Higher Education: Improved Tax Information Could Help Pay for College

Published by the Government Accountability Office on 2012-07-25.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                             United States Government Accountability Office

GAO                          Testimony
                             Before the Committee on Finance,
                             U.S. Senate

                             HIGHER EDUCATION
For Release on Delivery
Expected at 10:00 a.m. EDT
Wednesday, July 25, 2012

                             Improved Tax Information
                             Could Help Pay for College
                             Statement of James R. White
                             Director, Strategic Issues

                             George A. Scott
                             Director, Education, Workforce, and Income Security

Chairman Baucus, Ranking Member Hatch, and Members of the

We are pleased to be here to discuss federal assistance for higher
education. The federal government provides billions of dollars in
assistance each year to help millions of students and families meet the
costs of higher education. This assistance is provided through federal
student aid programs authorized under Title IV of the Higher Education
Act of 1965, as amended, (Title IV) and through tax expenditures—
reductions in federal tax liabilities that result from provisions in the tax
code such as tax credits, deductions, exemptions, and tax-preferred
savings programs. Providing federal financial assistance in these varied
ways presents students and their families with multiple tools to help them
pay higher education expenses. However, it may be difficult for families to
understand and apply for higher education assistance.

This statement summarizes our recently issued report that addressed
how tax information could help families pay for college. 1 In response to
your request, our report: (1) described the size and distribution of federal
grants, loans, and tax expenditures available to assist students and
families with higher education expenses; (2) assessed the extent to which
tax filers select higher education provisions that maximize their tax
benefit; (3) summarized what is known about the effect of grants, loans,
and tax expenditures on student attendance, choice, persistence, 2 and
completion; and (4) described factors that contribute to the effectiveness
and efficiency of federal higher education student assistance programs.
To address these issues, we analyzed data from the Department of
Education (Education), Internal Revenue Service (IRS), and the Board of
Governors of the Federal Reserve, and conducted a literature review for
original empirical research. 3 We also developed a framework for
evaluating federal assistance and validated it with recognized experts of

GAO, Higher Education: Improved Tax Information Could Help Families Pay for College,

GAO-12-560 (Washington, D.C.: May 18, 2012).

Persistence is the likelihood that students will continue their education.

 We conducted this performance audit from June 2011 to May 2012 in accordance with generally
accepted government auditing standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit objectives.

Page 1                                                                              GAO-12-863T
                                        higher education finance. Detailed information on our findings as well as
                                        our scope and methodology is available in the report.

                                        We found that multiple Title IV programs and tax expenditures provided
                                        substantial aid to populations across income levels. Figure 1 summarizes
                                        the Title IV programs and tax expenditures we reviewed. 4

Figure 1: Title IV Programs and Tax Expenditures Available to Save, Pay, or Repay Higher Education Expenses

                                         Details on each program can be found in GAO-12-560.

                                        Page 2                                                                GAO-12-863T
In 2009, 12.8 million students received Title IV aid, and approximately 18
million tax filers claimed a higher education tax benefit for current
expenses. 5 The number of students receiving Title IV aid increased from
10.4 million to 12.8 million, or 23 percent, from 2006 to 2009. The number
of tax filers benefiting from an education tax expenditure was larger, and
increased from 14.4 million to 18 million, or 25 percent, from 2006 to
2009. Recent increases in both Title IV aid and tax expenditures from
2008 to 2009 may be because of enrollment increases and legislative
actions, among other factors. Title IV grants tend to benefit students and
families with incomes below the national median (about $52,000 from
2006 to 2010), while loans and work-study serve these students as well
as students at family incomes above the median. Most tax benefits from
the tuition and fees deduction and the parental exemption for dependent
students went to families with incomes above $60,000, whereas the
majority of benefits from the other higher education tax expenditures in
our review—such as the American Opportunity Credit—went to families
with lower incomes.

In our analysis of 2009 IRS data for selected returns with information on
education expenses, we found that tax filers do not always choose tax
expenditures that maximize their potential tax benefits. 6 We found about
14 percent of filers (1.5 million of almost 11 million eligible returns) failed
to claim a credit or deduction for which they appear eligible. On average,
these filers lost a tax benefit of $466. We estimate that the total amount of
tax benefits filers did not claim was approximately $726 million in 2009.
We found no cases where filers’ combined state and federal tax liability
would have been higher if they had claimed one of those benefits on their
federal return. Taxpayers might not maximize their tax benefits because
they are unaware of their eligibility for the provisions or confused about
their use. IRS and Education have taken steps to provide information on
these provisions, but the number of filers failing to claim a higher

 The total number of Title IV and tax recipients should not be added together, as in some cases
students and families may be eligible for benefits from both types of programs. The most current year
for which data are available for both tax and Title IV programs is 2009.
 Our analysis is limited to tax filers who appeared eligible for the lifetime learning credit (LLC) or the
tuition and fees deduction in 2009, had a Form 1098-T Tuition Statement with information on the
student’s education expenses, and had a tax liability after claiming other tax benefits. After eliminating
returns where eligibility was not clear, we included only 29 percent of returns in our analysis of filers
with a 1098-T but selecting neither the LLC nor the tuition deduction in 2009. Estimates have 95
percent confidence intervals that are within 10 percent of the estimate itself. Details on our
methodology and its limitations can be found in GAO-12-560.

