Tackling college affordability through state tax codes – ITEP
Federal policy alone will not solve the college affordability crisis
For decades, post-secondary education has been described as a path to a better life and a stronger economy. But the exorbitant cost of college makes it out of reach for far too many people, especially people of color. Of those who attend college, student debt is growing rapidly for all students, and the average black college graduate owes an additional $ 25,000 while studying loans than white college graduates. The Build Back Better Act, which has just been passed by the House, would take Small steps toward tackling the current college affordability crisis, such as the expansion of Pell Grants. However, more ambitious proposals, such as free college and student debt forgiveness, are not in the bill.
Since a radical federal solution to the college affordability crisis does not appear to be on the immediate horizon, it is even more important that states take all possible steps to expand access and affordability. colleges. While most of these efforts will need to focus on general ledger spending, such as reducing tuition fees, increasing financial aid, or perhaps even directly funding free universities, tax policy also has a role. to play. Specifically, states could restructure their tax policies for higher education to be more equitable and efficient by moving beyond tax policies that encourage university savings, which benefit high-income families, and instead, create policies that make university more accessible to lower-income families.
Current federal and state tax policy for higher education benefits the rich
At the federal level, households can benefit from tax advantages for higher education before, during and after college. Families benefit before sending their children to college by receiving annual tax breaks for money invested in a 529 plan. U.S. Opportunity Tax Credit (AOTC), or after college with the student loan interest deduction, among other programs. The costs are also substantial. In 2020, these exclusions, tax credits and deductions totaled over $ 28 billion, which is more than the $ 27 billion spent on Pell Grants. While the Pell scholarships massively support students from low-income families, the reverse is true for these tax breaks.
Most states already have tax policies in place for higher education, but too many of them are poorly targeted and likely offer greater benefits to high-income or wealthy white families. For example, tax breaks for investment income in 529 accounts massively benefit wealthy, predominantly white families able to set aside large amounts of college savings. The tax deductions for 529 contributions are also imperfect. People of color tend to have less family wealth to draw on to pay for their education, and therefore are more likely to find themselves paying for their education with loans rather than savings.
Deductions for student loan interest or tuition and tuition are less of a problem than the tax breaks associated with 529 accounts, but even these policies can have unfair effects because, by taking the form of a deduction, the benefit per dollar deducted will tend to be lower for low-income people of color.
Tax policy is a tool that policymakers can use to tackle challenges within the higher education system
One of the main principles of good tax policy is simplicity, but state tax policies for higher education do not respect this principle. States could do better by streamlining existing programs. And they should disassociate themselves from federal tax breaks for higher education and create a refundable credit for pre-college, during college, and post-graduate. eligible study expenses. This would support the goal of simplicity because, unlike current policies where there are many requirements to be met and there are many tax policies to be understood, this credit would be applied to any post-secondary education expenditure. For example, this credit could cover contributions to a 529 plan, course books, and interest on student loans. It would also be universal for all post-secondary institutions, such as community colleges, four-year universities and trade schools, among other eligible establishments.
The design of such a tax program would help ensure fairness and justice, as lawmakers could design it to target those who need it most. This is where the repayment comes in, as it helps ensure that people who do not have to pay income tax – usually low-income households – can receive assistance. Designing policy in a way that has a low income cap also makes sense as a way to target available dollars so that those who need help the most get a significant boost.
The big picture
When it comes to the affordability of higher education, policymakers face many competing policies, such as free college education, forgiveness of student debt, strengthening financial aid programs or l increase in public funding for post-secondary institutions. Given the breadth and depth of the college affordability crisis, policymakers should explore a broad and ambitious range of options. The overhaul of state-level tax breaks related to higher education is an admittedly modest policy change from some of the most transformational investments lawmakers might consider. But if states intend to use their tax codes to promote university affordability (and every state with a personal income tax has at least one higher education-related tax preference), then it’s worth worth it for them to do so in the most efficient way possible.
The proposal put forward in this article – an income-limited refundable credit for a wide range of university expenses – would reduce the inequalities present in many preferential income tax states offered today. Low- and middle-income families facing university expenses would receive a larger and more consistent benefit through a refundable credit than they do under the current tax deduction system, while high-income families would see their benefits. reduced benefits through further phasing out of taxes. grants paid out of their contributions to 529 accounts or their direct tuition payments.
The net result would represent a reshuffle of state priorities away from grants for high-income, wealthy families who are disproportionately white, and towards a more focused policy offering more substantial benefits to a diverse group of past, present college students. and future. more modest means.
With upcoming legislative sessions for most states, lawmakers have an opportunity to address a problem that too many Americans face: the affordability of universities. Taking the time to create a tax program that helps steer post-secondary tax relief in a better direction, towards fairness and efficiency, can be a useful part of such an endeavor. Where federal policymakers fail, state policymakers should do what they can to move us forward.