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Report Calls for End to Education Tax Credits to Save Pell Grants

What family shelling out thousands of dollars for tuition isn't thrilled to get a tax break for college expenses? Politicians on both sides of the aisle are keenly aware of the popularity of the American Opportunity Tax Credit and other federal tuition tax-break programs. But, in an era of shrinking budgets, Stephen Burd of Education Sector contends it's not good public policy.

In his recent report, Moving on Up: How Tuition Tax Breaks Increasingly Favor the Upper-Middle Class, Burd suggests these programs be eliminated rather than cutting back on Pell Grants that provide access to college for low-income students.

Burd is a senior policy analyst with the Washington-based independent think tank on education policy.

The government spent $70 billion on tax breaks aimed at subsidizing higher education for families in the past decade, and about 13 percent of that went to families making more than $100,000 a year. At the same time, only 11 percent went to the neediest families, those making less than $25,000, while the lion's share went to those in the middle, the report notes.

But in recent years, with the creation of new and more-generous tax breaks, the amount and share of the tax savings going to the highest-income families eligible for these programs has soared. Between 1999 and 2001, nearly 83 percent of the higher education tax benefits went to families earning less than $75,000 per year and none to those earning more than $100,000, reports Burd. However, in the last three tax years alone, families making between $100,000 and $180,000 received nearly a quarter of the benefits.

The problem is that these programs are not effectively targeted at those who need it the most, suggests Burd. Filers making more than $75,000 were two-and-a-half times more likely to take advantage of the AOTC than those earning less than $25,000. Under the program, families can get an annual maximum credit of $2,500 for higher education expenses.

Raising income limits meant the percentage of total tax savings from education credits and deductions going to filers with incomes of $100,000 or higher increased from 18 percent in 2008 to 26 percent in 2009.

"Policymakers who have championed these programs say that delivering student aid through the tax code is the easiest way for them to provide relief to students and families who are facing ever-rising college prices," writes Burd. "That's because, unlike federal grant and loan programs, the tax benefits are not counted as spending in the federal budget and therefore do not appear to increase the deficit, even though they reduce the amount of revenue the government collects each year." And politicians know that upper-income families are more likely to vote, solidifying support for these programs, notes Burd.

Meanwhile, lawmakers have tightened eligibility for the Pell Grant program and more cuts are being discussed, while the tax credits have not been on the table.

Looking down the road, the U.S. Joint Committee on Taxation has estimated that the government will spend about $55 billion on the tuition tax break programs from 2010 through 2014, and those making over $100,000 will continue to be the primary beneficiaries through the end of 2012.

President Obama has emphasized the savings that the middle class receives with education tax credits. "What he didn't say was that this proposal would also provide a major windfall for families up the income scale who presumably were already planning to send their children to college without the help," writes Burd. "At a time when Congress is struggling to fund the Pell Grant program and financially needy students who pursue a higher education are facing mountains and mountains of debt, policymakers need to refocus the government's resources on its core mission of eliminating the financial barriers that prevent low-income and working-class students from enrolling in and completing college."

Rather than cutting Pell, Burd says Congress should allow the AOTC to expire at the end of this year, eliminate all of the other tuition tax breaks, and use the savings to ensure that the Pell Grant program remains on a sustainable path.

To protect the future of Pell Grants, other education policy leaders through the College Board have suggested reforms, such as placing a limit on the number of semesters student can receive the aid and increase the number of credits required to get a federal grant.

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