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.
Recommendations for Executive Action
|Department of Education||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.|
|Department of Education||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.|
|Department of Education||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.|
|Department of the Treasury||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.|