Student Aid and Tax Benefits:

Better Research and Guidance Will Facilitate Comparison of Effectiveness and Student Use

GAO-02-751: Published: Sep 13, 2002. Publicly Released: Sep 13, 2002.

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Title IV of the Higher Education Act (HEA), as first adopted in 1965, authorizes federal grant and loan programs, providing a total of $53 billion in assistance to 8.1 million students in fiscal year 1999. The Taxpayer Relief Act of 1997 allowed eligible taxpayers to reduce their tax liability by receiving up to $1,500 HOPE or $1,000 Lifetime Learning tax credit for tuition and course-related fees paid. The 2001 Economic Growth and Tax Relief Reconciliation Act created a new tax deduction for tuition expenses and expanded many existing higher education tax provisions. The federal investment in providing student assistance through the tax code has risen sharply from $.0056 billion in 1996 to $7.6 billion in 2002--more than 80 percent of which is comprised of HOPE and Lifetime Learning tax expenditures. GAO reviewed title IV aid programs and higher education tax provisions designed to assist students and families, to help Congress prepare for the reauthorization of HEA. GAO found that, in the 1999-2000 academic year, the Lifetime Learning and HOPE tax credits provided an estimated 4 in 10 undergraduate students with benefits that equaled a varying share of tuition and fees charged and title IV aid received. Some students did not receive the credits on the basis of their income; while others received the credits, but obtained less than the credits' maximum value because their educational expenses were too small to make full use of the credits. Available policy and instructions provide clear guidance about the impact that several, but not all, tax provisions have on title IV aid eligibility. For several higher education tax provisions, the HEA or Education's policies and instructions make clear how the use of tax provisions affects aid eligibility. For some tax provisions, however, Education has not established a policy on how their use affects aid eligibility, or it has established a policy but not communicated it clearly to aid applicants. Little information is available to Congress on the relative effectiveness of title IV grants, loans, and the HOPE and Lifetime Learning tax credits in promoting postsecondary attendance, choice, and completion or on the impact of these programs on college costs. This is due, in part, to the data and methodological challenges intrinsic to conducting studies examining their effects. Moreover, Education has conducted few evaluations of the title IV aid programs, and Treasury has not yet examined the effects of higher education tax credits.

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: In order to provide Congress with information about the relative effectiveness of Education's direct expenditure programs and Treasury's higher education tax provisions, the Secretaries of Education and Treasury should collaborate in studying the impact of tax credits and title IV student aid programs on college attendance and choice, completion, and costs. As a first step, the Secretaries will need to identify opportunities for, and limits to, the sharing of data, and develop a plan to address them.

    Agency Affected: Department of the Treasury

    Status: Closed - Not Implemented

    Comments: The Department of Education noted that planned data collections, including the National Postsecondary Student Aid Study, would include relevant questions regarding respondents' use of higher education income tax benefits. Further, subsequent to our report, Education noted that it was informed by Treasury that Section 6103 of the Internal Revenue Code governs sharing/disclosing confidential federal income tax return data and because Section 6103 does not currently provide for releasing tax return data for research and/or policy analysis purposes, a statutory change would be necessary. Education, Treasury and OMB have been collaborating in seeking to get legislative changes made that would allow the sharing of tax data for the purpose of addressing improper payments with respect to the federal Pell grant program. If successful, this collaboration could provide a basis for future collaboration between the agencies in conducting research. During the 108th Congress, legislation (H.R.3613 "Student Aid Streamlined Disclosure Act of 2003") was introduced that would sanction the sharing of IRS data for the purpose of verifying eligibility of Pell grants, but the legislation was not enacted. The Administration has stated that it intends to have the legislation reintroduced in the 109th Congress. The Education Department has sought to have additional research undertaken on the use of postsecondary tax provisions via its National Postsecondary Student Aid Survey data collection.

    Recommendation: In order to provide Congress with information about the effectiveness of its title IV programs as well as to ensure its programs are achieving results, the Secretary of Education should sponsor research on the impact of title IV programs on postsecondary education attendance and choice, completion, and costs.

