Are Education Tax

Credits Making

College More

Affordable?

Garza & Harris

The income gap between college

graduates and individuals without a

college education has never been wider.

A college educated person stands to earn $570,000 more throughout their

lifetime than an individual with only a high school diploma.

The Bureau of Labor Statistics recently reported that the unemployment rate for 25-

year-olds without a degree is more than double the unemployment rate for college

graduates of the same age.

Is this system really achieving it’s goal of making college more accessible?

A System of Education Tax Credits

Since 1997, the method the Federal government has employed to encourage more students to attend college is by issuing education tax credits to offset the large (and growing) cost of obtaining a degree.

This system was then expanded upon 2009 with the American Opportunity Tax Credit to include people of higher income backgrounds and incorporated refundable tax credits.

Are tax credits actually making a college education attainable for people who could otherwise not afford it? The numbers suggest they are doing the opposite.

A System of Education Tax Credits

In 2010, the first year of the amended system, only 20 percent of the

claimed federal educational tax credit went to people earning $30,000 or

less per year.

By contrast, 30 percent of the credits went to those earning more than

$100,00 per year and an additional 18 percent to those earning $75,000 per

year.

The Increasing Cost of a Higher-Education

The cost of obtaining a college degree has never been higher.

The growing cost of college far outpaces the rate of inflation (27%) and growth of median household

income (17%) over the last 10 years.

Students are taking out larger loans to meet the growing cost of college leading to $1 trillion worth of

student debt.

This skyrocketing cost of attending college is a product of the same tax credit intended to bring

education to more people for two specific reasons.

Supply and demand: there are more students competing for admission to essentially the same number

of major universities.

Price Discriminators: Universities are able to adjust their price to capture the maximum amount of tax

credit money from each student because of their intimate knowledge of students’ financial situations.

Alternative Solutions to Make More

College Affordable

Removing educational tax credits all together.

One study by the Washington DC based think tank Tax Foundation suggests removing the

educational tax credits all together.

Projections show that the saved assets could be used to cut marginal tax rates across the board

by 0.9% which would add $19 billion to GDP and create an estimated 121,000 full-time jobs.

Pre-payment arrangements for tuition.

These types of savings plans are already in place in seventeen states and allow for people to pre-

pay tuition based on a fixed cost, as far as 18 years in the future.

This gives families a degree of certainty and requires colleges to control their costs.

A renewed focus on Pell Grants would be a more targeted solution than the

current tax credit system.