Incoming HGSE Professor Susan Dynarski, formerly of the University of Michigan, testified on June 29 before the U.S. House Ways & Means Committee's Oversight Subcommittee in a hearing entitled Expanding Access to Higher Education and the Promise it Holds. Dynarski was joined as a witness by Marshall Anthony Jr., senior policy analyst at the Center for American Progress; Susan Whealler Johnston, president and CEO of the National Association of College and University Business Officers; Steven Rose, president of Passaic County Community College; and Scott Pulsipher, president of Western Governors University.
Professor Dynarski's testimony follows:
Chairman Pascrell, Members of the Committee, I am honored to testify before you today.
College is a Great Investment
A college education is a great investment. Over a lifetime, a person with a bachelor’s degree will earn, on average, a million dollars more than a less-educated worker. Even with record-high tuition prices, a BA pays for itself several times over.
Growing Gaps in Educational Attainment
But as college has grown more valuable, it has also grown more unequal. Low-income children are very unlikely to earn a BA when they grow up: just 9% do so. The odds are six times higher for children from high-income families: 54% earn a BA. And this gap is not shrinking — if anything, it is growing.
Expanding College Access
I give you these statistics to get us thinking about our goals for the education tax incentives. Whether they have been a success, after all, depends on the goals we set for them.
Is our goal to ease the pinch of college costs for upper-income families whose children attend expensive colleges? If so, then the tax incentives do a passable job.
But I think our goal is far more ambitious: that we want to open the doors of college to anyone who can benefit. If this is our goal, then the current tax incentives are a complete failure.
Why? The tax incentives can increase schooling only if they put money into the hands of those for whom price is a barrier, when and where they need it.
- These potential college students are overwhelmingly from low-income families. They attend community colleges, where tuition and fees average $3,800, or a state university, where they average $10,600.
This is who we should keep in mind as we design tax incentives for college: a low-income person attending a public college.
The Education Tax Incentives Don't Reach the Right Students
Unfortunately, the education tax incentives do very little for low-income students at public colleges. Perversely, they provide the most money to upper-income students at private colleges.
Here are some facts to drive home that statement:
- The tax credits are only partially refundable. A low-income student gets a credit of just $1,000 a year, while a richer one gets $2,500.
- The full Lifetime Learning Credit goes only to students who pay tuition and fees over $10,000. Community colleges, which educate a majority of undergraduates, charge less than half that.
- The tuition deduction and student-loan interest deduction pay the most to families with the highest tax rates.
- The Coverdell and 529 saving plans benefit those who can afford to save and who face high tax rates – that is, the wealthy. And, if a low-income family does save, they are punished for it: their assets count against eligibility for federal student aid and safety-net programs like SNAP.
The Education Tax Incentives Are Complex and Confusing
The regressivity of the tax incentives is not all that hampers their effectiveness. They are simply too complicated and confusing to affect schooling decisions. The IRS publication devoted to explaining them fills 95 pages! Families can't respond to a price subsidy if they do not know about or understand it.
We are better off funding simple programs that work than trying to explain complex programs that don’t.
The Limits of Tax Policy as Education Policy
If the goal is expanded college access, the tax incentives for higher education are terrible policy. We must set aside the illusion that they increase education. The evidence is clear on this question.
Simplify and Focus the Education Tax Incentives
As it stands, the education tax incentives are essentially a transfer program. They get money to households that have sent people to college. To do this modest job well, they should impose minimal paperwork and go to families who most need the money.
Here are some recommendations:
First, create a single, fully refundable credit that covers not just tuition and fees but books, room, and board.
- This comprehensive definition of schooling expenses is used for the 529 and Coverdell accounts, which primarily benefit wealthy families. A narrower definition is used for the credits, which help at least some low-income families.
Second, deliver the credit at the time of college enrollment.
The Endowment Tax
Finally, you asked me to address the endowment tax. It is proposed to waive this tax if schools make sufficient effort to be affordable. Here is one way to define such effort:
Does a college meet the full financial need of its students, as defined by the FAFSA and the federal methodology?
Many private colleges (and a handful of publics) require that students fill out the College Board’s PROFILE form and use its expanded data to measure need. This more than doubles the paperwork burden on students and increases uncertainty for families.
The questions on the PROFILE distinguish between the rich and extremely rich. But even a student who gets an automatic EFC of zero has to complete this complicated form. The PROFILE should not be required of low-income students.
The education tax benefits provide relief for upper-income people who have gone to college. But they provide comparatively little relief for low-income families.
The evidence is clear is that the tax incentives do nothing to expand access. They are no substitute for federal financial aid, or for free college.