How federal tax policy interacts with higher education spending

Two significant things happen every April: Income taxes are due and high school seniors, bound for college, decide where they want to continue their education.

These events are not unrelated. The federal government and the states — in addition to the aid they supply through grants and other spending initiatives — provide a range of income tax benefits intended to help students and their families pay for higher education.

Members of Congress are contemplating policy changes that could affect both types of programs: a major tax reform effort and reauthorizing the Higher Education Act.

 

As legislators engage in debates over changes to tax and spending programs for higher education, such discussions should not happen in silos. Policymakers should consider these two types of support to determine how federal resources can most efficiently and effectively contribute to achieving policy goals.

The federal government provided nearly $80 billion, excluding loans, to support students pursuing higher education in 2014, according to an analysis of federal data by The Pew Charitable Trusts.

Of that, just over half — $45 billion — came from spending programs primarily governed by the Higher Education Act. The rest — $34.5 billion — was in the form of tax benefits for students and families such as deductions, credits, and exclusions.

For budgeting purposes these tax expenditures have the same effect as spending programs: They reduce the amount of revenue available for other national priorities.

The cost of these tax expenditures has increased dramatically in just over two decades, from $2.4 billion in 1990 to $34.5 billion in 2014.


In addition to having similar impacts on the budget, spending and tax programs for higher education often have overlapping goals.

For example, the federal Pell Grant program — a spending initiative — and the American Opportunity Tax Credit — a provision in the federal tax code — are both meant to help individuals and families afford…

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