Introduction
Senator Marco Rubio (R-FL) and Congressman Aaron Schock (R-IL) have recently introduced the Higher Education and Skills Obtainment Act, which would reform the current tax subsidies for higher education by eliminating the current assortment of education tax credits and deductions and consolidating them into one higher education credit called the Higher Education and Skills Obtainment Credit. This proposal reduces some complexity that exists in the current tax benefits for higher education, targets the credits for a narrower population of taxpayers, and saves taxpayers money.
However, there are still problems with using the tax code to subsidize higher education. Tax credits for higher education are likely contributing to rising tuition costs while not making students any more likely to enroll in college. Although this reform is a step in the right direction towards a simpler tax code, there is still room for a conversation about whether the tax code is the right tool for making college more affordable.
Higher Education Tax Benefits
Lawmakers have increasingly used tax credits as a way to help students cover the cost of college. From 1998, the first year these credits were available, to 2010, the use and cost of these credits has greatly increased. Chart 1 shows the cost of higher education tax credits has grown from $4.5 billion in 1998 to more than $24 billion in 2010. With more than 24 million taxpayers claiming the credit, the average taxpayer claimed roughly $1, 000 in education tax credits.
Currently, there are three tax benefits for education that create an amalgamation of tax preferences for higher educational expenses. Each of these preferences has different benefit sizes, income limits, income definitions, and qualifying expenses. Table 1 shows the three available tax benefits for education expenses, their requirements, and their limitations.
The American Opportunity Credit, which was a temporary expansion of the Hope Credit, is a refundable tax credit of up to , 500. With the highest income limit of all education tax benefits, married taxpayers with incomes as high as $180, 000 can claim this credit. On the other end, since this credit is refundable, taxpayers can receive the credit even without a tax liability. This credit has a four-year lifetime limit.
The second tax benefit, the Lifetime Learning Credit, is not as generous as the American Opportunity Credit. This provision gives taxpayers a non-refundable credit up to $2, 000 on qualifying expenses and has an income limit of $124, 000 for married taxpayers. However, unlike the American Opportunity Credit, it has no lifetime limit. Taxpayers can receive this tax credit as long as they have qualifying educational expenses anytime in their life.
