Savings Incentives for Higher Education

A closer look at the Taxpayer Relief Act of 1997 suggests the following: first, that the package will do little to encourage college enrollment, since low-income youth on the margin of college entry can expect little from the nonrefundable credits; second, because the package has no impact on the marginal cost of tuition above $5,000, it is unlikely to lead to sizable increases in college expenditures by families already spending more than $5,000; third, because the marginal tuition subsidy is between 50-100 percent for institutions charging less than $2,000, state governments will be tempted to capture a share of the federal subsidies by tailoring their own tuition and financial aid policies; fourth, the package does little to encourage parental saving since many families will benefit more from the Hope Scholarship credit than from the Education IRAs. Ironically, by partially relieving the burden of college expenses for families and by granting larger subsidies for borrowing than parental saving, the package may actually discourage parental saving.