The Government Accountability Office has published Student and Postsecondary Tax Preferences: Limited Research Exist on Tools to Assist Students and Families through Title IV Student Aid and Tax Preferences (GAO-05-684) (64 pages) (11/17/05). Here are the 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.
