Education Tax Credits

Commentary by Pete du Pont

Anxiety lies heavy in households in April. Taxes to be paid, and graduating high school seniors anxiously awaiting news of acceptance to the college of their dreams. Parents lose sleep over both taxes due and how to pay for college tuition.

Both students and parents, however, are keenly aware that attending the right college can make a huge difference in one's lifetime income. But with tuition and fees approaching $25,000 per year at top schools, many students will not be able to attend the college of their choice and will have to settle for less, with economic consequences that could last a lifetime.

In the midst of all this anxiety, President Clinton has proposed a potential lifesaver: tax credits of up to $1,500 per year and a deduction of up to $10,000 per year for college tuition. Clearly, these provisions, if enacted, will have a major impact on the ability of families to send their children to the best schools. Maybe.

First of all, the returns to education are so high that families are already willing to pay extraordinary sums for college education. This has caused a vast inflation in tuition that shows little sign of waning. In just the last 10 years, average tuition at private, four-year colleges has virtually doubled, from $6,581 per year to $12,432, an increase of 89 percent. Tuition at public universities, which are already heavily subsidized by taxpayers, has more than doubled, from $1,285 to $2,860, an increase of 123 percent. Over this same period, the Consumer Price Index has only risen 40 percent. Thus prices for secondary education are rising two to three times faster than those for other goods and services.

Tuition inflation has been fueled by government subsidies, which already underwrite almost all of the cost of higher education. In 1994, tuition and fees covered but 35 percent of the cost of higher education in the United States. State and local government subsidies covered 34 percent, while federal aid covered 13 percent. The remaining funds come from other, nongovernment services.

Federal education subsidies already include Federal Pell Grants and Supplemental Educational Opportunity Grants, as well as various state grants, such as Georgia's HOPE program after which Clinton's plan is modeled. There are also numerous loan programs, veterans' programs and work study programs that subsidize higher education as well.

But these subsidies have actually helped increase college tuition. Throwing more money into this situation is equivalent to throwing gasoline on a fire. All it will do is lead to even more rapid increases in tuition, as colleges take advantage of parents' increased ability to pay.

Another problem with the Clinton plan is the requirement that students maintain a B average to qualify for the tuition credit. This is very likely to lead to grade inflation as well as tuition inflation. This is already a problem at most universities, where Bs are routinely given for work that would have earned a C a generation ago. Moreover, it raises the specter of IRS auditing of college transcripts, to ensure compliance with the B-average requirement. As a study from Congress's Joint Economic Committee noted, "New regulatory, reporting, and compliance requirements for taxpayers and schools will broaden the powers of the Internal Revenue Service in the field of education." As taxpayers know full well this month, the IRS is one mean adversary. Giving more power and responsibility to the IRS is about last on parents' priorities.

Finally, the Clinton plan is badly targeted. The benefits will largely go to families whose children will go to college with or without the new credit or deduction. It will do little to help the poor because they pay little, if any, taxes at present. Thus they have nothing to offset the credit against and do not itemize, thus having no ability to use the deduction.

No one denies the importance of education in today's economy. But the Clinton plan is not going to put more students in college or even make tuition more affordable for those already attending. The plan is generally of no value to those most in need of funds for college, while tuition inflation is likely to quickly erode the value of the credit and deduction to everyone else.

All we will be left with is bigger government, greater federal intrusion into education policy, and more opportunities for the IRS to audit innocent taxpayers.