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The Impact of Federal Tax Credits for Higher Education Expenses

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  • Bridget Terry Long

Abstract

The 1997 creation of the Hope and Lifetime Learning Tax Credits marked a dramatic shift in the way in which federal support for college expenses is distributed to students and their families. Unlike other aid programs, the tax credits have exceptionally broad eligibility requirements, and there is a significant delay between when a recipient enrolls in college and when they receive the benefit. When introduced, the projected benefits of the tax credits were $9.7 billion, over fifty percent greater than the total amount spent at the time on the Pell Grant, the primary Federal grant program. This study examines the impact of the tax credits on students, families, colleges, and states. Using several data sources, I analyze the distribution of the benefits and the effect on enrollment decisions and college pricing. Analysis of tax return data suggests that what was intended to be a transfer to the middle class did benefit families with incomes between $30,000 and $75,000 the most. Insufficient tax liability due to low income levels and the interaction of the credits with other aid programs prevents many low-income individuals from qualifying for a benefit. Additionally, many eligible students did not claim a credit, particularly those from minority groups. Further analysis finds no evidence of increased postsecondary enrollment among eligible students in spite of the stated goal to increase access to higher education. On the other hand, some states and public institutions appear to have responded to incentives to increase the prices of colleges at which students face a low marginal cost. However, the results of this analysis are mixed and less conclusive.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9553.

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Date of creation: Mar 2003
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Publication status: Published 2004 in College Choices: The Economics of Which College, When College, and How to Pay For It. Caroline M. Hoxby, ed. Chicago: University of Chicago Press and the National Bureau of Economic Research.
Handle: RePEc:nbr:nberwo:9553

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  1. Neil S. Seftor & NSarah E. Turner, 2002. "Back to School: Federal Student Aid Policy and Adult College Enrollment," Journal of Human Resources, University of Wisconsin Press, vol. 37(2), pages 336-352.
  2. Bridget Terry Long, 2004. "Does the Format of a Financial Aid Program Matter? The Effect of State In-Kind Tuition Subsidies," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 767-782, August.
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  5. Susan Dynarski, 2000. "Hope for Whom? Financial Aid for the Middle Class and Its Impact on College Attendance," NBER Working Papers 7756, National Bureau of Economic Research, Inc.
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  7. Thomas J. Kane, 1995. "Rising Public College Tuition and College Entry: How Well Do Public Subsidies Promote Access to College?," NBER Working Papers 5164, National Bureau of Economic Research, Inc.
  8. Christopher M. Cornwell & David B. Mustard & Deepa Sridhar, 2005. "The Enrollment Effects of Merit-Based Financial Aid: Evidence from Georgia's HOPE Scholarship," HEW 0501002, EconWPA.
  9. McPherson, Michael S. & Schapiro, Morton Owen, 1997. "Financing Undergraduate Education: Designing National Policies," National Tax Journal, National Tax Association, vol. 50(3), pages 557-71, September.
  10. V. Joseph Hotz & John Karl Scholz, 2001. "The Earned Income Tax Credit," NBER Working Papers 8078, National Bureau of Economic Research, Inc.
  11. Cronin, Julie-Anne, 1997. "The Economic Effects and Beneficiaries of the Administration's Proposed Higher Education Tax Subsidies," National Tax Journal, National Tax Association, vol. 50(3), pages 519-40, September.
  12. Juhn, Chinhui & Murphy, Kevin M & Pierce, Brooks, 1993. "Wage Inequality and the Rise in Returns to Skill," Journal of Political Economy, University of Chicago Press, vol. 101(3), pages 410-42, June.
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  14. Clotfelter, Charles T, 1976. "Public Spending for Higher Education: An Empirical Test of Two Hypotheses," Public Finance = Finances publiques, , vol. 31(2), pages 177-95.
  15. Caroline M. Hoxby, 1998. "Tax Incentives for Higher Education," NBER Chapters, in: Tax Policy and the Economy, Volume 12, pages 49-82 National Bureau of Economic Research, Inc.
  16. Kane, Thomas J., 1997. "Beyond Tax Relief: Long-Term Challenges in Financing Higher Education," National Tax Journal, National Tax Association, vol. 50(2), pages 335-49, June.
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Cited by:
  1. Christopher Avery & Caroline M. Hoxby, 2003. "Do and Should Financial Aid Packages Affect Students' College Choices?," NBER Working Papers 9482, National Bureau of Economic Research, Inc.
  2. Eric Bettinger & Betsy Williams, 2013. "Federal and State Financial Aid During the Great Recession," NBER Chapters, in: How the Financial Crisis and Great Recession Affected Higher Education National Bureau of Economic Research, Inc.
  3. Hans J. Baumgartner & Viktor Steiner, 2006. "Does More Generous Student Aid Increase Enrolment Rates into Higher Education?: Evaluating the German Student Aid Reform of 2001," Discussion Papers of DIW Berlin 563, DIW Berlin, German Institute for Economic Research.
  4. Ehrenberg, R.G.Ronald G., 2004. "Econometric studies of higher education," Journal of Econometrics, Elsevier, vol. 121(1-2), pages 19-37.
  5. William W. Olney, 2008. "Do Firms Respond to Immigration?," Department of Economics Working Papers 2010-11, Department of Economics, Williams College, revised Jan 2011.
  6. Michael Smart & Mark Stabile, 2003. "Tax Credits and the Use of Medical Care," NBER Working Papers 9855, National Bureau of Economic Research, Inc.
  7. Orkodashvili, Mariam, 2007. "Higher Education Funding Issues: U.S. / UK Comparison," MPRA Paper 16417, University Library of Munich, Germany.
  8. Susan Dynarski & Judith Scott-Clayton & Mark Wiederspan, 2013. "Simplifying Tax Incentives and Aid for College: Progress and Prospects," NBER Working Papers 18707, National Bureau of Economic Research, Inc.
  9. Turner, Nick, 2010. "Who Benefits From Student Aid? The Economic Incidence of Tax-Based Federal Student Aid," University of California at San Diego, Economics Working Paper Series qt7g0888mj, Department of Economics, UC San Diego.

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