Page 3                                                                                     GAO-12-863T
education tax provision suggests more could be done. For example, IRS
stated that it coordinated with tax preparation software providers to
provide links to relevant higher education forms, while Education’s
Federal Student Aid website provides a link to IRS’s Publication 970, Tax
Benefits for Education. Developing a coordinated, comprehensive
strategy to better inform eligible students could improve take-up of these
tax provisions.

We also found that despite Education’s research efforts, evaluative
research on the effects of federal assistance for higher education on
student outcomes—such as the likelihood students will complete their
education—remains limited, as shown in table 1. Researchers have
examined the effects of federal assistance on a limited basis, such as
only for certain states or groups of students, but these studies provide an
incomplete view of the effects of federal assistance. Education’s efforts to
sponsor and undertake research represent an important step, but
research available at present still lacks evaluative information on the
effects of federal grants, loans, and work-study. Continuing gaps in
research on the effectiveness of federal assistance may be due, in part,
to data and methodological challenges that have proved difficult to
overcome. Recent changes in Title IV aid and tax expenditures—such as
the introduction of the American Opportunity Credit in 2009—may provide
opportunities for evaluative research, but Education officials told us they
have not conducted such research due in part to the level of resources
Education officials told us they devote to such research. In an
environment of constrained budgets, evaluative research can help inform
policy decisions.

Page 4                                                           GAO-12-863T
Table 1: Research We Reviewed on the Effects of Federal Assistance Is Limited and Cannot Be Generalized

Federal assistance for higher education                           Attendance           Choice             Persistence            Completion
Grants                                                                                                         
Student loans                                                                                                                         
Work-study                                                                                                                             
Tax expenditures
    Tuition and Fees Deduction                                                                                                         
    Student Loan Interest Deduction
    Parental exemption for students age 19 to 23
    American Opportunity Credit
    Hope Credit                                                       
    Lifetime Learning Credit                                                                                                           
    Earned Income Tax Credit for students age 19 to 23
    Coverdell Education Savings Account
    529 Qualified Tuition Program
                                          Source: GAO analysis.

                                          Note: We did not find research that could be generalized. A check mark indicates that one or more
                                          Title IV aid or tax provisions in the category has been studied for certain states, types of school, or
                                          groups of students.
                                          Research conducted into the effects of Pell Grants but not Federal Supplemental Educational
                                          Opportunity Grants.

                                          Finally, we identified factors that contribute to effective and efficient
                                          higher education assistance programs to help policymakers allocate
                                          limited resources among multiple programs. 7 These factors can be used
                                          as a policy tool for considering improvements to current programs,
                                          consolidating programs, eliminating programs, or designing features of
                                          new programs. They can be used as a framework for assessing whether
                                          a higher education program: 8

                                          •     achieves program goals and produces demonstrable results,
                                          •     provides appropriate incentives for targeted populations,
                                          •     facilitates beneficiaries’ use of the program,

                                          We consulted subject-matter experts and our prior work as we identified these factors. See

                                          GAO-12-560 for details on the framework and our methodology.
                                           Programs include federal assistance through Title IV grants, loans, and work-study, and tax
                                          expenditures directed at future, current, and past education expenses.

                                          Page 5                                                                                     GAO-12-863T
                  •   interacts effectively with other programs,
                  •   minimizes costs and risks, and
                  •   establishes monitoring and evaluation mechanisms.

                  Based on our work, we recommended the Commissioner of Internal
                  Revenue and the Secretary of Education work together to:

                  •   identify characteristics of tax filers who are not claiming a higher
                      education tax expenditure when they appear to be eligible for one and
                      possible reasons for this, and
                  •   use this information to identify strategies to improve information
                      provided to eligible students and families.

                  We also recommended that the Secretary of Education take advantage of
                  opportunities presented by recent and anticipated substantive program
                  changes to sponsor and conduct evaluative research into the
                  effectiveness of Title IV programs and higher education tax expenditures
                  at improving student outcomes.

                  Education and IRS agreed with our recommendations. Education noted
                  that while it does not have access to tax data, it will work with IRS to
                  assist in taxpayer outreach. A complete discussion of agency comments
                  and our evaluation are provided in the report.

                  Chairman Baucus, Ranking Member Hatch, and Members of the
                  Committee, this completes our prepared statement. We would be happy
                  to respond to any questions you and Members of the Committee may
                  have at this time.

                  For further information regarding this testimony, please contact James R.
GAO Contact and   White, Director, Strategic Issues, at (202) 512-9110 or whitej@gao.gov,
Staff             or George A. Scott at (202) 512-7215 or scottg@gao.gov. Contact points
                  for our Offices of Congressional Relations and Public Affairs may be
Acknowledgments   found on the last page of this statement.

                  Page 6                                                         GAO-12-863T
           Individuals making key contributions to this statement and the related
           report include David Lewis and Tranchau (Kris) Nguyen, Assistant
           Directors; Shannon Finnegan, Analyst-In-Charge; Patrick Dudley; John
           Mingus; Amy Moran Lowe; Tom Moscovitch; Erika Navarro; and Mark
           Ramage. JoAnna Berry, Jessica Botsford, Amy Bowser, Andrew Ching,
           Susannah Compton, Michele Fejfar, Lois Hanshaw, Donna Miller, Edward
           Nannenhorn, Mimi Nguyen, and Melanie Papasian provided technical

           Page 7                                                      GAO-12-863T
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