savings vehicle is the 
Coverdell Education Savings Account. Tax penalties apply to both 529 
programs and Coverdell savings accounts if the funds are not used for 
allowable education expenses. Key features of these and other education-
related tax preferences are described below, in table 2. 

Table 2: Selected Postsecondary Education Tax Preferences: 

Tax preference: Hope Credit; 
Preference details: Eligibility: Tax filer on behalf of self, spouse, or dependent who is working toward a degree or certificate at least half-time in the first 2 years of postsecondary enrollment.; 
Preference details: Income ranges for phasing out benefits[A]: Single filer: $42,000-$52,000; Joint return: $85,000- $105,000.[B]; 
Eligible expenses: Tuition and fees at institutions eligible to participate in title IV programs; 
Tax benefit: Maximum credit: $1,500 per student. Credit rate is 100 percent on first $1,000 of qualified higher education expenses, 50 percent on next $1,000; Nonrefundable: if filer has no tax liability due to offsetting deductions, exemptions, or competing tax credits, filer cannot receive credit; 
Number and characteristics of beneficiaries: In tax year 2002, 3.3 million tax filers claimed $3.2 billion in Hope credits; the average credit claimed was $991, and the median income of filers claiming the credit was $39,203. 

Tax preference: Lifetime Learning Credit; 
Preference details: Eligibility: Tax filer on behalf of self, spouse, or dependent who is enrolled in undergraduate or graduate courses, or any course that aids in learning new or improving existing job skills, for as many years as the student is enrolled; 
Preference details: Income ranges for phasing out benefits[A]: Single filer: $42,000-$52,000; Joint return: $85,000-$105,000.[B]; 
Eligible expenses: Tuition and fees at institutions eligible to participate in title IV programs; 
Tax benefit: Maximum credit: $2,000 per tax filer. (20 percent of qualified higher education expenses up to $10,000); Nonrefundable: if filer has no tax liability due to offsetting deductions, exemptions, or competing tax credits, filer cannot receive credit; 
Number and characteristics of beneficiaries: In tax year 2002, 3.5 million tax filers claimed $1.7 billion in Lifetime Learning credits; the average credit claimed was $477, and the median income of filers claiming the credit was $39,706. 

Tax preference: Student Loan Interest Deduction; 
Preference details: Eligibility: Tax filer, on behalf of self, spouse, or dependent, available even to those who do not itemize interest paid. Student must have been enrolled at least half-time in a degree program; 
Preference details: Income ranges for phasing out benefits[A]: Single filer: $50,000-$65,000; Joint return: $100,000-$130,000; 
Eligible expenses: Eligible loans are those used to pay for tuition, fees, room and board, and related expenses and include, for example, student loans provided under title IV; 
Tax benefit: Maximum deduction: $2,500; interest paid on eligible education loans is deductible; 
Number and characteristics of beneficiaries: In tax year 2002, 6.6 million tax filers deducted $892.6 million of student loan interest; the average deduction was $134, and the median income of filers deducting student loan interest was $43,544. 

Tax preference: Section 529 qualified tuition programs--prepaid tuition programs and state-sponsored college savings programs[C]; 
Preference details: Eligibility: Specifics depend on particular program. Normally a prepaid program is open for contributions only on behalf of young children and accounts must be closed within some number of years after the beneficiary reaches college age. Generally, savings programs do not have age restrictions; 
Preference details: Income ranges for phasing out benefits[A]: No phaseout; 
Eligible expenses: Tuition, fees, books, supplies, and equipment required for attendance. Room and board if enrolled half time or more; 
Tax benefit: No tax is due on a distribution from an account unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses; 
Number and characteristics of beneficiaries: About 7.2 million prepaid tuition and college savings program accounts had been established by December 31, 2004, with a reported balance of $64.7 billion in both types of programs. 

Tax preference: Coverdell Education Savings Accounts; 
Preference details: Eligibility: Distributions can be used for students enrolled on full-time, half-time, or less than half-time basis; Account must be closed within 30 days after beneficiary reaches age 30; 
Preference details: Income ranges for phasing out benefits[A]: For contributions, $95,000-$110,000 for single filers and $190,000-$220,000 for joint returns; 
Eligible expenses: Tuition, fees, books, supplies, and equipment required for attendance; Room and board if enrolled half- time or more; 
Tax benefit: No tax is due on a distribution from an account unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses; Annual contribution limit is $2,000 per year per student (through age 17); 
Number and characteristics of beneficiaries: Approximately 1 million contributions were made to accounts in tax year 2002. 

Tax preference: Tuition Deduction (expires Dec. 31, 2005); 
Preference details: Eligibility: Same as Lifetime Learning credit; 
Preference details: Income ranges for phasing out benefits[A]: Single filer: $65,000-80,000; Joint Return: $130,000-160,000; 
Eligible expenses: Tuition and fees at institutions eligible to participate in title IV programs; 
Tax benefit: Maximum deduction: $4,000 per return for individual filers whose modified adjusted gross income is less than $65,000 ($130,000 for joint filers); $2,000 per return for individuals whose modified adjusted gross income is more than $65,000 ($130,000) but less than $80,000 ($160,000); 
Number and characteristics of beneficiaries: In tax year 2002, 3.4 million tax filers deducted $1.3 billion; the average deduction was $377, and the median income of filers using the deduction was $54,326. 

Sources: IRS and College Savings Plan Network; GAO analysis of IRS Statistics of Income data for tax year 2002: 

[A] Modified adjusted gross income amounts are provided. 

[B] Under the Taxpayer Relief Act of 1997, the income phaseout amounts are indexed to inflation according to a formula specified in law for this purpose, which may or may not result in a yearly increase. 

[C] The Economic Growth and Tax Relief Reconciliation Act of 2001 provides that from January 1, 2001 to December 31, 2011 eligible higher education institutions, in addition to states, may offer tuition prepayment programs. States remain the sole tax-exempt sponsors of college savings programs. 

[End of table] 

Our review of tax preferences did not include exclusions from income, 
which permit certain types of education-related income to be excluded 
from the calculation of adjusted gross income on which taxes are 
based.[Footnote 9] We also did not include special provisions in the 
tax code that also extend existing tax preferences when tax filers 
support a postsecondary education student.[Footnote 10] Appendix IV 
lists all tax preferences reported by IRS, including ones not included 
in this review. 

Tax Preferences Are More Recent Than Most Title IV Programs: 

Title IV programs have been in place for decades, while most education-
related tax preferences were created much more recently. Between the 
late 1950s and the early 1980s each major federal initiative to assist 
students with the costs of postsecondary education was provided either 
through grant or loan programs. From 1981 through 1995 no new federal 
grant or loan-financing vehicles were adopted; however, new financing 
options, such as loan consolidation, and new delivery systems, such as 
direct student lending, were introduced for student loan programs. 
Since 1995, on the other hand, every federal initiative for the 
financing of postsecondary education has been implemented through the 
federal tax code, primarily through the Tax Relief Act of 1997 and the 
Economic Growth and Tax Relief Reconciliation Act of 2001. By 2002 the 
number of tax filers claiming a tax credit or tuition deduction was 
broadly comparable to the number of students aided through title IV 
programs: about 8.4 million students received a title IV grant and/or 
loan, and about 9.6 million tax filers filed returns claiming a Hope 
tax credit, Lifetime Learning tax credit, or tuition deduction. (See 
fig. 1.)[Footnote 11]

Figure 1: Recipients of Title IV Assistance and Tax Filers Claiming an 
Education Tax Credit or Tuition Deduction, 1997-2002: 

[See PDF for image] 

[End of figure] 

Tax Preferences Differ from Title IV Assistance in Timing, 
Distribution, and Students' and Families' Responsibility for Obtaining 
Benefits: 

Postsecondary student financial assistance provided through programs 
authorized under title IV of the Higher Education Act and the tax code 
differ in three key ways. First, tax preferences and title IV programs 
differ in the timing and the distribution of benefits they provide. 
Title IV grant and loan programs primarily provide aid to students and 
families while students are in college, whereas tax preferences help 
both during the college years and before and after college by assisting 
with saving for or repaying college costs. Additionally, although 
student aid programs and tax preferences assist students and families 
across a wide range of income levels, some title IV programs, such as 
the Pell Grant and subsidized Stafford student loan programs, provide 
much of their financial assistance to students and families whose 
incomes are lower, on average, than students who receive unsubsidized 
Stafford loans, tax deductions, or make use of tax-exempt saving 
vehicles. Last, students and families have more responsibility for 
appropriately using and thereby obtaining the benefits of tax 
preferences compared with title IV aid. 

Tax and Title IV Programs Differ in Benefit Timing: 

Title IV programs and education-related tax preferences differ 
significantly as to when eligibility is established and in the timing 
of the assistance they provide. Eligibility for title IV programs is 
generally established at the time of enrollment and prior to each 
subsequent school year thereafter, and title IV programs generally 
provide benefits to students while they are in school. Education-
related tax preferences reach widely across the life span. They 
encourage saving for college, especially among families with dependent 
children through tax-exempt saving; assist enrolled students and their 
families in meeting the current costs of postsecondary education 
through credits and a tuition deduction; and assist students and 
families repaying the costs of past postsecondary education by allowing 
tax filers to claim a deduction for student loan interest paid. Thus, 
tax filers must determine their eligibility for these preferences every 
year that contributions are made to Coverdell Education Savings 
Accounts or every year that a former student claims a student loan 
interest deduction. Table 3 shows a comparison of the timing of title 
IV assistance and the assistance provided through various tax 
preferences. 

Table 3: Comparison of Assistance by Timing of Benefit for Selected 
Programs and Tax Preferences: 

Type of assistance: Grant programs; 
Pay current expenses: Pell Grants; Supplemental Educational; 
Opportunity Grants. 

Type of assistance: Loan programs; 
Pay current expenses: Subsidized and Unsubsidized; Stafford Loans; 
Federal Perkins Loans; Federal PLUS Loans. 

Type of assistance: Tax preferences; 
Save for future expenses: Coverdell Educational Savings Accounts; 
Section 529 Qualified Tuition; Programs; 
Pay current expenses: Hope Credit; Lifetime Learning Credit; Tuition 
Deduction; 
Repay expenses: Student Loan Interest; Deduction. 

Type of assistance: Work-Study program; 
Pay current expenses: Federal Work Study. 

Source: GAO. 

[End of table]

Beneficiaries of Title IV Programs and Tax Preferences Differ: 

While title IV programs and tax preferences assist many students and 
families, a variety of program and tax rules affect students' and 
families' eligibility for such assistance. These rules also affect the 
distribution of title IV aid and the assistance provided through tax 
preferences. As a result, the beneficiaries of title IV programs and 
tax preferences differ, as discussed below. 

Title IV Assistance: 

Title IV programs have rules for calculating grant and loan assistance 
that give different consideration to family income, assets, and college 
costs in the award of financial aid.[Footnote 12] Pell Grant awards are 
calculated by subtracting the student's expected family contribution 
(EFC) from the maximum Pell Grant award ($4,050 in academic year 2004-
2005), or the student's cost of attendance, whichever is less. Because 
the expected family contribution is closely linked to family income and 
circumstances (such as the size of the family and the number of 
dependents in school), and modest EFCs are required for Pell 
eligibility, Pell awards are received primarily by families with modest 
incomes. The maximum subsidized Stafford loan that a student may obtain 
is based upon his or her cost of attendance, minus the expected family 
contribution and the estimated financial assistance that the student 
will receive.[Footnote 13] For a given cost of attendance, therefore, 
the amount of a subsidized Stafford loan increases as EFC decreases. In 
contrast, the maximum unsubsidized Stafford loan amount is calculated 
without direct consideration of financial need: students may borrow up 
to their cost of attendance, minus the estimated financial assistance 
they will receive.[Footnote 14]

The different award rules for Pell Grants and subsidized and 
unsubsidized Stafford loans result in different patterns of program 
participation among students of different incomes, and different 
distributions of dollar support among students. As table 4 shows, 92 
percent of Pell financial support in 2003-2004 was provided to 
dependent students whose family incomes were $40,000 or below, and the 
38 percent of Pell recipients in the lowest income category ($20,000 or 
below) received a higher share (48 percent) of Pell financial support. 
With respect to subsidized Stafford loans, 67 percent of recipients had 
family incomes of $60,000 or less and received a proportional share of 
total subsidized loan volume. In contrast, 65 percent of unsubsidized 
Stafford loan recipients had family incomes above $60,000 and received 
69 percent of total unsubsidized loan volume. 

Table 4: Percentage of Aid Recipients and Dollars of Aid by Income 
Category for Dependent Students Served by Selected Title IV Programs: 

Program: Pell Grant; 
Dependent students: Recipients; 
$0-20,000: 38; 
$21,001-40,000: 47; 
$40,001-60,000: 14; 
$60,001-80,000: 2; 
$80,001-100,000: 0; 
More than $100,000: 0. 

Dependent students: Dollars; 
$0-20,000: 48; 
$21,001-40,000: 44; 
$40,001-60,000: 8; 
$60,001-80,000: 1; 
$80,001-100,000: 0; 
More than $100,000: 0. 

Program: Stafford Subsidized Loan; 
Dependent students: Recipients; 
$0-20,000: 16; 
$21,001-40,000: 28; 
$40,001-60,000: 23; 
$60,001-80,000: 17; 
$80,001-100,000: 9; 
More than $100,000: 7. 

Dependent students: Dollars; 
$0-20,000: 16; 
$21,001-40,000: 28; 
$40,001-60,000: 24; 
$60,001-80,000: 17; 
$80,001-100,000: 9; 
More than $100,000: 6. 

Program: Stafford Unsubsidized Loan; 
Dependent students: Recipients; 
$0-20,000: 7; 
$21,001-40,000: 14; 
$40,001-60,000: 14; 
$60,001-80,000: 19; 
$80,001-100,000: 18; 
More than $100,000: 28. 

Dependent students: Dollars; 
$0-20,000: 7; 
$21,001-40,000: 12; 
$40,001-60,000: 12; 
$60,001-80,000: 18; 
$80,001-100,000: 19; 
More than $100,000: 32. 

