College Savings Proposal: Worthy but Flawed

House and Senate conference committees will begin huddling this week on the contentious matter of tax cuts. Most of the public attention so far has fastened on the paramount issues of child credits and capital gains tax cuts. But a good chunk of the proposed tax changes is aimed at helping families finance college educations for their children.

Politically it’s a done deal, because of May’s bipartisan agreement to provide about $35 billion in education tax credits and deductions as part of the new budget. The goal now is to fashion fiscally sound, responsible benefits that do not exclude the working poor.

The House, Senate and White House each have packages. These are works in progress, but each proposes a tax credit for some college costs, a tax deduction for other costs, and educational savings accounts similar to individual retirement accounts. These concepts have merit; the devil will be in the details, and so far those are sketchy at best.

The House, Senate and President Clinton each would provide a tax credit of up to $1,500 for tuition and fees for at least two years, but they vary on income eligibility. Clinton would phase out credits for families with incomes of $80,000 and up--more sensible than the higher income limits in the House and Senate versions.

The amount of the credit is based on the $1,500 average cost of tuition and fees at a U.S. public community college. The California Postsecondary Education Commission would like to include other costs of attending college, such as transportation and child care, because full-time students at California community colleges pay just $400 a year, which would automatically cap the credit at that amount. The state commission rightly warns that states like California would be tempted to raise tuition and fees since they essentially would be paid in federal dollars.

The tax credit, as proposed, could be applied only against taxes actually owed. So if a low-income family had no tax liability, it would get no benefit. Either the credit should be fashioned so that poorer families can receive some benefit or some other mechanism should be developed to supplement the federal Pell grants and loans available to poorer students.

The Clinton plan would allow substantial tax deductions for third- and fourth-year college students, graduate students and courses taken by working men and women. But what is a “college course”? Would a weekend cooking school be included?

All three proposals include some form of tax-advantaged education saving accounts. The House would allow up to $5,000 per child a year to be saved; the Senate $2,000 annually, plus the amount of the child tax credit, up to $500 per child. Neither bill has income limits for who could have these accounts. Contributions would not be tax-deductible but interest earned would be free of tax if the money was ultimately used for qualified educational expenses. Whereas the two congressional plans would benefit mostly higher-income taxpayers, the Clinton plan rightly would limit contributions to $1,000. If the child did not go to college, the money could alternatively be used only for buying a first home or for retirement.

These proposals map a virtuous path, but there are potholes. They are complicated, with provisions like the requirement of maintaining a B average. Who would be the watchdog for this?

There are too many rules and calculations. And the plans too often benefit comfortable families who should need little government help in sending children to college. The money for education credits is pledged, but the program will not work well unless congressional negotiators keep in mind simplicity, clarity and fairness.