Working Paper: NBER ID: w9553
Authors: Bridget Terry Long
Abstract: The 1997 creation of the Hope and Lifetime Learning Tax Credits marked a dramatic shift in the way in which federal support for college expenses is distributed to students and their families. Unlike other aid programs, the tax credits have exceptionally broad eligibility requirements, and there is a significant delay between when a recipient enrolls in college and when they receive the benefit. When introduced, the projected benefits of the tax credits were $9.7 billion, over fifty percent greater than the total amount spent at the time on the Pell Grant, the primary Federal grant program. This study examines the impact of the tax credits on students, families, colleges, and states. Using several data sources, I analyze the distribution of the benefits and the effect on enrollment decisions and college pricing. Analysis of tax return data suggests that what was intended to be a transfer to the middle class did benefit families with incomes between $30,000 and $75,000 the most. Insufficient tax liability due to low income levels and the interaction of the credits with other aid programs prevents many low-income individuals from qualifying for a benefit. Additionally, many eligible students did not claim a credit, particularly those from minority groups. Further analysis finds no evidence of increased postsecondary enrollment among eligible students in spite of the stated goal to increase access to higher education. On the other hand, some states and public institutions appear to have responded to incentives to increase the prices of colleges at which students face a low marginal cost. However, the results of this analysis are mixed and less conclusive.
Keywords: Federal tax credits; Higher education; College enrollment; Financial aid
JEL Codes: I2; H2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Federal tax credits for higher education (I23) | Benefit families with incomes between $30,000 and $75,000 (I38) |
| Insufficient tax liability (H26) | Low-income individuals do not qualify for benefits (H53) |
| Federal tax credits for higher education (I23) | No increased postsecondary enrollment among eligible students (I23) |
| Liquidity constraints and timing of benefit realization (D15) | No increased postsecondary enrollment among eligible students (I23) |
| Eligible students from minority groups (J15) | Often do not claim the credit (G51) |
| Federal tax credits for higher education (I23) | Increase in college prices by states and public institutions (H79) |