Source: GAO analysis of 2003-2004 NPSAS data. 

Notes: See appendix II for confidence intervals associated with these 
estimates. 

Numbers in rows may not add to 100 percent because of rounding. 

[End of table]

Because independent students generally have lower incomes and 
accumulated savings than dependent students and their families, 
patterns of program participation and dollar distribution differ. 
Participation of independent students in Pell, subsidized Stafford, and 
unsubsidized Stafford loan programs is heavily concentrated among those 
with incomes of $40,000 or less: from 74 percent (unsubsidized 
Stafford) to 95 percent (Pell) of program participants have incomes 
below this level. As shown in table 5, the distribution of award 
dollars follows a nearly identical pattern. 

Table 5: Percentage of Aid Recipients and Dollars of Aid by Income 
Category for Independent Students Served by Selected Title IV Programs: 

Program: Pell Grant; 
Independent students: Recipients; 
$0-20,000: 67; 
$21,001-40,000: 28; 
$40,001-60,000: 5; 
$60,001-80,000: 0; 
$80,001-100,000: 0; 
More than $100,000: 0. 

Independent students: Dollars; 
$0-20,000: 73; 
$21,001-40,000: 25; 
$40,001-60,000: 3; 
$60,001-80,000: 0; 
$80,001-100,000: 0; 
More than $100,000: 0. 

Program: Stafford Subsidized Loan; 
Independent students: Recipients; 
$0-20,000: 51; 
$21,001-40,000: 29; 
$40,001-60,000: 12; 
$60,001-80,000: 5; 
$80,001-100,000: 2; 
More than $100,000: 1. 

Independent students: Dollars; 
$0-20,000: 52; 
$21,001-40,000: 28; 
$40,001-60,000: 12; 
$60,001-80,000: 5; 
$80,001-100,000: 2; 
More than $100,000: 2. 

Program: Stafford Unsubsidized Loan; 
Independent students: Recipients; 
$0-20,000: 46; 
$21,001-40,000: 28; 
$40,001-60,000: 14; 
$60,001-80,000: 6; 
$80,001-100,000: 3; 
More than $100,000: 3. 

Independent students: Dollars; 
$0-20,000: 46; 
$21,001-40,000: 24; 
$40,001-60,000: 13; 
$60,001-80,000: 7; 
$80,001-100,000: 3; 
More than $100,000: 5. 

Source: GAO analysis of 2003-2004 NPSAS data. 

Notes: See appendix II for confidence intervals associated with these 
estimates. 

Numbers in rows may not add to 100 percent because of rounding. 

[End of table]

Tax Preferences: 

Many education-related tax preferences have both de facto lower limits created by the need to have a positive tax liability in order to obtain their benefit and income ceilings on who may use them. For example, the Hope and Lifetime Learning tax credits require that tax filers have a positive tax liability to use them and income-related phase-out provisions in 2004 that begin at $42,000 and $85,000 for single and joint filers, respectively. The income-related phase-out provision for the tuition deduction, in comparison, begins in 2004 at $65,000 and $130,000 for single and joint filers, respectively. As a result, the majority of tax filers claiming the Hope and Lifetime Learning tax credits in 2002 had incomes under $40,000. Among those who claimed the tuition deduction, in contrast, 38 percent of tax filers had incomes in this range, while 62 percent had incomes over $40,000. Table 6 shows the income categories of tax filers claiming the three tax preferences available to current students and/or their families along with the distribution of dollars through those preferences in 2002. 

The reduction in tax liability associated with the use of the Hope and Lifetime tax credits also differs from that associated with the use of the tuition deduction. In 2002 tax filers claimed Hope credits worth about $3.2 billion and Lifetime Learning credits totaling about $1.7 billion. As shown in table 6, below, about 80 percent of the 2002 Hope and Lifetime credits' reduction in tax liability went to tax filers with incomes between $20,001 and $80,000. The distribution of benefits for the tuition deduction shows a substantially different pattern: more than half (52 percent) of the approximately $1.3 billion reduction in tax liability associated with the use of the deduction in 2002 went to families with incomes of $80,001 and above. 

Table 6: Percentage of Tax Filers Claiming Hope and Lifetime Learning 
Credits and Tuition Deduction and Tax Preference Dollars by Income 
Category, Tax Year 2002: 

Type of aid: Hope Credit; Tax filers; 
$0-20,000: 18; 
$20,001-40,000: 33; 
$40,001-60,000: 20; 
$60,001-80,000: 18; 
$80,001-100,000: 11; 
More than $100,000: 0. 

Type of aid: Dollars; 
$0-20,000: 10; 
$20,001-40,000: 33; 
$40,001-60,000: 23; 
$60,001-80,000: 24; 
$80,001-100,000: 10; 
More than $100,000: 0. 

Type of aid: Lifetime Learning Credit; Tax filers; 
$0-20,000: 16; 
$20,001-40,000: 34; 
$40,001-60,000: 25; 
$60,001-80,000: 16; 
$80,001-100,000: 8; 
More than $100,000: 0. 

Type of aid: Dollars; 
$0-20,000: 12; 
$20,001-40,000: 34; 
$40,001-60,000: 25; 
$60,001-80,000: 21; 
$80,001-100,000: 7; 
More than $100,000: 0. 

Type of aid: Tuition Deduction; Tax filers; 
$0-20,000: 20; 
$20,001-40,000: 18; 
$40,001-60,000: 16; 
$60,001-80,000: 13; 
$80,001-100,000: 16; 
More than $100,000: 17. 

Type of aid: Dollars; 
$0-20,000: 11; 
$20,001-40,000: 10; 
$40,001-60,000: 13; 
$60,001-80,000: 14; 
$80,001-100,000: 23; 
More than $100,000: 29. 

Source: GAO analysis of 2002 SOI data. 

Notes: See appendix II for confidence intervals associated with these 
estimates. 

Numbers in rows may not add to 100 percent because of rounding. 

[End of table]

Although many families are eligible to participate in tax-exempt savings programs, the programs are more advantageous to those with higher incomes and tax liabilities. Families with higher than average incomes are more likely to use tax-exempt savings opportunities for a range of reasons, including, among others, that (1) these families hold greater assets to invest in these vehicles; (2) these families have a higher marginal tax rate, and thus benefit the most from the use of these vehicles; and (3) higher-income families may gain a reduction in tax liability even if withdrawals are not used for postsecondary expenses.[Footnote 15] 

Students and Families Have More Responsibility for Obtaining Benefits 
of Tax Preferences in Comparison to Title IV Aid: 

The federal government and postsecondary institutions have significant 
responsibilities in assisting students and families in obtaining 
assistance provided under title IV programs but only minor roles with 
respect to tax filers' use of education-related tax preferences. To 
obtain federal student aid, applicants must first complete the FAFSA 
form, which in its 2004 paper version was over eight pages long and 
contained more than 100 questions. While concerns have been raised that 
the FAFSA application may deter potentially eligible students from 
participating in title IV grant and loan programs,[Footnote 16] filling 
out the FAFSA and submitting it to the Department of Education 
completes, by and large, students' and families' responsibility in 
obtaining aid. To benefit from title IV programs, students need not 
learn the rules of the federal student aid methodology, eligibility 
rules for individual programs, or understand the ways in which federal 
student aid programs interact with one another. Rather, the Department 
of Education is responsible for calculating students' and families' EFC 
on the basis of the FAFSA, and a student's educational institution is 
responsible for determining aid eligibility and the amounts and 
packaging of aid awards. In addition, title IV educational institutions 
assist Education in verifying the information submitted on the FAFSA 
form for a sample of aid applicants. 

Higher education tax preferences, in contrast to federal grants and 
student loans, require more responsibility on the part of students and 
families. Although postsecondary institutions provide students and IRS 
with information about higher education attendance, they have no other 
responsibilities for higher education tax credits, deductions, or tax-
preferred savings. The federal government's primary role with respect 
to higher education tax preferences is limited to the promulgation of 
rules; the provision of guidance to tax filers; and to the processing 
of tax returns, including some checks on the accuracy of items reported 
on those tax returns. In contrast, the primary responsibility for 
selecting among and properly using tax preferences rests with tax 
filers: they must understand the rules in light of their own situation, 
identify applicable tax preferences, understand how these tax 
preferences interact with one another and with federal student aid, 
keep records sufficient to support their tax filing, and correctly 
claim the credit or deduction on their return. 

Some Tax Filers May Not Effectively Use Postsecondary Tax Preferences, 
Possibly Due to Complexity: 

According to our analysis of IRS data on the use of Hope and Lifetime 
tax credits and the tuition deduction, some tax filers appear to make 
less-than-optimal choices among them. The apparently suboptimal use of 
postsecondary tax preferences may arise, in part, from the complexity 
of using these provisions; however, our analysis of tax data does not 
permit us to identify why they are making these choices. Tax policy 
analysts consistently identify postsecondary tax preferences as a set 
of tax provisions that demand a particularly large investment of 
knowledge and skill on the part of students and families or expert 
assistance purchased by those with the means to do so.[Footnote 17] 
Additional complexity associated with the use of postsecondary tax 
preferences also arises from the interaction of tax preferences and 
title IV student aid. 

Some Tax Filers Appear to Make Suboptimal Choices: 

Making poor choices among tax preferences for postsecondary education 
may be costly to tax filers. For example, families may strand assets in 
a tax-exempt savings vehicle and incur tax penalties on their 
distribution if their child chooses not to go to college. They may also 
fail to minimize their federal income tax liability by claiming a tax 
credit or deduction that yields less of a reduction in taxes than a 
different tax preference or by failing to claim any of their available 
tax preferences. For example, if a married couple filing jointly with 
one dependent in his/her first 2 years of college had an adjusted gross 
income of $50,000, qualified expenses of $10,000 in 2004, and tax 
liability greater than $2,000, their tax liability would be reduced by 
$2,000 if they claimed the Lifetime Learning credit but only $1,500 if 
they claimed the Hope credit. 

To assess whether tax filers faced difficulty with choosing among these 
preferences, we examined whether tax filers who were confronted with a 
relatively common tax choice--whether to claim the Hope or Lifetime 
Learning credit or the tuition deduction--chose the tax preference that 
minimized their tax liability. We analyzed information that IRS was 
provided with by educational institutions using Form 1098-T and tax 
return information in IRS's 2002 Statistics of Income sample. Because 
87 percent of Form 1098-T returns did not contain educational expense 
information, we were able to analyze only the remaining 13 percent of 
tax returns (representing about 1.8 million returns) in the SOI sample 
that received a Form 1098-T and contained information concerning 
students' educational expenses. We were unable to determine if this 13 
percent of returns is representative of the entire population of Form 
1098-Ts. (See appendix I for details.) All estimates and their 
associated confidence intervals can be found in appendix II. 

We found that some people who appear to be eligible for tax credits 
and/or the tuition deduction did not claim them. The filers of about 77 
percent of the tax returns that we were able to review were apparently 
eligible to claim one or more of the three tax preferences: the tax 
filers appear to have had a positive income tax liability, qualified 
educational expenses, an adjusted gross income below statutory phase-
out limits, and were otherwise eligible.[Footnote 18] Among filers who 
were apparently eligible to claim one of the three tax preferences, 27 
percent, representing about 374,000 tax filers, failed to do so. The 
amount by which these tax filers failed to reduce their tax averaged 
$169; 10 percent of this group could have reduced their tax liabilities 
by over $500. 

Some tax filers used a higher education tax credit or the tuition 
deduction but chose one that yielded a smaller reduction in their tax 
liability than they could have otherwise realized.[Footnote 19] Among 
those who claimed the tuition deduction, we estimate that 21 percent 
(representing about 51,000 tax filers) would have been better off 
claiming the Lifetime Learning tax credit while 8 percent (representing 
about 22,000 tax filers) of those claiming the Lifetime Learning credit 
would have reduced their taxes by a greater amount if they had claimed 
the tuition deduction instead. The average amount by which these tax 
filers failed to reduce their taxes was $83 for tax filers claiming the 
tuition deduction and $138 for those claiming the Lifetime Learning 
credit. Some tax filers making these decisions failed to realize larger 
reductions in their tax liabilities--10 percent of suboptimal tuition 
deduction claimants could have reduced their tax liabilities by about 
$158 or more and 10 percent of suboptimal Lifetime Learning credit 
claimants could have reduced their tax liabilities by about $237 or 
more. On the other hand, we found no cases where tax filers claiming a 
Hope credit would have been better off by claiming a Lifetime Learning 
credit instead. 

Suboptimal choices were not limited to tax filers who prepared their 
own tax returns. A possible indicator of the difficulty people face in 
understanding education-related tax preferences is how often the 
suboptimal choices we identified were found on tax returns prepared by 
paid tax preparers. We estimate that about 50 percent of the returns we 
found that appear to have failed to optimally reduce the tax filer's 
tax liability were prepared by paid tax preparers. Generalized to the 
population of tax returns we were able to review, returns prepared by 
paid tax preparers represent about 223,000 of the approximately 447,000 
suboptimal choices we found. 

The Suboptimal Use of Postsecondary Tax Preferences May Result from 
Their Complexity: 

The apparently suboptimal use of postsecondary tax preferences may 
arise, in part, because of the complexity of using these provisions. 
Tax policy analysts have frequently identified postsecondary tax 
preferences as a set of tax provisions that demand a particularly large 
investment of knowledge and skill on the part of students and families 
or expert assistance purchased by those with the means to do so. They 
suggest that this complexity arises from multiple postsecondary tax 
preferences with similar purposes, from key definitions that vary 
across these provisions, and from rules that coordinate the use of 
multiple tax provisions. Additional complexity associated with the use 
of these provisions may arise from the interaction of tax preferences 
and title IV student aid. Complexity may lead some not to claim a 
credit because they judge the added costs of filing for the credit to 
outweigh its benefits. 

