The Senate Finance Committee held a hearing Tuesday to examine ways to improve tax credits for education and lower student debt as part of the latest series of hearings on tax reform.
“As the Finance Committee continues to drill down with hearings on reform, the committee will focus on one byzantine part of the tax code that’s ripe for improvement: how the tax code incentivizes higher education,” said Senate Finance Committee chairman Ron Wyden, D-Ore., in his opening statement. “Everybody knows that getting a college education is one of the surest ways to climb the economic ladder. But the skyrocketing cost of college leads to smothering loads of student loan debt, and in fact, it can even have the effect of reinforcing inequality.”
Congress has been debating various ways to make student debt more manageable as tuition costs continue to rise, Wyden pointed out. He said he would like to focus on policies that would allow students to have less debt from the start.
“The crazy quilt of tax benefits and aid programs on the books today doesn’t get that job done,” said Wyden. “And as a result, there are millions of Americans who want to get a college degree, but can’t. It now takes at least 36 calculations for a family to navigate the overlapping web of tax incentives for higher education in the code today. Each of those tax incentives has its own definition of qualified expenses, student eligibility and income thresholds. Students and parents shouldn’t be expected to wade through this mess.”
Student Perspective
Willamette High School graduate Amber Lee testified at Tuesday’s hearing. Lee, who dreams of becoming a physician, comes from a low-income household with a single mother and knew paying for college by herself would be impossible. Despite an A-average GPA and participation in various extra-curricular activities, scholarships have only covered a small fraction of her tuition for Portland State University, which she will attend in the fall. She is working 35 hours per week this summer to reduce her financial burden. Lee testified that both she and her mother were unaware of the various tax credits available to help her lower her debt burden from the start.
“It is absolutely appalling to me that students experience so many disheartening financial setbacks just for trying to further their post high school education,” said Lee. “We are immersed in a culture that supports the freedom to challenge ourselves, to search for new knowledge, and to gain meaningful careers, but we are constantly refused the opportunity to do so through the lack of options we have when it comes to paying for education. The idea of a college education has become only possible for the privileged, and that needs to change now.”
Wyden said the committee needs to make education tax incentives more accessible for all Americans by simplifying them to three credits or deductions that are user-friendly and get students and families the help they need. This improved system should be based on a few key goals: saving; covering current costs; and easing the burden of loans. Wyden said America can’t afford to let higher education become a luxury good.
“There are common-sense steps I believe this committee can take on a bipartisan basis to help students avoid taking on paralyzing amounts of debt,” Wyden said. “Today's hearing showcases just one of our committee's challenges in our bipartisan effort to fix America's tax code. It is an especially important one, and we are determined to get it right.”
Grants, Loans and Tax Incentives
Sen. Orrin Hatch, R-Utah, the ranking Republican member of the committee, noted that traditionally, the federal government has supported millions of individuals seeking higher education through grants and loans.
“Over the last 20 years, however, federal support for higher education has increasingly relied on incentives in the tax code,” said Hatch. “These education tax incentives can generally be classified into one of three categories. The first category includes tax incentives for current expenditures on higher education. These incentives include the Hope, American Opportunity, and Lifetime Learning Credits. The second category includes tax incentives for student loans, including the deduction for interest paid on student loans. The third category includes tax incentives for savings for college, which includes qualified tuition plans, usually referred to as 529 plans.”
The various education tax incentives have served as a way to control the increasing costs of college education, which has become a barrier to entry for those who cannot afford them. However, despite the availability of loans, grants and tax incentives, Hatch pointed out that approximately 71 percent of college seniors have student loan debt with an average of $29,400 per borrower. From 2008 to 2012, their debt at graduation increased an average of 6 percent per year.
Mark J. Mazur, Assistant Secretary of the Treasury for Tax Policy, noted that there are 18 major tax benefits that support post-secondary education in the form of credits, deductions and income exclusions. In total, they offered more than $41 billion of support last year and represented more than one-fifth of the total federal support for post-secondary education.
“Students and their families are caught in a difficult financial situation, feeling that a college degree or other post-secondary credential is too important to achieving a secure economic future to forgo, but struggling to pay for that investment because of rising costs,” said Mazur. “Indeed, the resulting difficulties students face in paying off student loan debt has emerged as an important economic challenge itself. In these conditions it is imperative that government policy facilitate valuable investments in education and skills, both by helping students and families pay for college and to rein in the cost increases we have seen in recent years. Addressing these issues will require better information provision to students, their families, and policymakers. It will also require new and modified financing tools. Tax policies will surely be part of the policy mix in the future, and it is important for these policies to be as efficient and as effective as possible.”
