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 Issues GAO-12-863T Chairman Baucus, Ranking Member Hatch, and Members of the Committee: 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, 1 GAO-12-560 (Washington, D.C.: May 18, 2012). Persistence is the likelihood that students will continue their education. 2 3 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 4 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 5 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. 6 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 a 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. a 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 7 GAO-12-560 for details on the framework and our methodology. 8 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 firstname.lastname@example.org, Staff or George A. Scott at (202) 512-7215 or email@example.com. 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 support. (451003) Page 7 GAO-12-863T This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. GAO’s Mission The Government Accountability Office, the audit, evaluation, and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no Obtaining Copies of cost is through GAO’s website (www.gao.gov). Each weekday afternoon, GAO Reports and GAO posts on its website newly released reports, testimony, and correspondence. To have GAO e-mail you a list of newly posted products, Testimony go to www.gao.gov and select “E-mail Updates.” Order by Phone The price of each GAO publication reflects GAO’s actual cost of production and distribution and depends on the number of pages in the publication and whether the publication is printed in color or black and white. Pricing and ordering information is posted on GAO’s website, http://www.gao.gov/ordering.htm. Place orders by calling (202) 512-6000, toll free (866) 801-7077, or TDD (202) 512-2537. Orders may be paid for using American Express, Discover Card, MasterCard, Visa, check, or money order. Call for additional information. Connect with GAO on Facebook, Flickr, Twitter, and YouTube. Connect with GAO Subscribe to our RSS Feeds or E-mail Updates. Listen to our Podcasts. Visit GAO on the web at www.gao.gov. Contact: To Report Fraud, Waste, and Abuse in Website: www.gao.gov/fraudnet/fraudnet.htm E-mail: firstname.lastname@example.org Federal Programs Automated answering system: (800) 424-5454 or (202) 512-7470 Katherine Siggerud, Managing Director, email@example.com, (202) 512- Congressional 4400, U.S. Government Accountability Office, 441 G Street NW, Room Relations 7125, Washington, DC 20548 Chuck Young, Managing Director, firstname.lastname@example.org, (202) 512-4800 Public Affairs U.S. Government Accountability Office, 441 G Street NW, Room 7149 Washington, DC 20548 Please Print on Recycled Paper.
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)