Multiple Tax Preferences: 

Multiple tax preferences with similar purposes may place substantial 
demands on the knowledge and skills of millions of students and 
families. Twelve tax preferences are outlined in the IRS publication, 
Tax Benefits for Education,[Footnote 20] including four different tax 
preferences for educational saving.[Footnote 21] Three of these 
preferences--Coverdell Education Savings Accounts, Qualified Tuition 
Programs, and U.S. education savings bonds--differ across more than a 
dozen dimensions, including the tax penalty that occurs when account 
balances are not used for qualified higher education expenses, who may 
be an eligible beneficiary, annual contribution limits, and other 
features.[Footnote 22] Attempting to learn about, compare, and choose 
from among these tax-preferred higher education savings options may 
require substantial knowledge and skill on the part of parents with 
young dependents beyond that required of savings and investment 
decisions in general. 

Among the tax preferences we reviewed, three help students meet current 
costs--the Hope credit, Lifetime Learning credit, and the tuition 
deduction. 

These tax preferences also differ across many dimensions.[Footnote 23] 
Though similar in purpose, the three preferences have different 
eligibility criteria, benefit levels, and income-related phase-outs. 
For tax filers to obtain the maximum benefit from these preferences, 
they must first ascertain which preference they are eligible to 
use,[Footnote 24] and then correctly calculate which preference 
minimizes their tax liability by making separate calculations between 
the Hope and Lifetime Learning credits. If filers are within the phase-
out range, they must calculate whether the tuition deduction is 
preferable to either credit. Tax filers with more than one student in 
postsecondary education may be eligible to claim multiple preferences, 
and may need to test different combinations of benefits to optimize tax 
savings. 

Varying Qualified Expense Definitions: 

Additional demands on the skill and knowledge of students and families 
may result from the fact that higher education tax preferences do not 
all use the same definition of qualified higher education expenses. 
What tax filers are allowed to claim as a qualified higher education 
expense varies, for example, between tax-exempt savings vehicles and 
tax credits. For example, while Coverdell Education Savings Accounts 
and section 529 Qualified Tuition Programs permit tax filers to include 
tuition, fees, books, supplies, and equipment required for enrollment 
as part of their qualified educational expenses, higher education tax 
credits permit only tuition and fees required for enrollment to be 
counted as qualified higher education expenses.[Footnote 25] These 
dissimilar definitions require that tax filers keep track of expenses 
separately, applying some expenses to some tax preferences, but not 
others, and the Joint Committee on Taxation has suggested that they may 
increase the likelihood of inadvertent errors and may also increase 
taxpayer frustration.[Footnote 26]: 

Tax Rules Coordinating the Use of Multiple Preferences: 

In addition to learning about, comparing, and selecting tax 
preferences, filers who wish to make optimal use of multiple tax 
preferences must understand how the use of one tax preference affects 
the use of others. The use of multiple education-related tax 
preferences is coordinated through rules that prohibit the application 
of the same qualified higher education expenses for the same student to 
more than one education-related tax preference, sometimes referred to 
as "anti-double-dipping rules." These rules are important because they 
prevent tax filers from underreporting their tax liability. 
Nonetheless, anti-double-dipping rules are potentially difficult for 
tax filers to understand and apply, and misunderstanding them may have 
consequences for a filer's tax liability. 

Consider, for example, how the use of college savings programs and the 
tuition deduction is affected by these rules. To calculate whether a 
distribution from a college savings program is taxable, a tax filer 
must determine if the total distributions for the tax year are more or 
less than the total qualified educational expenses reduced by any tax-
free educational assistance, i.e., their adjusted qualified education 
expenses (AQEE). After subtracting tax-free assistance from qualified 
educational expenses to arrive at the AQEE, tax filers multiply total 
distributed earnings by the fraction (AQEE/total amount distributed 
during the year). If parents of a dependent student paid $6,500 in 
qualified education expenses from a $3,000 tax-free scholarship and a 
$3,600 distribution from a tuition savings program, they would have 
$3,500 in AQEE. If $1,200 of the distribution consisted of earnings, 
then $1,200 x ($3,500 AQEE/$3,600 distribution) would result in 
$1,167 of the earnings being tax-free, while $33 would be taxable. 
However, if the same tax filer had also claimed a tuition deduction, 
anti-double-dipping rules would require the tax filer to subtract the 
expenses taken into account in figuring the tuition deduction from 
AQEE. If $2,000 in expenses had been used toward the tuition deduction, 
then the taxable distribution from the section 529 savings program 
would rise to $700.[Footnote 27] For families such as these, anti-
double-dipping rules increase the computational complexity they face 
and may result in unanticipated tax liabilities associated with the use 
of section 529 savings programs. 

Interaction between Tax Preferences and Student Financial Aid: 

Because the use of federal higher education tax preferences may affect 
a student's eligibility for title IV federal student assistance--and 
the receipt of title IV federal student assistance may affect a 
student's ability to use federal higher education tax preferences--many 
students and families must develop knowledge and skill sufficient to 
understand the relationship between the two. For example, the Internal 
Revenue Code requires tax filers to reduce the qualified higher 
education expenses they apply toward higher education tax credits by 
the amount of nontaxable aid they receive, including federal aid such 
as a Pell Grant. As a result, receiving a Pell Grant has the potential 
to reduce the amount of Hope or Lifetime Learning tax credit for which 
a filer is eligible. More generally, tax filers must take care to 
reduce their qualified higher education expenses by the amount of all 
nontaxable assistance that they receive--federal and nonfederal--
applying only adjusted qualified higher education expenses toward 
credits, deductions, and distributions from tax-exempt savings 
vehicles. 

While some federal higher education tax preferences, such as tax 
credits, have no effect on one's eligibility for title IV federal 
student assistance,[Footnote 28] others do: like other family savings, 
assets held in tax-exempt savings vehicles, such as a Coverdell 
Education Savings Account or a section 529 savings account, are 
included in the calculation of the expected family contribution. In 
those instances where students are on the margin of eligibility to 
participate in need-based title IV federal aid programs, using these 
accounts may reduce the aid for which a student is eligible. 

The federal financial aid methodology in place prior to January 2004 
treated assets held in different savings vehicles in widely varying 
ways. According to one set of calculations, each dollar of funds held 
in a 529 savings program resulted in a reduction of 15 cents in need-
based aid, while each dollar of funds held in a Coverdell Educational 
Savings Account resulted in a $1.22 reduction in need-based 
aid.[Footnote 29] For families close to the income limit for 
eligibility for need-based aid, a $1,000 pretax investment in a 
Coverdell Educational Savings Account yielded a simulated final return 
(net of income taxation and foregone student aid) of -$1,194, leaving 
the family worse off than if they had not saved, or if they had saved 
using a regular savings account (+$490) or a traditional individual 
retirement account (+$844). In response to recommendations contained in 
our 2002 report on student aid,[Footnote 30] the Department of 
Education modified its guidance concerning federal financial aid 
methodology,[Footnote 31] announcing that Coverdell assets would be 
treated as assets of the parent, rather than the student--and, 
therefore, result in the same reduction in need-based aid as 529 
savings program assets. Nonetheless, families that save in prepaid 
tuition programs remain subject to a dollar-for-dollar reduction in 
federal aid for each dollar distributed by the program.[Footnote 32] 

Research on Effectiveness of Federal Postsecondary Assistance Is 
Incomplete: 

Little is known about the effectiveness of federal grant and loan 
programs and education-related tax preferences in promoting attendance, 
choice, and persistence. Many federal aid programs and tax preferences 
have not been studied, and for those that have been studied, important 
aspects of their effectiveness remain unexamined. When research exists, 
it reaches varying conclusions about the effects of federal programs 
and tax preferences. Some studies identify no measurable effects on 
college attendance and persistence, while others find positive effects. 
(A bibliography listing the studies we reviewed is included at the end 
of this report.) Data and methodological challenges limit the certainty 
with which the effects of title IV programs and tax preferences, 
especially the effects of the latter, can be identified and result in 
widespread gaps in the knowledge of their effectiveness.[Footnote 33] 
In 2002 we recommended that Education sponsor research into key aspects 
of effectiveness of title IV programs and that Education and the 
Department of the Treasury collaborate on such research into the 
relative effectiveness of title IV programs and tax 
preferences.[Footnote 34] Since our prior report, little has been done 
to implement these recommendations, although Education is the process 
of establishing a postsecondary research center. 

Little Is Known about the Effectiveness of Federal Title IV 
Postsecondary Programs and Tax Preferences: 

We found no research on any aspect of effectiveness for several major 
title IV federal postsecondary programs and tax preferences, including 
the Federal Work-Study program, the tuition deduction, tax-exempt 
savings programs, and others. For other federal programs, no research 
exists on important aspects of program effectiveness. For example, no 
research has examined the effects of federal postsecondary education 
tax credits on students' persistence in their studies or on the type of 
postsecondary institution they choose to attend. 

Limited Research about Federal Assistance Reaches Varying Conclusions 
about Some Aspects of Effectiveness: 

When research on the effectiveness of federal assistance does exist, it 
reaches varying findings about title IV student aid and tax 
preferences. Some studies find that title IV programs increase the 
rates of college attendance and persistence, while others have 
identified no positive effects. Research on Pell Grants shows that they 
generally have little or no impact on attendance, with the exception of 
one study that found Pell Grants to have increased attendance for 
students from 22 to 35 years of age.[Footnote 35] The study attributed 
the program's impact to the fact that older students generally attend 
less-expensive institutions where Pell Grants represent a larger share 
of the cost of college than the same size grants provided to students 
in general. The study also suggests that the limited impact of Pell 
Grants on attendance in general may be due to the fact that 
institutional aid awards may decrease at the same time as Pell Grant 
awards increase, creating a substitution effect that could diminish the 
impact of Pell Grants on attendance. According to the study, this 
occurs less often for older students because they tend to go to 
institutions that have less institutional aid for which Pell Grant 
awards might substitute. 

Some research has also found that Pell Grants, like other grant 
programs, appear to increase students' persistence toward completing 
their studies.[Footnote 36] 

Student loans have been found to modestly increase college attendance, 
persistence, and choice, but there are various limitations to consider. 
Of the three studies examining the effect of borrowing on college 
attendance, only one focuses on lower-income students.[Footnote 37] The 
study estimates that a $1,000 increase (in 1977 dollars) resulted in a 
4.3 percentage point increase in college enrollment among dependent 
students with family incomes below $15,000. However, given long-term 
changes in lending markets, returns to schooling, and other conditions, 
students' behavioral responses to equivalent changes in loan amounts 
may be different today from what they were in 1977.[Footnote 38] 
Findings about the impact of loans on persistence and choice are each 
based on only one study, and focus only on middle-income 
students.[Footnote 39] 

We found one study concerning how the Hope and Lifetime Learning tax 
credits affect college attendance. The study found the credits to have 
no effect on college attendance. This may be because the students who 
receive these credits are likely to attend college anyway.[Footnote 40] 
The author acknowledges several limitations of the study. For example, 
the study uses income categories--as opposed to actual income--thereby 
introducing measurement error and attenuating the estimated effects of 
the credits on attendance. We also note that the study measured 
eligibility for the credits, rather than the receipt of tax credits. 
Measuring eligibility rather than the receipt of credits tends to 
underestimate the effect of credits on attendance because many tax 
filers who appear to be eligible for the credits do not claim 
them.[Footnote 41] This study did not examine whether federal student 
tax credits affect persistence or choice. 

In addition to the research into the federal tax, grant, and loan 
programs described above, a large body of research estimates the 
effects of both tuition changes and non-title IV financial aid programs 
on postsecondary attendance.[Footnote 42] These studies all found 
either an inverse relationship between the cost of tuition and level of 
enrollment or that financial assistance increased enrollment.[Footnote 
43] One survey of this work concludes that a $1,000 reduction in net 
costs (in 2001 dollars) would result in a 3 to 6 percent increase in 
college enrollment rates.[Footnote 44] Federal Pell Grants and 
postsecondary tax credits do not show similar effects in the studies we 
examined. Substitution effects caused by offsetting reductions in 
nonfederal aid may diminish the enrollment effect of Pell awards. Also, 
the impact of tax credits on enrollment may be limited by the fact that 
tax filers receive higher education tax credits the year following 
tuition outlays. Program design and information may also account for 
some of these differences: tuition information and many nonfederal aid 
benefits are known when a person is choosing whether or not to attend 
college; however, students may not be aware of tax credits and Pell 
Grants or their effects on price until after they have already decided 
to go to college. 

While federal grants, student loans, and tax credits were created to 
result in beneficial consequences, such as increasing college 
attendance, they have also been found to result in the raising of 
tuition by institutions in some circumstances.[Footnote 45] One 
potential explanation is that institutions raise tuition because 
federal aid increases the amount students are able to pay. 
Alternatively, federal aid may increase the demand for education, and 
with no offsetting factors, this drives the price of tuition up. 

Data and Methodological Challenges Hinder Research: 

Gaps in the research-based evidence of federal postsecondary program 
effectiveness may be due, in part, to data and methodological 
challenges that have proven difficult to overcome. The relative newness 
of most of the tax preferences also presents challenges because 
relevant data are just now becoming available. Additionally, to analyze 
the tax programs, actual tax return data are preferred to indirect or 
processed data, but researchers are often limited to publicly available 
data containing self-reported information on income because of tax data 
confidentiality protections. 

Methodological challenges add to the difficulty of estimating the 
effects of these programs. In general, researchers can reliably 
identify the behavioral effects of a program when one factor changes 
while all others remain unchanged. For example, if no other factors 
change, a researcher could identify the impact of postsecondary tax 
credits on enrollment by comparing enrollment rates before and after 
the tax credits are enacted. Typically, however, many factors change 
simultaneously, either offsetting or enhancing the effect of the policy 
intervention being studied. For example, tuition rates may rise at the 
same time that postsecondary tax credits are introduced, or other 
sources of postsecondary assistance--such as federal, state, or 
institutional grants--may decrease. These changes undermine 
researchers' ability to reliably isolate the behavioral effects of the 
policy under study. While researchers in some fields address this 
problem through the use of experiments, few opportunities exist for 
experimentation in the study of postsecondary education finance. 
Alternatively, researchers may address this problem through the use of 
quasi-experimental research designs, which attempt to approximate the 
random assignment of participants to treatment and control groups by 
matching participants to nonparticipants having similar 
characteristics. In practice, however, data limitations often make this 
difficult to implement. To isolate the impact of tax credits on college 
attendance, for example, researchers may need to compare credit 
recipients with nonrecipients who are similar in a range of ways--
including academic preparation, family income and wealth. National 
surveys often do not contain complete data on all of these necessary 
factors both for those who attend and do not attend college. 