High School Counselors’ Role
Jayne Caflin Fonash, director of school counseling at the Loudoun Academy of Science in Loudoun County, Va., told the lawmakers about her work as a school counselor. She noted that many guidance counselors don’t feel qualified to dispense tax advice to parents and students. But if they avoid discussions of the various tax credits available to students, parents may not be aware of the ability to take advantage of the money available to them and their children.
Fonash cited research from the National Association for College Admission Counseling that found nearly three-fourths of school counselors have expressed a need for more information in order to feel confident about advising students on paying for college.
“School counselors are typically constrained from providing intensive, one-on-one support to students and families on the intricacies of paying for college,” she said. “Consider that the average student-to-counselor ratio for public schools in the United States is 471 to 1; that school counselors in public schools are able to devote only about one-fourth of their professional time to assisting students with the college search and financial aid processes; and that access to school counselors is often most limited for the students who are most likely to be under-represented in higher education.”
She noted that many families may be unaware of the tax benefits available to help families mitigate the cost of post-secondary education. “I know as a taxpayer with two grown children that these tax credits can directly reduce the amount of federal income tax for returns,” said Fonash. “That being said, I have never had a conversation with a student about the potential impact of future tax credits on affordability of attendance, nor have I been asked a question by a parent about tax credits. Based on my colleagues’ reports, I am not alone in that regard. It is common practice for those of us on the high school side to ask our college financial aid officers to do presentations for our parents about the financial aid process, but it has been my experience that it is rare for a question to arise about tax credits. It has been my experience that financial aid professionals shy away from giving any information that could be construed as tax advice. If questioned, they may mention that tax credits do exist and that families should consult a tax professional for more information about how that might affect their personal situation. A concise, one-page document to share with parents and students on the availability of tax benefits and resources to consult for additional information would open the door for a conversation in an area that families are often reticent to discuss their financial situation.”
Wyden urged Mazur to have the Treasury Department develop brochures that high school counselors can distribute to students describing the various tax credits available.
Suggested Reforms
Dean Zerbe, national managing director of the tax consulting firm alliantgroup and a former senior tax counsel for the Senate Finance Committee, said the committee could do a great deal with the tax code to encourage colleges to control tuition increases and help families meet the costs of college without risking their future economic security.
“To do so, the committee needs to recognize two things—first, the enormous amount of taxpayer dollars that are being provided to colleges and universities every year through various provisions of the tax code; and second, that under current law, these billions of dollars are being provided without application of any real requirements, standards or incentives to control the ever increasing cost of tuition,” he said.
Zerbe added that the Finance Committee needs to engage in a thorough review of the billions of dollars dedicated to supporting colleges and universities, understanding what dollars are provided and what institutions are getting those taxpayer monies. “Armed with that knowledge, the committee should consider revisiting the policy choices it has made in the past—particularly looking at areas such as tax-exempt bonds which are actually in some ways counterproductive to the goals of the committee of encouraging low tuition costs for students from low- and middle-income families as well as veterans.”
Scott Hodge, president of the Tax Foundation, a Washington think tank, argued that the tax code is generally not the proper tool for increasing access to higher education and making college more affordable. “These tax credits violate the principles of sound tax policy by greatly increasing the complexity and distortions in the tax code,” he said.
Hodge noted that since the first education tax credit was enacted in 1997, the government has greatly increased the size and scope of education tax credits. “However, there is little evidence that they have accomplished what they intended to do and more evidence that they may be fueling higher costs and simply becoming a windfall for colleges, not students,” he said. “Education tax credits are not well targeted. Although they reach lower-income individuals more than deductions, they still tend to benefit today and tomorrow’s high-income tax payers much more than low-income families. The over-use of tax credits has turned the IRS into an extension of—or substitute for—other government agencies. The IRS is not equipped to be a social welfare agency. As a result, these credits are prone to fraud, improper payments, and placing an excessive burden on the IRS.”
Hodge argued that trading the elimination of education tax credits for lower marginal tax rates would be better for economic growth. The Tax Foundation estimates that such an exchange would boost GDP by about $19 billion, federal revenues by $4.5 billion, and increase employment by about 121,000 full-time workers. “We know the current system isn’t working, so what is the solution?” said Hodge “Options consistent with tax reform should include simplifying the vehicles for saving within the tax code, perhaps through universal saving accounts; and encouraging new markets that will incentivize colleges to keep long term costs down, such as pre-paid tuition plans or a futures market.’ Finally, a better option to help low-income studies is to shift resources out of tax programs’ and into established programs like Pell Grants.”
