Few Taking Advantage of College Tax Credits

In the lexicon of politics, few ideas are as attractive as helping middle-class families pay for college. So it is not surprising that in his 2001 budget to be unveiled Monday, President Clinton earmarks $30 billion over the next 10 years to expand tax credits for tuition relief.

What is surprising is that, according to an early analysis by the Treasury Department, fewer than half of those eligible for current tax credits are taking advantage of the benefits.

Experts blame puzzling rules, relatively meager benefits for some families and a widespread lack of awareness that taxpayers now can turn to the Internal Revenue Service to help put their kids through college.

Tuition bills can be the bane of middle-class budgets, and the fact that so many Americans apparently pass up what amounts to free money for college has reopened a debate over whether the income tax system is an efficient conduit for such assistance.

“It increasingly complicates the process of applying for help,” said economist Eugene Steuerle, a tax analyst at the Urban Institute here. “Now someone looking for help with college expenses has to apply to the college for scholarships, to the government for grants and also apply on their income taxes. It makes the world very difficult for families.”

At issue are the Hope and Lifetime Learning tax credits, centerpieces of Clinton’s education agenda, which he pushed through Congress in 1997. Taxpayers were allowed to claim the benefits for the first time last year on federal tax returns for 1998. Yet initial Treasury figures show that only 4.8 million of an estimated 13 million eligible taxpayers received the credits--about 40%.

The Hope credit provides as much as $1,500 per student for tuition and fees in the first two years of college or vocational school, while the Lifetime Learning credit offers as much as $1,000 a year per family for a wide range of post-secondary schooling. Married couples earning up to $80,000 and single filers making as much as $40,000 can claim the full amount of the credits. Married couples earning as much as $100,000 and single filers making as much as $50,000 are eligible for reduced credits.

Only last year, the administration had estimated that the Hope and Lifetime Learning credits would cost the Treasury $7 billion in the 1999 fiscal year.

Instead, taxpayers claimed $3.5 billion in benefits, according to preliminary figures.

“Those data were surprisingly low, but we really can’t say why that is,” said a senior Treasury Department official. One possibility is that original projections of the credits’ effect were far off the mark.

Slightly less than half of the total--$1.7 billion--went to taxpayers earning $50,000 or more.

Education Department officials remain hopeful, saying that they expect the number of taxpayers receiving the credits to rise in coming years as more people find out about the program.

“I must say that the 4.8-million figure is enormously gratifying,” said Lee Fritschler, assistant secretary for post-secondary education. “That’s one heck of a lot of families. . . . It is being used substantially and will be used more in the future.”

The question of why more parents and students have not claimed the credit intrigues Kate Jeffery, director of student financial support for the University of California system. She said that the system will do a survey to determine to what extent students and parents are aware of the aid.

“I have the gut feeling that it is underutilized,” Jeffery said. “This is the kind of program that, because it is so complicated, will take a few years for people to learn about and understand.”

In his new budget, Clinton will propose spending $30 billion over 10 years on a “college opportunity tax cut” that builds on the Lifetime Learning credit. Under his plan, the maximum credit gradually would rise to $2,800 per family. (Currently, the maximum $1,000 credit is scheduled to rise to $2,000 after 2002.)

His plan also would extend the full benefit of the Lifetime Learning credit--but not the Hope credit--to married couples making as much as $100,000 and single filers earning as much as $50,000. A reduced benefit would be available for married couples making as much as $120,000 and single filers with incomes of as much as $60,000.

In his State of the Union message last month, Clinton said that the expansion would make four years of college “affordable for all.” The average tuition and fees at four-year public colleges nationwide is $3,356 for the 1999-2000 school year, and for community colleges the average cost is $1,627.

UC’s Jeffery said that additional benefits would be welcome, since a greater number of families would be helped. However, she and many other financial aid officers believe that the credits are unlikely to become a mainstay of student aid because of their many limits.

“What I see this program for is to help fill a gap that exists for middle-income families who aren’t eligible for need-based aid to finance the cost of their college attendance,” she said. “It’s part of the mix, but I don’t see it as a replacement for need-based aid.”

The credits come with more than a few catches. Room and board expenses are not covered. Benefits are structured so families have to incur the expense before they can claim a tax credit.

Karen Yeager, manager of tax research at H&R; Block’s Kansas City, Mo., headquarters, cited further examples of complexities.

Take a divorced couple with one parent paying tuition for a student while the other parent claims the student as a dependent for tax purposes. Under Treasury Department rules, Yeager said, the custodial parent would be entitled to claim the credit. End result: the parent who pays tuition gets no benefit.

“Someone who might look to be eligible may not be,” said Yeager. Since the late 1990s, the Clinton administration and Congress increasingly have turned to tax breaks to provide help in paying and saving for college. A maze of conflicting rules and requirements has been the unintended consequence.

In an analysis published last year, Congress’ Joint Committee on Taxation cautioned:

“While . . . more taxpayers are able to take advantage of . . . education incentives, the various eligibility requirements, the interaction between different provisions, as well as the record-keeping and reporting requirements may be time-consuming and confusing. Taxpayers . . . must be careful about which incentives are selected in any particular year so as to avoid losing eligibility for [another] provision.”

The Urban Institute’s Steuerle said that may explain why so many people apparently have not bothered to apply for the benefits.

“It shows the consequences of having so many programs coming through so many different parts of government that often one hand doesn’t know what the other is doing,” he said. “They should be coordinated and pulled together in ways that are a lot simpler.”