Steps to Support Effectiveness Research: 

In 2002, we recommended that Education sponsor research into key 
aspects of effectiveness of title IV programs, and that Education and 
the Department of the Treasury collaborate on such research into the 
relative effectiveness of title IV programs and tax 
preferences.[Footnote 46] In order to provide Congress with information 
about the effectiveness of title IV programs, we recommended in 2002 
that Education sponsor research on the impact of title IV programs on 
postsecondary attendance, choice, completion, and costs. To provide 
information about the relative effectiveness of Education's direct 
expenditure programs and Treasury's postsecondary tax provisions, we 
recommended that the Secretaries of Education and Treasury collaborate 
in studying the combined effects of tax preferences and title IV aid. 
Few steps have been taken to implement these recommendations. However, 
Education is in the process of establishing a postsecondary research 
center that will, among other things, examine the impact of title IV 
programs. 

As we noted in our 2002 report, research into the effectiveness of 
different forms of postsecondary education assistance is important. 
Without such information federal policymakers cannot make fact-based 
decisions about how to build on successful programs and make necessary 
changes to improve less effective programs. As we stress in our recent 
report 21st Century Challenges: Reexamining the Base of the Federal 
Government[Footnote 47], the budget deficit and other major fiscal 
challenges facing the nation necessitate rethinking the base of 
existing federal spending and tax programs, policies, and activities by 
reviewing their results and testing their continued relevance and 
relative priority for a changing society. 

In our January 2004 report on OMB's Program Assessment Rating Tool 
(PART),[Footnote 48] we recommended that OMB target PART assessments 
based on such factors as the relative priorities, costs, and risks 
associated with related clusters of programs and activities and that 
OMB select related or similar programs for review in the same year to 
facilitate comparisons and trade-offs.[Footnote 49] Furthermore, in our 
June 14, 2005 testimony before the Senate Committee on Homeland 
Security and Governmental Affairs, Subcommittee on Federal Financial 
Management, Government Information, and International Security, we 
reported that it is often critical to understand how programs fit with 
a portfolio of tools and strategies in order to capture whether 
programs complement and support related programs, are duplicative or 
redundant, or work at cross purposes to other initiatives.[Footnote 50] 
The different tax preferences and title IV programs in place to help 
students and families finance postsecondary education are a good 
example of the sort of related clusters of programs and activities to 
which we were referring. 

Concluding Observations: 

Congress has adopted a range of tools to help students and families pay 
for postsecondary education, including grants, loans, and tax 
preferences. Many title IV financial aid programs have a long history, 
while most of the tax preferences do not. The addition of tax 
preferences to the title IV grant and loan programs has increased the 
number of options and given students and families new choices about how 
to combine saving, borrowing, and current income to meet the costs of 
postsecondary education. Postsecondary tax preferences are widely 
thought to present challenges of complexity to students and families. 
As we have shown, tax filers appear to have some difficulty in making 
fully effective use of some postsecondary tax preferences now in the 
tax code. Also, although millions of tax filers are receiving billions 
of dollars in assistance with postsecondary costs through both title IV 
programs and tax preferences, little is known about the effectiveness 
of any of these forms of assistance in part because of data and 
methodological issues. As we recommended in our 2002 report on federal 
financial aid,[Footnote 51] it is important that information about the 
effectiveness of both tax preferences and title IV federal grant and 
loan programs be developed so that decision makers in Congress and in 
the executive branch can make efficient use of limited federal 
resources and reexamine, if necessary, the tools used to help students 
and families pay for postsecondary education. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to the Internal Revenue Service, the 
Department of the Treasury, and the Department of Education for review 
and comment. The Internal Revenue Service provided technical comments, 
which we incorporated. The Department of the Treasury did not provide 
comments on our report. 

In its written comments, Education disagreed with our conclusion on the 
extent that title IV programs have been studied. Education also said 
that we did not properly acknowledge the role that its National 
Postsecondary Student Aid Study (NPSAS) played in our analysis and that 
the report did not cite many Departmental publications prepared on the 
basis of NPSAS and other Departmental data collections, such as 
Persistence and Attainment of Beginning Students with Pell 
Grants.[Footnote 52] In our report, we describe NPSAS as a 
comprehensive study examining how students and their families pay for 
postsecondary education and note that we relied upon NPSAS data to 
conduct our analysis. Further, we explain in our report that our 
findings about the effectiveness of federal postsecondary assistance 
are based upon studies that meet professional standards of econometric 
analysis and contain acceptably identified statistical estimates of 
program effects. We do not include publications that fail to meet these 
standards. While the data collections cited by the Department provide 
useful descriptive information concerning title IV programs, they do 
not provide data sufficient to determine key program effects. In 
particular, because these data collections do not contain information 
about those who do not attend postsecondary institutions, they are of 
limited use in establishing the effectiveness of title IV programs, 
especially with respect to postsecondary attendance--a challenge we 
note in our report. Consequently, publications based upon these data 
share this limitation. 

With respect to the study specifically cited by the Department--
Persistence and Attainment of Beginning Students with Pell Grants--it 
does not contain acceptably identified estimates of Pell Grant effects 
on persistence. In particular, the study does not implement a design 
and include variables that can isolate the effect of Pell Grant receipt 
on persistence from other factors that are associated both with 
persistence and with Pell Grant receipt, including academic 
preparation, changes in family income, and the net cost of education. 
Thus the study's estimate of the effect of Pell Grants on persistence 
may reflect not only the influence of the Pell Grant, but also the 
influence of these other factors. Consequently, its results cannot be 
used to reliably assess the impact of Pell Grant receipt on 
persistence.[Footnote 53] 

Although Education stated that our report presented an incomplete and 
inaccurate assessment of its research, it nonetheless agreed that more 
research should be done and that it is "committed to continuing to 
increase its research associated with the effectiveness of the [its] 
programs." The Department expressed a similar commitment in response to 
our September 2002 report[Footnote 54] which found that Education had 
undertaken little work identifying the impact of its grant and loan 
programs and recommended that the Department sponsor research on the 
impact of title IV programs on postsecondary education attendance and 
choice, completion, and costs. 

As agreed with your offices, unless you publicly announce its contents 
earlier, we plan no further distribution of this report until 30 days 
after its date. At that time, we will send copies of this report to The 
Commissioner of Internal Revenue, The Secretary of Education, The 
Secretary of the Treasury, and other interested parties. This report is 
available at no charge on GAO's web site at [Hyperlink, 
http://www.gao.gov]. 

If you or any of your staff have any questions, please contact Michael 
Brostek at (202) 512-9110 or Cornelia Ashby at (202) 512-7215. You may 
also reach us by e-mail at [Hyperlink, BrostekM@gao.gov] and 
[Hyperlink, AshbyC@gao.gov]. Contact points for our Offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this report. Key contributors to this report were David Lewis, 
Assistant Director, Jeff Appel, Assistant Director, Eric Mader, Thomas 
Weko, John Mingus, Cynthia Decker, Jeffrey Weinstein, and Katherine 
France. 

Signed by: 

Michael Brostek: 
Director, Tax Issues: 
Strategic Issues: 

Signed by: 

Cornelia M. Ashby: 
Director, Education Workforce and Income Security: 

[End of section] 

Appendixes: 

Appendix I: Objectives, Scope, and Methodology: 

Our review focused on answering the following three questions: (1) How 
does title IV grant and loan assistance compare with that provided 
through the tax code? (2) To what extent are tax filers effectively 
using the opportunities presented by postsecondary tax preferences? (3) 
What is known about the effectiveness of federal assistance in 
promoting college attendance, providing students with a wider range of 
choices among postsecondary institutions, or encouraging students to 
persist in their studies? 

To compare title IV programs and tax preferences, we reviewed articles, 
studies, and reports on federal assistance for postsecondary education 
published by the Joint Committee on Taxation, the Internal Revenue 
Service (IRS), the Department of Education's National Center for 
Education Statistics and Office of Federal Student Aid, and other 
sources. Programs or tax preferences that served more than 500,000 
participants were judged to be, for the purpose of our review, major. 
To obtain information on participant numbers and other comparative 
information, we used (1) fiscal year 2004 information from the 
President's fiscal year 2006 budget request,[Footnote 55] (2) IRS's 
2002 Statistics of Income (SOI) data set including IRS Form 1098-T 
information for all tax filers in the 2002 SOI sample, (3) 2003-2004 
school year data from the National Postsecondary Student Aid Study 
(NPSAS),[Footnote 56] (4) data as of December 31, 2004, on the number 
of accounts and amounts invested in section 529 Qualified Tuition 
Programs from the College Savings Plans Network,[Footnote 57] and (5) 
tax year 2002 data on the estimated number of contributions to 
Coverdell Education Savings Accounts from IRS. We also reviewed studies 
conducted by Congressional Research Service, the Congressional Budget 
Office, GAO, the Department of the Treasury, the Urban Institute, and 
the College Board. We also interviewed individuals from the 
Congressional Research Service, Education, IRS, Treasury, and 
universities. 

The 2002 SOI data and 2003-2004 NPSAS data were the most recent data 
available. The SOI individual tax return file is a stratified 
probability sample of income tax returns filed with IRS. The SOI sample 
of 175,000 returns represented the approximately 130 million tax 
returns filed for 2002. NPSAS is a comprehensive study that examines 
how students and their families pay for postsecondary education. It 
includes nationally representative samples of 79,852 undergraduates, 
9,611 graduate students, and 1,283 first-professional students enrolled 
during the 2003-2004 academic year. The NPSAS data are based on student 
interviews and administrative records, and NPSAS includes survey 
results from both students who received financial aid and those who did 
not. To assess the reliability of the SOI and NPSAS sample data, we 
reviewed existing information about the samples and performed 
electronic testing of the required data elements to detect obvious 
problems in accuracy and completeness. We determined that SOI and NPSAS 
data, as well as other data used to provide certain specific pieces of 
information, were sufficiently reliable for this report. 

Because estimates from the SOI and NPSAS data are based on samples, 
they are subject to sampling errors. These sampling errors measure the 
extent to which the point estimates may vary from the actual values in 
the population of tax filers. Each of our estimates is surrounded by a 
95 percent confidence interval: an interval that 95 times out of 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 tables in appendix II. 

To examine the extent to which tax filers are effectively using 
postsecondary education tax preferences, we used much of the same 
information we obtained for the description and comparison of the 
programs and tax preferences. In addition we estimated the number of 
tax filers who were eligible for an education tax credit or tuition and 
fees deduction but either did not claim one at all or appeared to make 
a less-than-optimal choice among these tax preferences and the amounts 
of tax benefits lost as a result. To do this analysis we used IRS's SOI 
sample of individual tax returns for tax year 2002 and all Form 1098-T 
information returns for tax filers in the sample. Postsecondary 
institutions participating in Education's student aid programs are 
required to issue Form 1098-Ts to all enrolled students. Form 1098-Ts 
include the student's name, address, and social security number, and 
the school's taxpayer identification number (TIN). Form 1098-Ts also 
indicate if the student was a graduate student and if he or she was 
enrolled at least half-time. Postsecondary institutions had the option 
of providing information concerning students' educational expenses, 
scholarships, and grants but were not required to do so. By combining 
information on the Form 1098-Ts with information on the tax return, we 
were able to identify the postsecondary student population in the SOI 
sample and the choices that tax filers made concerning education-
related tax preferences. 

To conduct the analysis, we had to exclude two types of tax returns 
from consideration. Because a person cannot claim the tuition deduction 
or the Hope or Lifetime Learning credits if he or she is claimed as a 
dependent on someone else's tax return, we excluded dependent tax 
returns in the SOI sample from our analysis. We also excluded the tax 
returns of tax filers that received a Form 1098-T with no information 
concerning students' educational expenses because we could not analyze 
the tax returns without these data. This included the tax returns of 
individuals who received an education tax credit or tuition deduction 
but did not receive a Form 1098-T. These limitations excluded 87 
percent of the returns in the sample. 

We considered different explanations for why those tax filers with 
education expenses did not claim an education tax credit or tuition 
deduction. For example, we examined whether tax filers had (1) income 
that exceeded the program thresholds for tax year 2002, (2) no taxable 
income, (3) no tax liability after claiming other tax credits, or (4) 
no net educational expenses after accounting for scholarships and 
grants as reported on the Form 1098-T. We also examined whether tax 
filers were married filing separately or filed a Form 1040EZ because 
this would prevent tax filers from being able to claim the education 
tax credits or tuition deduction. 

We calculated tax filers' optimal choice among the Hope and Lifetime 
Learning credits, and the tuition deduction on the basis of program 
eligibility criteria for tax year 2002. Tax filers are limited to 
claiming either a tuition deduction or an education tax credit for the 
same student. Eligibility is restricted by modified adjusted gross 
income and, in the case of the Hope tax credit, whether or not students 
are enrolled at least half-time. 

We shared our methodology for this analysis with tax policy researchers 
outside of GAO and incorporated their comments into our analysis. 

To identify available academic research on the effectiveness of major 
federal financial aid programs, we reviewed studies that examined 
whether the programs or tax preferences affect college attendance, 
persistence, and choice. We looked for these measures 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 we found through searches 
in EconLit, Digital Dissertations from ProQuest, and the National 
Bureau of Economic Research web site. These online sources are 
nationally recognized repositories of research results. In addition, we 
also examined relevant studies cited in studies found from our 
searches. 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. We 
assessed studies that provided an original empirical analysis according 
to professional standards of econometric analysis for their 
methodological rigor. The results of the studies that we judged to 
contain acceptably identified statistical estimates formed the basis 
for our findings about the availability of information concerning the 
relative effectiveness of major federal financial aid programs. 

We conducted our review from May 2004 through June 2005 in accordance 
with generally accepted government auditing standards. 

