Feature Story

May 17, 2007

Making Higher Education Tax Credits More Available To Low- And Moderate-Income Students: How and Why

Center on Budget and Policy Priorities:

Senate Finance Committee Chairman Max Baucus has indicated that his committee will soon mark up education tax incentives.

In addressing this issue, the Finance Committee should start by considering how to improve the existing tax credits for higher education.

In particular, it should consider reforms that would address these credits' single greatest failing: the fact that most low-income, and many moderate-income, students cannot benefit from them.

This analysis discusses the reforms needed to make the credits more available to low- and moderate-income students and the importance of making these changes if the credits are to fulfill their basic purpose of enabling more students to go to college.

There are two existing federal tax credits for higher education expenses: the Hope Credit and the Lifetime Learning Credit.

If a credit is nonrefundable, it is available only to the extent that it can be applied against positive income tax liability.

In addition considerable unmet need also exists among students with family income between $20,000 and $40,000.

Many of these families are unable to benefit in full from the education tax credits.

Several members of the Senate Finance Committee have introduced legislation that would reform the education tax credits in ways that would make them more available to low- and moderate-income students.

As a result, the credits would remain unavailable to most low-income and many moderate-income students.

Moreover, even if needed improvements in the Pell Grant Program are made, low- and moderate-income students still will face significant higher education costs.