College Tax Credits Raise Tuition Costs
December 18, 2003
The Tax Relief Act of 1997 created the Hope and Lifetime Learning Tax Credit program, which was promoted as a way to increase access to college. By 2000 the program cost $4.9 billion a year, slightly more than half as much as the Pell Grant program.
Author Bridget Terry Long examined the program's results. She finds:
- The federal tax credits had little apparent effect on the probability of attending college for any group.
- Instead, they tax credits may have given colleges incentives to increase their tuition.
- Tuitions grew 19 percent faster at low-cost two-year colleges with many students who were eligible for these credits than at more expensive schools with fewer potential beneficiaries.
- Among public four-year colleges, "schools in states with large financial aid programs increased their prices relative to similar institutions in other states after the introduction of the credits."
The credits were aimed at middle class families, and that group does seem to have taken the most advantage of them. Although they make up only 35 percent of eligible returns, half of the households who took advantage of the program had an adjusted gross income of between $30,000 and $75,000. However, by 2000, only half of the tax returns that were eligible for the credits claimed them. Insufficient tax liability probably kept many low-income families from participating. And, income ceilings theoretically kept high-income families out.
Source: Linda Gorman, "Tax Credits Don't Spur College Attendance," NBER Digest, September 2003; based upon: Bridget Terry Long, "The Impact of Federal Tax Credits For Higher Education Expenses," National Bureau of Economic Research, Working Paper, No. 9553, March 2003.
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