[End of section] 

Appendix II: Confidence Intervals: 

We used two data sets in this review: Education's 2003-2004 National 
Postsecondary Student Aid Study and the Internal Revenue Service's 2002 
Statistics of Income. Estimates from both data sets are subject to 
sampling errors and the estimates we report are surrounded by a 95 
percent confidence interval. The following tables provide the lower and 
upper bounds of the 95 percent confidence interval for all estimate 
figures in the tables in this report. For figures drawn from these 
data, we provide both point estimates and confidence intervals. 

Table 7: Description of Federal Student Aid Programs Authorized under 
Title IV of the Higher Education Act: 

Dependent students: 

Type of assistance: Pell Grant; 
Number of recipients: Lower bound: 2,026,011; 
Number of recipients: Upper bound: 2,115,312; 
Total award: Lower bound: 5,201,091,600; 
Total award: Upper bound: 5,452,845,564; 
Average award: Lower bound: 2,543; 
Average award: Upper bound: 2,573; 
Median income: Lower bound: 24,165; 
Median income: Upper bound: 24,999. 

Type of assistance: Supplemental Educational Opportunity Grant; 
Number of recipients: Lower bound: 530,408; 
Number of recipients: Upper bound: 577,316; 
Total award: Lower bound: 466,079,305; 
Total award: Upper bound: 522,325,472; 
Average award: Lower bound: 857; 
Average award: Upper bound: 892; 
Median income: Lower bound: 22,022; 
Median income: Upper bound: 23,484. 

Type of assistance: Federal Work-Study; 
Number of recipients: Lower bound: 1,023,755; 
Number of recipients: Upper bound: 1,089,687; 
Total award: Lower bound: 1,927,247,135; 
Total award: Upper bound: 2,090,819,033; 
Average award: Lower bound: 1,856; 
Average award: Upper bound: 1,901; 
Median income: Lower bound: 45,000; 
Median income: Upper bound: 48,231. 

Type of assistance: Federal Perkins Loan; 
Number of recipients: Lower bound: 472,640; 
Number of recipients: Upper bound: 517,207; 
Total award: Lower bound: 907,800,538; 
Total award: Upper bound: 1,004,290,295; 
Average award: Lower bound: 1,887; 
Average award: Upper bound: 1,932; 
Median income: Lower bound: 37,623; 
Median income: Upper bound: 40,814. 

Type of assistance: Subsidized FFEL or Direct Stafford Loan; 
Number of recipients: Lower bound: 2,505,118; 
Number of recipients: Upper bound: 2,604,668; 
Total award: Lower bound: 7,962,531,788; 
Total award: Upper bound: 8,329,729,995; 
Average award: Lower bound: 3,155; 
Average award: Upper bound: 3,188; 
Median income: Lower bound: 43,834; 
Median income: Upper bound: 45,446. 

Type of assistance: Unsubsidized FFEL or Direct Stafford Loan; 
Number of recipients: Lower bound: 1,578,160; 
Number of recipients: Upper bound: 1,664,757; 
Total award: Lower bound: 5,173,481,648; 
Total award: Upper bound: 5,505,576,910; 
Average award: Lower bound: 3,244; 
Average award: Upper bound: 3,293; 
Median income: Lower bound: 74,263; 
Median income: Upper bound: 77,439. 

Type of assistance: FFEL or Direct PLUS Loan; 
Number of recipients: Lower bound: 609,125; 
Number of recipients: Upper bound: 659,071; 
Total award: Lower bound: 5,458,550,634; 
Total award: Upper bound: 5,979,275,038; 
Average award: Lower bound: 8,787; 
Average award: Upper bound: 9,019; 
Median income: Lower bound: 69,547; 
Median income: Upper bound: 73,439. 

Independent students: 

Type of assistance: Pell Grant; 
Number of recipients: Lower bound: 2,967,340; 
Number of recipients: Upper bound: 3,087,638; 
Total award: Lower bound: 7,212,123,299; 
Total award: Upper bound: 7,540,282,035; 
Average award: Lower bound: 2,409; 
Average award: Upper bound: 2,436; 
Median income: Lower bound: 12,614; 
Median income: Upper bound: 13,262. 

Type of assistance: Supplemental Educational Opportunity Grant; 
Number of recipients: Lower bound: 684,528; 
Number of recipients: Upper bound: 745,839; 
Total award: Lower bound: 368,492,546; 
Total award: Upper bound: 415,343,758; 
Average award: Lower bound: 526; 
Average award: Upper bound: 548; 
Median income: Lower bound: 10,425; 
Median income: Upper bound: 11,626. 

Type of assistance: Federal Work-Study; 
Number of recipients: Lower bound: 676,216; 
Number of recipients: Upper bound: 766,317; 
Total award: Lower bound: 933,916,755; 
Total award: Upper bound: 1,084,530,206; 
Average award: Lower bound: 2,192; 
Average award: Upper bound: 2,303; 
Median income: Lower bound: 9,808; 
Median income: Upper bound: 11,525. 

Type of assistance: Federal Perkins Loan; 
Number of recipients: Lower bound: 522,918; 
Number of recipients: Upper bound: 595,499; 
Total award: Lower bound: 839,749,704; 
Total award: Upper bound: 970,851,318; 
Average award: Lower bound: 2,648; 
Average award: Upper bound: 2,752; 
Median income: Lower bound: 9,181; 
Median income: Upper bound: 11,628. 

Type of assistance: Subsidized FFEL or Direct Stafford Loan; 
Number of recipients: Lower bound: 3,658,692; 
Number of recipients: Upper bound: 3,869,237; 
Total award: Lower bound: 15,604,880,694; 
Total award: Upper bound: 17,068,144,196; 
Average award: Lower bound: 4,244; 
Average award: Upper bound: 4,340; 
Median income: Lower bound: 18,754; 
Median income: Upper bound: 20,148. 

Type of assistance: Unsubsidized FFEL or Direct Stafford Loan; 
Number of recipients: Lower bound: 3,154,948; 
Number of recipients: Upper bound: 3,359,231; 
Total award: Lower bound: 17,728,962,613; 
Total award: Upper bound: 19,212,909,259; 
Average award: Lower bound: 5,531; 
Average award: Upper bound: 5,671; 
Median income: Lower bound: 21,190; 
Median income: Upper bound: 23,095. 

Type of assistance: FFEL or Direct PLUS Loan; 
Number of recipients: Lower bound: 0; 
Number of recipients: Upper bound: 0; 
Total award: Lower bound: 0; 
Total award: Upper bound: 0; 
Average award: Lower bound: 0; 
Average award: Upper bound: 0; 
Median income: Lower bound: 0; 
Median income: Upper bound: 0. 

Source: GAO analysis of 2003-2004 National Postsecondary Student Aid 
Study data. 

[End of table] 

Table 8: Selected Postsecondary Education Tax Preferences: 

Type of assistance: Hope Credit; 
Number of returns: Lower bound: 3,115,595; 
Number of returns: Upper bound: 3,414,023; 
Total benefits: Lower bound: 3,064,601,005; 
Total benefits: Upper bound: 3,399,426,275; 
Average benefit: Lower bound: 965; 
Average benefit: Upper bound: 1,016; 
Median income: Lower bound: 37,506; 
Median income: Upper bound: 41,004. 

Type of assistance: Lifetime Learning Credit; 
Number of returns: Lower bound: 3,307,354; 
Number of returns: Upper bound: 3,612,179; 
Total benefits: Lower bound: 1,560,825,683; 
Total benefits: Upper bound: 1,740,857,453; 
Average benefit: Lower bound: 462; 
Average benefit: Upper bound: 493; 
Median income: Lower bound: 38,060; 
Median income: Upper bound: 41,001. 

Type of assistance: Student Loan Interest Deduction; 
Number of returns: Lower bound: 6,432,399; 
Number of returns: Upper bound: 6,849,170; 
Total benefits: Lower bound: 848,115,632; 
Total benefits: Upper bound: 937,085,664; 
Average benefit: Lower bound: 129; 
Average benefit: Upper bound: 140; 
Median income: Lower bound: 42,378; 
Median income: Upper bound: 44,657. 

Type of assistance: Tuition Deduction; 
Number of returns: Lower bound: 3,295,741; 
Number of returns: Upper bound: 3,599,012; 
Total benefits: Lower bound: 1,226,452,349; 
Total benefits: Upper bound: 1,370,953,823; 
Average benefit: Lower bound: 364; 
Average benefit: Upper bound: 391; 
Median income: Lower bound: 51,808; 
Median income: Upper bound: 56,842. 

Source: GAO analysis of Statistics of Income data for 2002. 

[End of table] 

Table 9: Tax Filers Claiming an Education Tax Credit or Tuition 
Deduction: 

Hope Credit, Lifetime Learning Credit, and Tuition Deduction; 
Lower bound; 
1998: 4,482,106; 
1999: 6,233,732; 
2000: 6,606,583; 
2001: 6,997,019; 
2002: 9,319,692. 

Upper bound; 
1998: 4,827,719; 
1999: 6,639,576; 
2000: 7,024,049; 
2001: 7,428,088; 
2002: 9,809,833. 

Source: GAO analysis of Statistics of Income data for 2002. 

[End of table] 

Table 10: Percentage of Aid Recipients and Dollars of Aid by Income 
Category for Dependent Students Served by Selected Title IV Programs: 

Program: Pell Grant; 
Dependent students: Recipients; 
Lower bound; 
$0-20,000: 36.66; 
$20,001-40,000: 45.41; 
$40,001-60,000: 13.17; 
$60,001-80,000: 1.41; 
$80,001-100,000: 0; 
More than $100,000: 0. 

Upper bound; 
$0-20,000: 38.89; 
$20,001-40,000: 47.72; 
$40,001-60,000: 14.76; 
$60,001-80,000: 2.02; 
$80,001-100,000: 0; 
More than $100,000: 0. 

Dependent students: Dollars; 
Lower bound; 
$0-20,000: 46.29; 
$20,001-40,000: 42.41; 
$40,001-60,000: 7.38; 
$60,001-80,000: 0.65; 
$80,001-100,000: 0; 
More than $100,000: 0. 

Upper bound; 
$0-20,000: 48.82; 
$20,001-40,000: 44.89; 
$40,001-60,000: 8.5; 
$60,001-80,000: 1.04; 
$80,001-100,000: 0; 
More than $100,000: 0. 

Program: Stafford Subsidized Loan; 
Dependent students: Recipients; 
Lower bound; 
$0-20,000: 15.41; 
$20,001-40,000: 26.79; 
$40,001-60,000: 22.45; 
$60,001-80,000: 16.1; 
$80,001-100,000: 8.38; 
More than $100,000: 6.23. 

Upper bound; 
$0-20,000: 16.94; 
$20,001-40,000: 28.73; 
$40,001-60,000: 24.3; 
$60,001-80,000: 17.72; 
$80,001-100,000: 9.61; 
More than $100,000: 7.33. 

Dependent students: Dollars; 
Lower bound; 
$0-20,000: 15.32; 
$20,001-40,000: 27.14; 
$40,001-60,000: 22.83; 
$60,001-80,000: 15.68; 
$80,001-100,000: 7.92; 
More than $100,000: 5.87. 

Upper bound; 
$0-20,000: 17.07; 
$20,001-40,000: 29.35; 
$40,001-60,000: 24.94; 
$60,001-80,000: 17.51; 
$80,001-100,000: 9.3; 
More than $100,000: 7.08. 

Program: Stafford Unsubsidized Loan; 
Dependent students: Recipients; 
Lower bound; 
$0-20,000: 6.51; 
$20,001-40,000: 12.83; 
$40,001-60,000: 13.15; 
$60,001-80,000: 17.69; 
$80,001-100,000: 16.68; 
More than $100,000: 27. 

Upper bound; 
$0-20,000: 7.88; 
$20,001-40,000: 14.76; 
$40,001-60,000: 15.21; 
$60,001-80,000: 19.94; 
$80,001-100,000: 18.84; 
More than $100,000: 29.5. 

Dependent students: Dollars; 
Lower bound; 
$0-20,000: 6.22; 
$20,001-40,000: 11.05; 
$40,001-60,000: 11.31; 
$60,001-80,000: 16.69; 
$80,001-100,000: 17.55; 
More than $100,000: 30.3. 

Upper bound; 
$0-20,000: 7.75; 
$20,001-40,000: 12.99; 
$40,001-60,000: 13.41; 
$60,001-80,000: 19.2; 
$80,001-100,000: 20.15; 
More than $100,000: 33.37. 

[End of table] 

Source: GAO analysis of 2003-2004 National Postsecondary Student Aid 
Study data. 

Table 11: Percentage of Aid Recipients and Dollars of Aid by Income 
Category for Independent Students Served by Selected Title IV Programs: 

Program: Pell Grant; Recipients; 
Lower bound; 
$0-20,000: 66.28; 
$20,001-40,000: 26.59; 
$40,001-60,000: 4.59; 
$60,001-80,000: 0; 
$80,001-100,000: 0; 
More than $100,000: 0. 

Upper bound; 
$0-20,000: 68.35; 
$20,001-40,000: 28.57; 
$40,001-60,000: 5.62; 
$60,001-80,000: 0; 
$80,001-100,000: 0; 
More than $100,000: 0. 

Dollars; 
Lower bound; 
$0-20,000: 71.68; 
$20,001-40,000: 23.62; 
$40,001-60,000: 2.32; 
$60,001-80,000: 0; 
$80,001-100,000: 0; 
More than $100,000: 0. 

Upper bound; 
$0-20,000: 73.77; 
$20,001-40,000: 25.65; 
$40,001-60,000: 2.96; 
$60,001-80,000: 0; 
$80,001-100,000: 0; 
More than $100,000: 0. 

Program: Stafford Subsidized Loan; Recipients; 
Lower bound; 
$0-20,000: 49.67; 
$20,001-40,000: 27.54; 
$40,001-60,000: 10.78; 
$60,001-80,000: 4.04; 
$80,001-100,000: 1.3; 
More than $100,000: 0.86. 

