An event Wednesday at the joint Urban- Brookings Tax Policy Center highlighted how unnecessarily complex and ineffective the federal student aid programs are, and offered simple solutions for progress.
It has been well-documented that the U.S. is beginning to fall behind in accessibility of college and completion of degrees. The Organisation for Economic Co-operation and Development reports that we have been overtaken in the percentage of young people pursuing post-secondary degrees. By failing to target financial aid dollars to the students who need it most, our tax policy has been enabling this decline.
To fully understand how our system of tax credits and educational grants functions (or doesn’t, depending on your view), see Wednesday’s report. The duplicity, mutual exclusivity, and poor targeting of the Hope credit, the Lifetime Learning Credit, and the tuition and fees deduction leave families confused. Never mind the current scandals in the student loan industry. A 2005 GAO report found “suboptimal use of the postsecondary tax preferences” by students and families arose, at least in part, from their complexity.
Beyond complexity, there are serious fundamental problems with the system we have in place. Most glaringly, there is no linkage between tax credits and grants administered by the Department of Education. The tax credits are administered by the IRS; a student must fill out the laborious Free Application for Federal Student Aid (FAFSA) to be eligible for Pell grants. Additionally, the tax credits are non-refundable, meaning those families with income below the threshold for paying net federal income taxes receive nothing, and the tax structure penalizes students who must work to pay for school.
These issues need to be ameliorated to regain our status as an international leader in higher education. We must target our financial aid programs better to the students who need them most. We need to stop penalizing working students. The students who must work their way through college are the same ones who we need to graduate. We should fix the issue of refundability. Tax credits with this restriction end up going to middle- and upper-class families, which is fine, but it doesn’t address the issue of affordability.
We should also make the FAFSA simpler. Susan Dynarski, a professor at Harvard University, showed an enlightening chart at the event comparing the FAFSA with the 1040, the 1040A, and the 1040EZ. The FAFSA had more questions and more pages and asked for more financial information than all of them (see a full explanation here). Legally, students cannot fill out the FAFSA until after January 1 of their senior year in high school, and they likely will not know their aid package until March or April. Imagine a situation where the aid was predictable based on income. Students and families could have a reasonable estimate of their financial aid before looking at colleges or applying. Better yet, imagine a system like that of the Social Security Administration, where the family of every child would receive a letter in the mail every year after birth letting them know how much financial aid they could expect. These steps would allow for greater transparency in the financial aid system, and target more directly the portion of the population least likely to attend college.
It has been well-documented that the U.S. is beginning to fall behind in accessibility of college and completion of degrees. The Organisation for Economic Co-operation and Development reports that we have been overtaken in the percentage of young people pursuing post-secondary degrees. By failing to target financial aid dollars to the students who need it most, our tax policy has been enabling this decline.
To fully understand how our system of tax credits and educational grants functions (or doesn’t, depending on your view), see Wednesday’s report. The duplicity, mutual exclusivity, and poor targeting of the Hope credit, the Lifetime Learning Credit, and the tuition and fees deduction leave families confused. Never mind the current scandals in the student loan industry. A 2005 GAO report found “suboptimal use of the postsecondary tax preferences” by students and families arose, at least in part, from their complexity.
Beyond complexity, there are serious fundamental problems with the system we have in place. Most glaringly, there is no linkage between tax credits and grants administered by the Department of Education. The tax credits are administered by the IRS; a student must fill out the laborious Free Application for Federal Student Aid (FAFSA) to be eligible for Pell grants. Additionally, the tax credits are non-refundable, meaning those families with income below the threshold for paying net federal income taxes receive nothing, and the tax structure penalizes students who must work to pay for school.
These issues need to be ameliorated to regain our status as an international leader in higher education. We must target our financial aid programs better to the students who need them most. We need to stop penalizing working students. The students who must work their way through college are the same ones who we need to graduate. We should fix the issue of refundability. Tax credits with this restriction end up going to middle- and upper-class families, which is fine, but it doesn’t address the issue of affordability.
We should also make the FAFSA simpler. Susan Dynarski, a professor at Harvard University, showed an enlightening chart at the event comparing the FAFSA with the 1040, the 1040A, and the 1040EZ. The FAFSA had more questions and more pages and asked for more financial information than all of them (see a full explanation here). Legally, students cannot fill out the FAFSA until after January 1 of their senior year in high school, and they likely will not know their aid package until March or April. Imagine a situation where the aid was predictable based on income. Students and families could have a reasonable estimate of their financial aid before looking at colleges or applying. Better yet, imagine a system like that of the Social Security Administration, where the family of every child would receive a letter in the mail every year after birth letting them know how much financial aid they could expect. These steps would allow for greater transparency in the financial aid system, and target more directly the portion of the population least likely to attend college.
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