Federal assistance helps students and families pay for
postsecondary education through several policy tools--grant and loan
programs authorized by title IV of the Higher Education Act of 1965 and
more recently enacted tax preferences. In fiscal year 2004, about $14
billion in grants and $56 billion in loans were made under title IV
while estimated outlay equivalents for postsecondary tax preferences
amounted to $10 billion. In light of the relative newness and financial
significance of tax preferences, this report examines (1) how title IV
assistance compares to that provided through the tax code, (2) the
extent to which tax filers effectively use postsecondary tax
preferences, and (3) what is known about the effectiveness of federal
Title IV student aid and tax preferences provide
assistance to a wide range of students and families in different ways.
While both help students meet current expenses, tax preferences also
assist students and families with saving for and repaying postsecondary
costs. While both serve students and families with a range of incomes,
some forms of title IV aid--grant aid, in particular--provide
assistance to those whose incomes are lower, on average, than is the
case with tax preferences. While both require students and families to
fill out forms, tax preferences require more responsibility on the part
of students and families because they must identify applicable tax
preferences, understand complex rules concerning their use, and
correctly calculate and claim credits or deductions. While the tax
preferences are a newer policy tool, the number of tax filers using
them has grown quickly, surpassing the number of students aided under
title IV in 2002. Some tax filers do not appear to make optimal
education-related tax decisions. For example, among the limited number
of tax returns available for our analysis, 27 percent of eligible tax
filers did not claim either the tuition deduction or a tax credit. In
so doing, these tax filers failed to reduce their tax liability by
$169, on average, and 10 percent of these filers could have reduced
their tax liability by over $500. One explanation for these taxpayers'
choices may be the complexity of postsecondary tax provisions, which
experts have commonly identified as difficult for tax filers to use.
Little is known about the effectiveness of title IV aid or tax
preferences in promoting, for example, postsecondary attendance or
choice, in part because of research data and methodological challenges.
As a result, policymakers do not have information that would allow them
to make the most efficient use of limited federal resources to help
students and families.
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