Upper bound; 
$0-20,000: 52.62; 
$20,001-40,000: 30.38; 
$40,001-60,000: 13.48; 
$60,001-80,000: 5.36; 
$80,001-100,000: 1.98; 
More than $100,000: 2.38. 

Dollars; 
Lower bound; 
$0-20,000: 49.93; 
$20,001-40,000: 25.26; 
$40,001-60,000: 10.05; 
$60,001-80,000: 3.87; 
$80,001-100,000: 1.2; 
More than $100,000: 0.46. 

Upper bound; 
$0-20,000: 54.61; 
$20,001-40,000: 29.79; 
$40,001-60,000: 14.73; 
$60,001-80,000: 5.4; 
$80,001-100,000: 2.05; 
More than $100,000: 2.65. 

Program: Stafford Unsubsidized Loan; Recipients; 
Lower bound; 
$0-20,000: 44.65; 
$20,001-40,000: 26.59; 
$40,001-60,000: 12.09; 
$60,001-80,000: 5.48; 
$80,001-100,000: 2.31; 
More than $100,000: 2.26. 

Upper bound; 
$0-20,000: 47.82; 
$20,001-40,000: 29.75; 
$40,001-60,000: 15.18; 
$60,001-80,000: 6.87; 
$80,001-100,000: 3.18; 
More than $100,000: 4.08. 

Dollars; 
Lower bound; 
$0-20,000: 44.28; 
$20,001-40,000: 22.51; 
$40,001-60,000: 11.96; 
$60,001-80,000: 6.22; 
$80,001-100,000: 2.86; 
More than $100,000: 3.42. 

Upper bound; 
$0-20,000: 48.37; 
$20,001-40,000: 26; 
$40,001-60,000: 14.78; 
$60,001-80,000: 8.49; 
$80,001-100,000: 4.12; 
More than $100,000: 6.99. 

Source: GAO analysis of 2003-2004 National Postsecondary Student Aid 
Study data: 

[End of table] 

Table 12: Percentage of Tax Filers Claiming Hope and Lifetime Learning 
Credits and Tuition Deduction and Tax Preference Dollars by Income 
Category, Tax Year 2002: 

Type of Aid: Hope Credit; 
Tax filers; 
Lower bound; 
$0-20,000: 16.63; 
$20,001-40,000: 30.43; 
$40,001-60,000: 18.06; 
$60,001-80,000: 16.2; 
$80,001-100,000: 9.45; 
More than $100,000: 0.1. 

Upper bound; 
$0-20,000: 20.29; 
$20,001-40,000: 34.75; 
$40,001-60,000: 21.67; 
$60,001-80,000: 19.7; 
$80,001-100,000: 12.27; 
More than $100,000: 0.62. 

Type of Aid: Dollars; 
Lower bound; 
$0-20,000: 9.14; 
$20,001-40,000: 30.19; 
$40,001-60,000: 20.37; 
$60,001-80,000: 21.75; 
$80,001-100,000: 8.66; 
More than $100,000: 0. 

Upper bound; 
$0-20,000: 11.82; 
$20,001-40,000: 35.06; 
$40,001-60,000: 24.77; 
$60,001-80,000: 26.52; 
$80,001-100,000: 11.7; 
More than $100,000: 0.03. 

Type of Aid: Lifetime Learning Credit; 
Tax filers; 
Lower bound; 
$0-20,000: 14.59; 
$20,001-40,000: 32.04; 
$40,001-60,000: 23.06; 
$60,001-80,000: 14.74; 
$80,001-100,000: 6.73; 
More than $100,000: 0.14. 

Upper bound; 
$0-20,000: 17.89; 
$20,001-40,000: 36.25; 
$40,001-60,000: 26.85; 
$60,001-80,000: 18.03; 
$80,001-100,000: 9.14; 
More than $100,000: 0.67. 

Type of Aid: Dollars; 
Lower bound; 
$0-20,000: 10.73; 
$20,001-40,000: 31.78; 
$40,001-60,000: 22.56; 
$60,001-80,000: 18.58; 
$80,001-100,000: 5.98; 
More than $100,000: 0. 

Upper bound; 
$0-20,000: 13.97; 
$20,001-40,000: 37.02; 
$40,001-60,000: 27.24; 
$60,001-80,000: 23.32; 
$80,001-100,000: 8.79; 
More than $100,000: 0.02. 

Type of Aid: Tuition Deduction; 
Tax filers; 
Lower bound; 
$0-20,000: 18.38; 
$20,001-40,000: 16.56; 
$40,001-60,000: 14.81; 
$60,001-80,000: 11.03; 
$80,001-100,000: 14.08; 
More than $100,000: 15.23. 

Upper bound; 
$0-20,000: 21.91; 
$20,001-40,000: 20.04; 
$40,001-60,000: 18.14; 
$60,001-80,000: 14.01; 
$80,001-100,000: 17.33; 
More than $100,000: 18.49. 

Type of Aid: Dollars; 
Lower bound; 
$0-20,000: 9.41; 
$20,001-40,000: 8.83; 
$40,001-60,000: 11.55; 
$60,001-80,000: 11.53; 
$80,001-100,000: 20.79; 
More than $100,000: 26.16. 

Upper bound; 
$0-20,000: 11.93; 
$20,001-40,000: 11.63; 
$40,001-60,000: 15.1; 
$60,001-80,000: 15.52; 
$80,001-100,000: 25.91; 
More than $100,000: 31.65. 

Source: GAO analysis of Statistics of Income data for 2002. 

[End of table] 

Table 13: Percentage of Form 1098-Ts with Postsecondary Expense 
Information in 2002: Point Estimates: 

1098Ts with expense information; 
Number of returns: 1,795,180; 
Percent of returns: 13. 

1098Ts without expense information; 
Number of returns: 12,356,444; 
Percent of returns: 87. 

Source: GAO analysis of Statistics of Income data for 2002. 

[End of table] 

Table 14: Percentage of Form 1098-Ts with Postsecondary Expense 
Information in 2002: Confidence Intervals: 

1098Ts with expense information; 
Number of returns: Lower bound: 1,687,744.88; 
Number of returns: Upper bound: 1,902,614.62; 
Percent of returns: Lower bound: 11.97; 
Percent of returns: Upper bound: 13.4. 

1098Ts without expense information; 
Number of returns: Lower bound: 12,087,410.46; 
Number of returns: Upper bound: 12,625,476.86; 
Percent of returns: Lower bound: 86.6; 
Percent of returns: Upper bound: 88.03. 

Source: GAO analysis of Statistics of Income data for 2002. 

[End of table] 

Table 15: Percentage of Taxpayers Apparently Eligible to Claim an 
Education Tax Credit or Tuition Deduction in 2002: Point Estimates: 

Total; 
Number of returns: 1,795,180; 
Percent of returns: 100. 

Potentially eligible; 
Number of returns: 1,386,659; 
Percent of returns: 77. 

All Other; 
Number of returns: 408,521; 
Percent of returns: 23. 

Source: GAO analysis of Statistics of Income data for 2002. 

[End of table] 

Table 16: Percentage of Taxpayers Apparently Eligible to Claim an 
Education Tax Credit or Tuition Deduction in 2002: Confidence 
Intervals: 

Total; 
Number of Returns: Lower bound: 1,795,176.75; 
Number of returns: Upper bound: 1,795,179.75; 
Percent of returns: Lower bound: 100; 
Percent of returns: Upper bound: 100. 

Potentially eligible; 
Number of Returns: Lower bound: 1,290,394.34; 
Number of returns: Upper bound: 1,482,923.26; 
Percent of returns: Lower bound: 74.83; 
Percent of returns: Upper bound: 79.66. 

All other; 
Number of Returns: Lower bound: 360,292.26; 
Number of returns: Upper bound: 456,749.64; 
Percent of returns: Lower bound: 20.34; 
Percent of returns: Upper bound: 25.17. 

Source: GAO analysis of Statistics of Income data for 2002. 

[End of table] 

Table 17: Percentage of Apparently Eligible Taxpayers to Claim an 
Education Tax Credit or Tuition Deduction That Failed to Do So in 2002: 
Point Estimates: 

Failed to claim; 
Number of returns: 373,595; 
Percent of returns: 27. 

Source: GAO analysis of Statistics of Income data for 2002. 

[End of table] 

Table 18: Percentage of Apparently Eligible Taxpayers to Claim an 
Education Tax Credit or Tuition Deduction That Failed to Do So in 2002: 
Confidence Intervals: 

Failed to claim; 
Number of returns: Lower bound: 323,504.26; 
Number of returns: Upper bound: 423,686.08; 
Percent of returns: Lower bound: 23.85; 
Percent of returns: Upper bound: 30.04. 

Source: GAO analysis of Statistics of Income data for 2002. 

[End of table] 

Table 19: Amounts by Which Apparently Eligible Taxpayers Failed to 
Reduce Their Tax Liability: Point Estimates: 

Median; 
Inaction led to increased tax liability: 52.45. 

Mean; 
Inaction led to increased tax liability: 168.66. 

10th percentile; 
Inaction led to increased tax liability: 4.34. 

25th percentile; 
Inaction led to increased tax liability: 10.94. 

75th percentile; 
Inaction led to increased tax liability: 207.2. 

90th percentile; 
Inaction led to increased tax liability: 532.96. 

Maximum value; 
Inaction led to increased tax liability: 1,116. 

Source: GAO analysis of Statistics of Income data for 2002. 

[End of table] 

Table 20: Amounts by Which Apparently Eligible Taxpayers Failed to 
Reduce Their Tax Liability: Confidence Intervals: 

Median: Lower bound; 
Inaction led to increased tax liability: 34.69. 

Median: Upper bound; 
Inaction led to increased tax liability: 73.57. 

Mean: Lower bound; 
Inaction led to increased tax liability: 136.57. 

Mean: Upper bound; 
Inaction led to increased tax liability: 200.76. 

10th percentile: Lower bound; 
Inaction led to increased tax liability: 3.01. 

10th percentile: Upper bound; 
Inaction led to increased tax liability: 6.57. 

25th percentile: Lower bound; 
Inaction led to increased tax liability: 8.66. 

25th percentile: Upper bound; 
Inaction led to increased tax liability: 16.72. 

75th percentile: Lower bound; 
Inaction led to increased tax liability: 137.73. 

75th percentile: Upper bound; 
Inaction led to increased tax liability: 312.14. 

90th percentile: Lower bound; 
Inaction led to increased tax liability: 429.22. 

90th percentile: Upper bound; 
Inaction led to increased tax liability: 729.58. 

Source: GAO analysis of Statistics of Income data for 2002. 

[End of table] 

Table 21: Percentage of Apparently Eligible Taxpayers That Claimed the 
Tuition Deduction but Would Have Been Better off Claiming the Lifetime 
Learning Credit in 2002: Point Estimates: 

Would have been better off claiming Lifetime Learning Credit; 
Number of returns: 50,908; 
Percent of returns: 21. 

Source: GAO analysis of Statistics of Income data for 2002. 

[End of table] 

Table 22: Percentage of Apparently Eligible Taxpayers That Claimed the 
Tuition Deduction but Would Have Been Better off Claiming the Lifetime 
Learning Credit in 2002: Confidence Intervals: 

Would have been better off claiming Lifetime Learning Credit; 
Number of Returns: Lower bound: 34,819.89; 
Number of returns: Upper bound: 70,274.77; 
Percent of returns: Lower bound: 14.53; 
Percent of returns: Upper bound: 29.33. 

Source: GAO analysis of Statistics of Income data for 2002. 

[End of table] 

Table 23: Amounts by Which Apparently Eligible Taxpayers Could Have 
Reduced Their Tax Liability in 2002: Point Estimates: 

Median; 
Lifetime Learning Credit produced larger reduction: 50.67. 

Mean; 
Lifetime Learning Credit produced larger reduction: 83.22. 

10th percentile; 
Lifetime Learning Credit produced larger reduction: 7.35. 

25th percentile; 
Lifetime Learning Credit produced larger reduction: 26.23. 

75th percentile; 
Lifetime Learning Credit produced larger reduction: 119.6. 

90th percentile; 
Lifetime Learning Credit produced larger reduction: 157.91. 

Maximum value; 
Lifetime Learning Credit produced larger reduction: 556. 

[End of table] 

Source: GAO analysis of Statistics of Income data for 2002. 

Table 24: Amounts by Which Apparently Eligible Taxpayers Could Have 
Reduced Their Tax Liability in 2002: Confidence Intervals: 

Median: Lower bound; 
Lifetime Learning Credit produced larger reduction: 32.89. 

Median: Upper bound; 
Lifetime Learning Credit produced larger reduction: 84.27. 

Mean: Lower bound; 
Lifetime Learning Credit produced larger reduction: 49.76. 

Mean: Upper bound; 
Lifetime Learning Credit produced larger reduction: 116.68. 

10th percentile: Lower bound; 
Lifetime Learning Credit produced larger reduction: . 

10th percentile: Upper bound; 
Lifetime Learning Credit produced larger reduction: 27.14. 

25th percentile: Lower bound; 
Lifetime Learning Credit produced larger reduction: 10.7. 

25th percentile: Upper bound; 
Lifetime Learning Credit produced larger reduction: 47.56. 

75th percentile: Lower bound; 
Lifetime Learning Credit produced larger reduction: 62.07. 

75th percentile: Upper bound; 
Lifetime Learning Credit produced larger reduction: 148.53. 

90th percentile: Lower bound; 
Lifetime Learning Credit produced larger reduction: 106.35. 

90th percentile: Upper bound; 
Lifetime Learning Credit produced larger reduction: . 

Source: GAO analysis of Statistics of Income data for 2002. 

[End of table] 

Table 25: Percentage of Apparently Eligible Taxpayers That Claimed the 
Lifetime Learning Credit but Would Have Been Better off Claiming the 
Tuition Deduction in 2002: Point Estimates: 

Would have been better off claiming the Tuition Deduction; 
Number of returns: 22,469; 
Percent of returns: 8. 

Source: GAO analysis of Statistics of Income data for 2002. 

