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Pell Grants vs. Tuition Tax Credits

The “Trends in College Pricing” and “Trends in Student Aid” reports released by the College Board earlier this week contain some interesting information about changes in the way we finance higher education in the U.S.  Few people are surprised to hear that once again, tuition and fee charges increased faster than average prices of goods and services in the economy. A passing knowledge of the fiscal troubles facing state governments is sufficient to anticipate the continuing decline in the appropriated funds available to public colleges and universities to educate the growing number of students enrolling on campuses across the country. That the federal government would take up a significant portion of the slack, and that it would do so in new ways, was less predictable.

The increase in federal spending on Pell Grants for low-and moderate-income students has received considerable attention—and has led to attempts in Congress to cut Pell funding as part of deficit-reduction efforts. In 2008-9, 6.2 million students received Pell Grants averaging $2,945. In 2009-10, total expenditures on the Pell program rose from $18.3-billion to $30-billion, and in 2010-11, the federal government distributed $34.8-billion in Pell Grants. In that year, 9.1 million students received Pell Grants averaging $3,828.

The increase in the use of the tax code to subsidize students and families has received much less attention.  In 2009, the American Opportunity Tax Credit was implemented, increasing the maximum credit for tuition and fees paid to $2,500, making the credit partially refundable to filers without tax liability, and increasing the income eligibility limit to $180,000 for joint filers.  These changes increased the amount the federal government spent on student aid through the tax code from about $6.6-billion in 2008 to about $14.7-billion in 2009.  This increased subsidy cushioned the blow to students and families from rising tuition levels.

The tax credits don’t get much attention from those paying tuition because they do not deliver their subsidies until long after the bills are paid, and even then it is not so easy to think of a lower tax bill as relief from that daunting tuition bill. The credits don’t get much attention from the deficit hawks either. $14.7-billion in additional spending on Pell Grants would raise lots of voices on Capitol Hill.  But the same impact on the government budget through a “tax cut” ruffles fewer feathers. Surely the distribution of the benefits is also relevant. Of the 40% of 2009-10 Pell Grant recipients who were dependent students, 53% came from families with incomes below $30,000.  Nine percent came from families with incomes of $50,000 or higher. In contrast, 26% of the savings from the 2009 education tax credits and deductions went to taxpayers with AGI exceeding $100,000.

There is room for debate about the best way to subsidize students. There is room for debate about whether the transfer we are witnessing from state responsibility to federal responsibility for funding postsecondary education is a good thing. Will we also debate whether government expenditures targeting low-income college students deserve much stricter scrutiny in this age of attempted austerity than government expenditures through the tax code targeting more-affluent students?

 

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