    Agency Affected: Department of Education

    Status: Closed - Implemented

    Comments: On April 7, 2006, Education's Institute of Education Sciences issued an RFP annoucing grants it would make available to conduct research projects that would contribute to its education research programs in several areas, including postsecondary education. In its notice, the Department noted that it was specifically seeking to sponsor research that would, among other things, evaluate programs for improving access to, persistence in, or completion of, postsecondary education. In addition, the Department noted it was interested in sponsoring research that would examine the complex relations between student financial aid programs (including federal, state, and private programs) and access and completion of postsecondary education, and was encouraging research that would address the interactions of student aid programs. Additionally, in making its announcement, the Department noted that policymakers and higher education adminstrators are interested in answers to questions regarding the relative impact--both costs and benefits--of student financial aid. The Department has requested that proposals be submitted in November 2006 for funding in fiscal year 2007.

    Recommendation: To ensure that students and families understand how using tax provisions will affect their eligibility for title IV financial aid, the Secretary of Education should develop a policy specifying whether the tax-free earnings of state-sponsored college savings plans, tuition prepayment plans, and Coverdell Education Savings Accounts should be included in the calculation of the expected family contribution and, therefore, reported by aid applicants as untaxed income on the Free Application for Federal Student Aid (FAFSA) form. Further, the Secretary of Education should clarify FAFSA instructions, clearly explaining who should report ownership of the assets held in state-sponsored savings plans, Coverdell education savings accounts, and Series EE Savings Bonds.

    Agency Affected: Department of Education

    Status: Closed - Implemented

    Comments: On January 22, 2004, Education posted a "Dear Colleague" letter to the Department of Education's web site, providing policy guidance to postsecondary institutions participating in programs concerning (1) how the income that students and parents report as part of the expected family contribution is affected by the tax-free earnings of state-sponsored college savings plans, tuition prepayment plans, and Coverdell Education Savings Accounts, and (2) the ownership of these assets. As a result, postsecondary institutions can now provide student and parents with guidance about how to report tax-free income from these sources, clarifying for them the impact of tax-free earnings from these sources on their eligibility for federal student aid. In addition, postsecondary institutions can now provide students and parents with guidance about the ownership of these assets, preventing error in the reporting of assets and in the calculation of eligibility for federal student aid.

    Recommendation: In order to provide Congress with information about the relative effectiveness of Education's direct expenditure programs and Treasury's higher education tax provisions, the Secretaries of Education and Treasury should collaborate in studying the impact of tax credits and title IV student aid programs on college attendance and choice, completion, and costs. As a first step, the Secretaries will need to identify opportunities for, and limits to, the sharing of data, and develop a plan to address them.

    Agency Affected: Department of the Treasury

    Status: Closed - Not Implemented

    Comments: The Department of Treasury agreed with GAO's recommendation. Developing a useful longitudinal database regarding higher education tax provisions will take some time, the Department noted, and be subject to the limited staff resources of the Office of Tax Policy and the Internal Revenue Service. The Department also noted that the confidentiality of information from individual tax returns must always be protected, which would limit the data that could be shared with the Department of Education in joint research. Along these lines, Treasury informed Education, subsequent to our report, that Section 6103 of the Internal Revenue Code governs sharing/disclosing confidential federal income tax return data and because Section 6103 does not currently provide for releasing tax return data for research and/or policy analysis purposes, a statutory change would be necessary. Education, Treasury and OMB have been collaborating in seeking to get legislative changes made that would allow the sharing of tax data for the purpose of addressing improper payments with respect to the federal Pell grant program. If successful, this collaboration could provide a basis for future collaboration between the agencies in conducting research. During the 108th Congress, legislation (H.R.3613 "Student Aid Streamlined Disclosure Act of 2003") was introduced that would sanction the sharing of IRS data for the purpose of verifying eligibility of Pell grants, but the legislation was not enacted. The Administration has stated that it intends to have the legislation reintroduced in the 109th Congress.

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