[End of table] 

Table 26: Percentage of Apparently Eligible Taxpayers That Claimed the 
Lifetime Learning Credit but Would Have Been Better off Claiming the 
Tuition Deduction in 2002: Confidence Intervals: 

Would have been better off claiming the Tuition Deduction; 
Number of Returns: Lower bound: 12,228.08; 
Number of returns: Upper bound: 37,165.3; 
Percent of returns: Lower bound: 4.48; 
Percent of returns: Upper bound: 13.61. 

Source: GAO analysis of Statistics of Income data for 2002. 

[End of table] 

Table 27: Amounts by Which Apparently Eligible Taxpayers Could Have 
Reduced Their Tax Liability in 2002: Point Estimates: 

Median; 
Tuition Deduction produced larger reduction: 108.05. 

Mean; 
Tuition Deduction produced larger reduction: 137.68. 

10th percentile; 
Tuition Deduction produced larger reduction: 17.3. 

25th percentile; 
Tuition Deduction produced larger reduction: 36.42. 

75th percentile; 
Tuition Deduction produced larger reduction: 191.55. 

90th percentile; 
Tuition Deduction produced larger reduction: 237.42. 

Maximum value; 
Tuition Deduction produced larger reduction: 456. 

Source: GAO analysis of Statistics of Income data for 2002. 

[End of table] 

Table 28: Amounts by Which Apparently Eligible Taxpayers Could Have 
Reduced Their Tax Liability in 2002: Confidence Intervals: 

Median: Lower bound; 
Deduction produced larger reduction: 37.39. 

Median: Upper bound; 
Deduction produced larger reduction: 190.77. 

Mean: Lower bound; 
Deduction produced larger reduction: 77.08. 

Mean: Upper bound; 
Deduction produced larger reduction: 198.28. 

10th percentile: Lower bound; 
Deduction produced larger reduction: 4.36. 

10th percentile: Upper bound; 
Deduction produced larger reduction: 41.46. 

25th percentile: Lower bound; 
Deduction produced larger reduction: 20.16. 

25th percentile: Upper bound; 
Deduction produced larger reduction: 108.84. 

75th percentile: Lower bound; 
Deduction produced larger reduction: 107.3. 

75th percentile: Upper bound; 
Deduction produced larger reduction: 244.85. 

90th percentile: Lower bound; 
Deduction produced larger reduction: 154.73. 

90th percentile: Upper bound; 
Deduction produced larger reduction: 350.13. 

Source: GAO analysis of Statistics of Income data for 2002. 

[End of table] 

Table 29: Percentage of Apparently Eligible Taxpayers That Claimed a 
Hope Credit but Would Have Been Better off Claiming a Lifetime Learning 
Credit in 2002: Point Estimates: 

Total; 
Number of returns: 271,494; 
Percent of returns: 100. 

Would have been better off claiming Lifetime Learning Credit; 
Number of returns: 0; 
Percent of returns: 0. 

All other; 
Number of returns: 271,494; 
Percent of returns: 100. 

Source: GAO analysis of Statistics of Income data for 2002. 

[End of table] 

Table 30: Percentage of Apparently Eligible Taxpayers That Claimed a 
Hope Credit but Would Have Been Better off Claiming a Lifetime Learning 
Credit in 2002: Confidence Intervals: 

Total; 
Number of Returns: Lower bound: 271,491.04; 
Number of returns: Upper bound: 271,494.04; 
Percent of returns: Lower bound: 100; 
Percent of returns: Upper bound: 100. 

Would have been better off claiming Lifetime Learning Credit; 
Number of Returns: Lower bound: 0; 
Number of returns: Upper bound: 0; 
Percent of returns: Lower bound: 0; 
Percent of returns: Upper bound: 0. 

All other; 
Number of Returns: Lower bound: 271,491.04; 
Number of returns: Upper bound: 271,494.04; 
Percent of returns: Lower bound: 100; 
Percent of returns: Upper bound: 100. 

Source: GAO analysis of Statistics of Income data for 2002. 

[End of table] 

Table 31: Percentage of Suboptimal Choices Made by Paid Tax Preparers: 
Point Estimates: 

Total; 
Taxpayers making suboptimal choice: Number of returns: 446,972; 
Taxpayers making suboptimal choice: Percent: 100. 

No preparer; 
Taxpayers making suboptimal choice: Number of returns: 219,139; 
Taxpayers making suboptimal choice: Percent: 49.03. 

Paid preparer; 
Taxpayers making suboptimal choice: Number of returns: 223,011; 
Taxpayers making suboptimal choice: Percent: 49.89. 

IRS prepared/reviewed; 
Taxpayers making suboptimal choice: Number of returns: 0; 
Taxpayers making suboptimal choice: Percent: 0. 

VITA/self help/outreach/elderly assistance; 
Taxpayers making suboptimal choice: Number of returns: 4,822; 
Taxpayers making suboptimal choice: Percent: 1.08. 

Source: GAO analysis of Statistics of Income data for 2002. 

[End of table] 

Table 32: Percentage of Suboptimal Choices Made by Paid Tax Preparers: 
Confidence Intervals: 

Total; 
Taxpayers Making Suboptimal choice: Number of returns: Lower bound: 
392,039; 
Taxpayers Making Suboptimal choice: Number of returns: Upper bound: 
501,905; 
Taxpayers Making Suboptimal choice: Percent: Lower bound: 99.72; 
Taxpayers Making Suboptimal choice: Percent: Lower bound: 100. 

No preparer; 
Taxpayers Making Suboptimal choice: Number of returns: Lower bound: 
179,777; 
Taxpayers Making Suboptimal choice: Number of returns: Upper bound: 
258,500; 
Taxpayers Making Suboptimal choice: Percent: Lower bound: 42.87; 
Taxpayers Making Suboptimal choice: Percent: Lower bound: 55.19. 

Paid preparer; 
Taxpayers Making Suboptimal choice: Number of returns: Lower bound: 
184,952; 
Taxpayers Making Suboptimal choice: Number of returns: Upper bound: 
261,070; 
Taxpayers Making Suboptimal choice: Percent: Lower bound: 43.74; 
Taxpayers Making Suboptimal choice: Percent: Lower bound: 56.05. 

IRS prepared/reviewed; 
Taxpayers Making Suboptimal choice: Number of returns: Lower bound: 0; 
Taxpayers Making Suboptimal choice: Number of returns: Upper bound: 0; 
Taxpayers Making Suboptimal choice: Percent: Lower bound: 0; 
Taxpayers Making Suboptimal choice: Percent: Lower bound: 0.28. 

VITA/self help/outreach/elderly assistance; 
Taxpayers Making Suboptimal choice: Number of returns: Lower bound: 
1,131; 
Taxpayers Making Suboptimal choice: Number of returns: Upper bound: 
9,328; 
Taxpayers Making Suboptimal choice: Percent: Lower bound: 0.26; 
Taxpayers Making Suboptimal choice: Percent: Lower bound: 2.91. 

Source: GAO analysis of Statistics of Income data for 2002. 

[End of table] 

[End of section] 

Appendix III: Postsecondary-Education-Related Tax Preferences: 

We analyzed the following postsecondary-education-related tax 
preferences in detail in this review. 

Lifetime Learning Credit: Income-based tax credit claimed by tax filer 
on behalf of students enrolled in one or more postsecondary education 
courses. 

Hope Credit: Income-based tax credit claimed by tax filer on behalf of 
students enrolled at least half-time in an eligible program of study 
and who are in their first 2 years of postsecondary education. 

Student Loan Interest Deduction: Income-based tax deduction claimed by 
tax filer on behalf of students who took out qualified student loans 
while enrolled at least half time. 

Tuition and Fees Deduction: Income-based tax deduction claimed by tax 
filer on behalf of students who are enrolled in one or more 
postsecondary education course and have either a high school diploma or 
a General Educational Development (GED) credential. 

Section 529 Qualified Tuition Programs--College Savings Programs and 
Prepaid Tuition Programs: Non-income-based programs that provide 
favorable tax treatment to investments and distributions used to pay 
the expenses of future or current postsecondary students. 

Coverdell Education Savings Accounts: Income-based savings program 
providing favorable tax treatment to investments and distributions used 
to pay the expenses of future or current elementary, secondary, or 
postsecondary students. 

The following postsecondary-education-related tax preferences were not 
included in this review. 

Scholarships, Fellowships, Grants, and Tuition Reductions Income 
Exclusion: Scholarships and fellowships paid directly to degree-
candidate students or to their educational institutions for tuition and 
fees are not taxed as income. However, scholarships and fellowships 
covering room and board or transportation or paid in return for 
services, such as teaching, are taxable. Also, tuition reductions, for 
example discounts given to employees of an educational institution or 
their children, are not counted as income for tax purposes. 

Employer-Provided Education Benefits Exclusion: Financial assistance 
provided by employers to employees up to $5,250 in 2004 to pay for 
employee educational expenses is not counted as income for tax 
purposes. Only funds used to pay for tuition, fees, books, equipment, 
and similar expenses qualify. Funds from an employer and used to pay 
for meals, lodging, or transportation count as income for tax 
purposes.[Footnote 58] 

Student Loan Forgiveness Exclusion: Student loan repayment assistance 
or cancellation provided in exchange for working for a period of time 
in certain professions for any of a broad class of employers is not 
treated is taxable income. 

Education Savings Bonds: Interest earned on U.S. savings bonds is not 
taxed if the bond holder is paying postsecondary education tuition and 
fees or making contributions to a 529 qualified tuition program or a 
Coverdell education savings account. The exclusion is available to tax 
filers with modified adjusted gross incomes below $74,850 ($119,750 if 
married filing jointly or qualified widow(er)). 

Business Expense Deduction of Work-Related Education: Tax filers may 
deduct the cost of work-related education if the education is required 
by their employer or the law to maintain the tax filer's present 
salary, status, or job and maintains or improves skills needed in the 
tax filer's present work. Education to meet the minimum educational 
requirements of the tax filer's present trade or business or education 
towards a new trade or business does not qualify. The tax filer must 
itemize deductions on form 1040 Schedule A, C, or F. The amount of the 
deduction is the total of work-related education expenses plus other 
job and certain miscellaneous expenses that is in excess of 2 percent 
of adjusted gross income. 

Uniform Transfers to Minors: Money paid directly to an educational 
institution for another person's tuition are not subject to gift 
taxes.[Footnote 59] 

Early Withdrawals From Individual Retirement Accounts: The 10 percent 
additional tax that applies to withdrawal of funds from an Individual 
Retirement Account does not apply if the funds are used to pay for the 
postsecondary education expenses of the account holder or his or her 
dependent. 

Parental Personal Exemption for Dependent Students: The tax code 
definition of "dependent" for tax filing purposes involves 5 tests, 
including whether the dependent is (1) a member of your household or 
related to you, (2) a U.S. citizen or resident, (3) filing a joint tax 
return, (4) earning less than $3,100, and (5) receiving more than half 
of their support from the taxpayer claiming the dependent. In 2004, 
someone over age 18, earning more than $3,100, and not living with the 
tax filer throughout the year would likely not qualify as a dependent. 
However, the tax code makes exceptions to these rules for students 
under age 24, thus postsecondary education students are still 
dependents for tax purposes while they are in school.[Footnote 60] 

[End of section] 

Appendix IV: Comments from the Department of Education: 

UNITED STATES DEPARTMENT OF EDUCATION: 

OFFICE OF POSTSECONDARY EDUCATION: 

THE ASSISTANT SECRETARY: 

Cornelia M. Ashby: 
Director, Education, Workforce, and Income Security Issues:
United States Government Accountability Office: 
Washington, DC 20548: 

JUL 12 2005 

Dear Ms. Ashby: 

Thank you for the opportunity to review and comment on your draft 
report, Student Aid and Postsecondary Tax Preferences: Limited Research 
Exists on the Effectiveness of Tools to Assist Students and Families 
Through Title IV Student Aid and Tax Preferences (GAO-05-684). 

While we agree with your assessment that more research should be done 
on various Federal programs that assist students enrolled in 
postsecondary education, we disagree with your conclusions that the 
Title IV programs, in particular, have not been adequately studied. 

The report ignores the fact that the Government Accountability Office's 
(GAO) analysis of the Federal Student Aid (FSA) program could not have 
been conducted if the U.S. Department of Education's (Department) 
National Center for Education Statistics (LACES) had not recently 
completed the 6T National Postsecondary Student Aid Study (NPSAS). It 
also fails to mention the nearly 60 reports and other publications 
LACES prepared using data from NPSAS, the Survey of Beginning 
Postsecondary Students Longitudinal Study, and the Baccalaureate and 
Beyond Student Survey, each repeated 4 times. The LACES prepared the 
publications based on these vital data sources about the FSA programs. 

One LACES report not considered, Persistence and Attainment of 
Beginning Students with Pell Grants (LACES Number 2002169, Released May 
7, 2002), concludes that, among all low-and middle-income beginning 
students who were enrolled at four-year institutions in 1995-96, no 
differences in three-year persistence rates were detected between Pell 
Grant recipients and non-recipients. The GAO draft report fails to cite 
this study. 

As indicated in the draft report, the Department is committed to 
continuing to increase its research associated with the effectiveness 
of our programs. However, GAO's failure to acknowledge such an 
extensive body of research presents an incomplete and inaccurate 
assessment. 

Sincerely, 

Signed by: 

Sally L. Stroup: 

[End of section] 

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(450324): 

FOOTNOTES 

[1] Tax preferences--also known as tax expenditures--are reductions in 
tax liabilities that result from preferential provisions in the tax 
code, such as exemptions and exclusions from taxation, deductions, 
credits, deferrals, and preferential tax rates. 

[2] Tax filers may claim only one of the tax preferences above for a 
single student. Families with more than one student with eligible 
expenses may claim more than one of these tax preferences. 

[3] Both data sets report 2002 adjusted gross income. In this report, 
dependent student income equals 2002 parental adjusted gross income, 
while independent student income equals the student's 2002 adjusted 
gross income (and, if married, the spouse's adjusted gross income). 

[4] Consolidation loans are also authorized under title IV. These loans 
allow borrowers to combine multiple student loans, possibly from 
different lenders and from different loan programs, into a single new 
loan with extended repayment periods. Because consolidation loans do 
not generally result in an increase in loan principal, consolidation 
loans are not addressed in this review. However, the federal government 
can incur significant costs in providing borrowers with these loans. 
See GAO, Student Loan Programs: As Federal Costs of Loan Consolidation 
Rise, Other Options Should Be Examined, GAO-04-101 (Washington, D.C.: 
Oct. 31, 2003) and Student Loan Programs: Lower Interest Rates and 
Higher Loan Volume Have Increased Federal Consolidation Loan Costs, GAO-
04-568T (Washington, D.C.: Mar. 17, 2004). 

[5] While called "unsubsidized," the federal government can still incur 
costs on such loans, including the costs associated with borrowers who 
default on their loans and, under the Federal Family Education Loan 
Program, the costs of making payments to lenders to ensure them a 
minimum federally guaranteed yield. 

[6] To be classified as an independent student for the purpose of 
receiving title IV financial aid, students must meet one of the 
following criteria: (1) be a veteran of the armed services; (2) be age 
24 years or older by December 31ST of the award year; (3) be married; 
(4) be enrolled in a graduate or professional education 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 independent through the exercise of their professional judgment. 

[7] These may include child care expenses for parents of young 
dependent children or supportive services for disabled students. 

[8] Certain aspects of the tax-favored treatment of section 529 
programs that were enacted in the Economic Growth and Tax Relief Act of 
2001 are subject to expire on December 31, 2010, if not extended. 

[9] For example, scholarships covering tuition and fees and tuition 
reductions for the children of employees of an educational institution 
are not counted as income for income tax purposes. Similarly, student 
loans forgiven when a graduate goes into certain professions are also 
not subject to federal income taxes. 

[10] For example, tax filers may claim postsecondary education students 
as dependents after age 18, even if the student has his or her own 
income over the limit that would otherwise apply. Also, gift taxes do 
not apply to funds used for certain postsecondary educational expenses, 
even for amounts in excess of the usual $11,000 limit on gifts. In 
addition, funds withdrawn early from an Individual Retirement Account 
are not subject to the usual 10 percent penalty when used for either a 
tax filer's or his or her dependent's postsecondary educational 
expenses. 

[11] The 8.4 million title IV aid recipient figure is an unduplicated 
count of students, i.e., a student receiving both a grant and a loan is 
counted only once. Each of the 9.6 million tax filers represents at 
least one student and in some cases more than one student. A tax filer 
with more than one dependent with qualified educational expenses, or 
with qualified expenses of his or her own along with those of a 
dependent, may claim more than one tax preference on his or her tax 
return as long as other eligibility criteria are met. 

[12] Campus-based aid programs authorized under title IV differ from 
these programs in funding and eligibility: institutions provide 
matching funding for federal spending, and participating institutions 
distribute aid using institution-specific criteria consistent with 
federal program requirements. Because they have institution-specific 
criteria, the relationship between program rules and the distribution 
of benefits is more complex and excluded from our analysis. 

[13] Estimated financial assistance includes the Pell Grant and most 
other sources of state, federal, private, and institutional aid. 

[14] Additionally, loan amounts for both subsidized and unsubsidized 
loans are subject to statutory limits on annual and cumulative 
borrowing. 

[15] The earnings portion of a withdrawal from a Coverdell Education 
Savings Account is taxed at the student's marginal rate, rather than 
the rate of the parents. For parents with more than $100,000 in 
household income, nonqualified withdrawals from such an account, even 
with a 10 percent tax penalty, are taxed at a lower rate than 
withdrawals from a nonadvantaged account. See Susan Dynarski, High 
Income Families Benefit Most from New Education Savings Incentives, Tax 
Policy Issues and Options, No. 9 (February 2005). 

[16] Advisory Committee on Student Financial Assistance, The Student 
Aid Gauntlet, Final Report of the Special Study of Simplification of 
Need Analysis and Application for Title IV Aid, (January 2005). Kane 
(1995) suggests that providing better information about financial aid 
and streamlining the process of applying for aid could increase 
enrollment. 

[17] See, for example, U.S. Congress, Joint Committee on Taxation, 
Study of the Overall State of the Federal Tax System, vol. II (April 
2001); U.S. Congress, Joint Committee on Taxation, Present Law and 
Analysis Relating to Tax Benefits for Higher Education (July 21, 2004); 
Nina E. Olson (National Taxpayer Advocate), "Complexity, Compliance, 
and Communication: Why Should Tax Filers Comply in a Complex and 
Changing Tax Environment?" (presentation before the President's 
Advisory Panel on Federal Tax Reform, Mar. 3, 2005). 

[18] We examined whether tax filers had (1) tax liability after 
claiming other tax credits, (2) net educational expenses after 
accounting for scholarships and grants as reported on the Form 1098-T, 
and (3) taxable income under program thresholds for tax year 2002. We 
also examined whether tax filers were married filing separately or 
filed a Form 1040EZ because this would prevent tax filers from being 
able to claim the education tax credits or tuition deduction. We were 
unable to consider other possible explanations, including whether tax 
filers did not meet certain qualification requirements, such as, in the 
case of the Hope tax credit, whether the student was in his or her 
first 2 years of postsecondary education. Eligibility for more than one 
tax preference for the same student does not mean that a tax filer may 
claim more than one--the tax filer must choose just one of the three 
tax preferences we discuss here per student. 

[19] Our analysis considered the difference between (1) the 2002 
maximum allowable Lifetime Learning credit, calculated from 20 percent 
of each tax filer's reported qualified educational expenses of up to 
$5,000 and (2) the amount of possible deduction from income for 
qualified educational expenses of up to $3,000 in combination with the 
tax filer's 2002 marginal tax rate. 

[20] Department of Treasury, IRS Publication 970, Tax Benefits for 
Education (2004). 

[21] The 12 programs and 2 others not listed in the Publication are 
listed in appendix III. 

[22] Albert J. Davis, Choice Complexity in Tax Benefits for Higher 
Education, National Tax Journal, Vol. LV, No. 3 (September 2002). 

[23] See, for example, U.S. Congress, Joint Committee on Taxation, 
Present Law and Analysis Relating to Tax Benefits for Higher Education 
(July 21, 2004); U.S. Congress, Joint Committee on Taxation, Study of 
the Overall State of the Federal Tax System, vol. II (April 2001). 

[24] Credit eligibility depends, in part, upon the academic year in 
which the student is enrolled, the number of credits taken by the 
student, the student's status with respect to a degree or certificate 
program, and the adjusted gross income of the parents. 

[25] Fees and expenses are qualified only if they must be paid to the 
institution as a condition of enrollment or attendance. 

[26] Study of the Overall State of the Federal Tax System, vol. II, 125-
6. 

[27] The new nontaxable distribution figure is calculated $1,200 x 
($1,500/$3,600) = $500. The taxable portion then becomes $1,200 -$500 
= $700. 

[28] The Higher Education Act stipulates that the Hope and Lifetime 
Learning tax credits may not be considered either as estimated 
financial assistance in the assessment of aid eligibility, or as income 
or assets in the calculation of the expected family contribution. 

[29] See Dynarski (2004). These calculations include school need-based 
grants and need-based federal aid (grant aid, work-study, and the 
Perkins and Stafford subsidized federal loans). 

[30] GAO, Student Aid and Tax Benefits: Better Research and Guidance 
Will Facilitate Comparison of Effectiveness and Student Use, GAO-02-751 
(Washington, D.C.: Sept. 13, 2002). 

[31] Department of Education, "Treatment of Coverdell Accounts and 529 
Tuition Plans," Dear Colleague Letter, DCL ID: GEN-04-02 (posted Jan. 
22, 2004). 

[32] Dr. Susan Dynarski, testimony on "The Role of Higher Education 
Financing in Strengthening U.S. Competitiveness in a Global Economy" 
before the U.S. Congress, Senate Committee on Finance (July 22, 2004). 

[33] We looked for studies addressing a program or tax preference's 
affect on rates of postsecondary attendance, persistence, and choice 
because these measures have been the focus of congressional concern as 
expressed in committee reports, statutorily established study 
commissions, and requests for our work from Congress. 

[34] GAO-02-751. 

[35] Hansen (1983), Kane (1995), and Kitmitto (2004) found that Pell 
Grants had little or no impact on attendance, while Seftor and Turner 
(2002) found they increased attendance for students of from 22 to 35 
years of age. 

[36] See Li (1999), Bettinger (2004), and Kitmitto (2004) for research 
on the impact of Pell Grants on persistence. Angrist (1993) and Bound 
and Turner (2002) found that the G.I. Bill and other veteran's benefits 
increased the amount of college completed. Dynarski (2003) found that 
the Social Security Student Benefit Program increased college 
completion as well. Dynarski (2004) found that merit aid increased 
college completion. 

[37] See Reyes (1995), Dynarski (2002), and Long (2004), which focuses 
on low-income students. 

[38] Likewise, because the composition of financial aid has changed--
the frequency and levels of borrowing have increased--an equivalent 
(real) change in loan amounts may elicit a different response. In 
particular, some students, especially lower-income students, may 
already have large loan levels and be less willing to increase their 
loan debt than they were in 1977. 

[39] See Reyes (1995) for estimates on how loans affect persistence and 
Dynarski (2002) for information on how loans affect college choice. 

[40] See Long (2003b), which does not separately examine the Hope and 
the Lifetime Learning tax credits. A few additional papers have 
simulated the effect of the Hope tax credit on college attendance, 
including Cronin (1997) and Cameron and Heckman (1999). These 
estimates, however, are based on the findings of how students respond 
to other financial aid policies, which may be different from the 
response to these tax credits. In addition, Cronin (1997) bases her 
analysis on a proposed version of the tax credit as opposed to the 
enacted tax credit. 

[41] Bershadker and Cronin (2004). 

[42] There is also research on the effects of financial aid policy, in 
general, on choice. Linsenmeier, Rosen, and Rouse (2002) and Van Der 
Klaauw (2002) found that financial aid policy at specific schools 
positively affected the likelihood of whether accepted students chose 
to attend those schools. Avery and Hoxby (2003), focusing on high 
aptitude students, found that larger amount of grants, loans, and work-
study made from all sources--federal, state, and institutions--were 
associated with students who were more likely to attend that school. 
Although it is unlike any existing federal program, Dynarski (2000) 
found that the Georgia Hope program shifted some would-be 2-year school 
students to 4-year schools and caused some students to choose to stay 
within state for college. 

[43] See Leslie and Brinkman (1988), McPherson and Shapiro (1991), 
Rouse (1994), Kane (1995) and (1999), and Cameron and Heckman (1999) on 
the effects of tuition changes. See studies of the Georgia Hope 
Scholarship by Dynarski (2000) and Cornwell, Mustard, and Sridhar 
(2004) as well as those conducted by Bound and Turner (2002) on the 
G.I. Bill, by Dynarski (2003) on the Social Security Benefit Program, 
and by Kane (2003) on the Cal Grant Program. 

[44] Kane (2002). 

[45] For studies of the effect on tuition, see Li (1999) for Pell 
Grants, Long (2003b) for tax credits, and Acosta (2001) for federal 
grant and federal loan aid. The Georgia Hope Scholarship has also been 
found to increase college costs by Long (2003a). 

[46] GAO, Student Aid and Tax Benefits: Better Research and Guidance 
Will Facilitate Comparison of Effectiveness and Student Use, GAO-02-751 
(Washington, D.C.: September 13, 2002). 

[47] GAO, 21ST Century Challenges: Reexamining the Base of the Federal 
Government, GAO-05-325SP (Washington, D.C.: February 2005). 

[48] GAO, Performance Budgeting: Observations on the Use of OMB's 
Program Assessment Rating Tool for the Fiscal Year 2004 Budget, GAO-04-
174 (Washington, D.C.: January 30, 2004). 

[49] OMB describes the PART as a diagnostic tool meant to provide a 
consistent approach to evaluating federal programs as part of the 
executive budget formulation process. It applies 25 questions under 
four broad topics: (1) program purpose and design, (2) strategic 
planning, (3) program management, and (4) program results. It also uses 
additional questions specific to the mechanism or approach used to 
deliver the program, such as grants or credit programs (e.g. student 
loans). OMB has not systematically applied the PART to tax preferences. 

[50] 21ST Century Challenges: Performance Budgeting Could Help Promote 
Necessary Reexamination, GAO-05-709T (Washington D.C.: June 14, 2005). 

[51] GAO-02-751. 

[52] Wei, C.C., and Horn, L., Persistence and Attainment of Beginning 
Students with Pell Grants, NCES 2002-169, U.S. Department of Education, 
National Center for Education Statistics (Washington, D.C.: May 2002). 

[53] A similar conclusion is reached in Review of NCES Research on 
Financial Aid and College Participation and Omitted Variables and 
Sample Selection Issues in the NCES Research on Financial Aid and 
College Participation, Reports Prepared for the Advisory Committee on 
Student Financial Assistance by Donald E. Heller and William E. Becker 
(September 2003). 

[54] GAO, Student Aid and Tax Benefits: Better Research and Guidance 
Will Facilitate Comparison of Effectiveness and Student Use, GAO-02-751 
(Washington, D.C.: Sept. 13, 2002). 

[55] Office of Management and Budget, Appendix, Budget of the United 
States Government, Fiscal Year 2006 (Washington, D.C.: Feb 7, 2005). 

[56] The NPSAS school year begins July 1 and ends on June 30 of the 
following year. 

[57] The College Savings Plan Network collects information from the 
states about the numbers of 529 accounts. The data are voluntarily 
provided by the states. On the basis of our interview with College 
Savings Plan Network staff, we determined that these data were 
sufficiently reliable for our use in this study. 

[58] Under the Working Condition Fringe Benefit Exclusion, employer-
provided educational assistance that exceeds $5,250 may still not be 
counted as income, provided it is used to pay for any educational 
expenses that are required by the employer or the law to maintain the 
tax filer's present salary, status, or job and maintain or improve 
skills needed in the tax filer's present work. 

[59] This tax preference is not listed in the 2004 IRS Publication 970. 

[60] Ibid. 

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