Members of the House Ways and Means Committee on Tuesday discussed what tax changes could encourage students to attend and complete college, especially low-income students. Witnesses speaking at the Oversight Subcommittee hearing had a simple answer: Keep it simple.
Too often, the forms and requirements to get the federal tax benefits created to help students are too complicated for students and families, said the witnesses, who represented a think tank, higher education association, university and community college. A simpler and more effective way to serve low-income students is to provide direct aid, such as increasing the Pell Grant award, to students and their colleges, they said.
When it comes to community colleges, Susan Dynarski, professor of public policy, education and economics at the University of Michigan, said that she supports the idea of making them free for their students, who are often first-generation in college, people of color and from low-income families.
“I don’t think anybody should be borrowing to go to community college,” Dynarski said. “We’ve put people in a bind where they need to borrow or they need to work more. Working more puts them at risk of dropping out, while borrowing puts them at greater risk if they drop out.”
Problems with the AOTC
Several of the speakers noted that the federal tax code incentives typically help only wealthier students who come from families that can work through the forms and requirements. On occasion, the tax benefit conflicts with other programs. For example, students who receive a Pell Grant often see their potential benefits from the American Opportunity Tax Credit Act (AOTC) reduced.
The AOTC covers up to $2,500 in annual college tuition, fees and other education-related expenses; 40% of the credit (up to $1,000) is refundable. Pell Grants are treated as tax-free income when used to cover tuition and fees, but any portion of the grant used for other education-related items, such as living expenses, is taxed. Also, using Pell grants to cover tuition reduces potential AOTC eligibility, which complicates determining the tax benefit.
About 725,000 Pell-eligible students are adversely affected by a lower AOTC benefit each year, said Susan Whealler Johnston, president and CEO of the National Association of College and University Business Officers.
Last week, Rep. Lloyd Doggett (D-Texas) and other committee members introduced bipartisan legislation to fix the Pell/AOTC issue. The Tax-Free Pell Grant Act would extend the tax-free use of Pell grants to cover all education-related expenses, like room and board. And it would expand the qualifying expenses to receive the AOTC benefit to cover computer costs and childcare.
Making Pell grant non-taxable is among the top legislative priorities for the American Association of Community Colleges, which supports the bill.
“Childcare has become a barrier for many students; this bill is designed to remove it,” Doggett said at the remote hearing.
In terms of providing more direct aid to students instead of tax refunds, Doggett noted that he also would like Congress to offer low-income students assistance through a direct expenditure or appropriation, including providing more money through the Pell Grant program. But that’s not likely to happen, he said.
“We live in a reality when this committee is in charge of tax expenditures and has a preference for those, in many cases,” Doggett said.
Dynarski observed that any changes to the tax code or to federal student aid programs require careful consideration because changes to either program can affect the other.
“We need to be extremely vigilant about unintended collisions between the programs,” she said, citing the Pell Grant/AOTC issue. “If we’re going to have multiple programs, someone needs to be out there keeping track of how they interact so that students don’t get hurt by it.”
It’s also important that students receive the tax refund at the beginning of the school year when they need it to pay college bills, Dynarski said.
“Getting it a year later doesn’t help anybody get to college,” she said.
A long way back
Steven Rose, the long-time president of Passaic County Community College in New Jersey, presented startling facts about recent high schools graduates in his service area, especially low-income students. Due to the pandemic, the college saw a -17% drop in enrollment this past year, mostly among newly enrolled students rather than continuing students, he said. While the rate among students from more affluent school districts dipped slightly, it dropped by 50% among several high schools in urban areas where most low-income students live.
“In our discussions with these districts, it is clear that these students did not then choose to go elsewhere; they just did not go to college,” Rose said.
The outlook for this fall remains grim, he said. Urban high schools in his area report that many students stopped attending remote classes over the past year and many will not graduate.
“In some cases, the school districts report that they totally lost touch with these students,” Rose said.
Many of those who did graduate and have enrolled at PCCC will require academic help, including remedial assistance, he said. That, in turn, will affect college graduation rates.
But PCCC and community colleges across the country are doing what they can to help these students and to encourage other students to return. For example, for those students not getting their high school diplomas, PCCC is offering a free GED program so they can earn the credential that will hopefully lead to them starting college, Rose said. The college is staying in contact with guidance counselors, principals and superintendents daily to identify those students, he said.
“While challenges are daunting, the cost of failing is far too great,” Rose said.
He also thanked members of Congress for providing federal funding to help community college and other higher education students deal with issues arising from the pandemic.
“I am not exaggerating when I report that the aid to student was in many cases life-sustaining and changing,” he said, noting students have struggled with housing and food security, access to technology, and challenges at work and home.
Other tax-related ideas
Several lawmakers on the subcommittee noted legislation they have introduced or are working on. Rep. Danny Davis (D-Illinois) said he wants to create a tax incentive for colleges and universities to graduate more low-income students with little debt. He added this is to supplement, not supplant, discretionary programs.
“Of course, this is tricky because nonprofits do not have tax liabilities,” he said, noting he has considered perhaps offering colleges bonds with good terms as an incentive.
“The Pell Grant is the best way for the federal government to invest in students, but a tax credit related to the investments that institutions are making in grant aid is an intriguing idea, one that should be explored further,” Dynarski said. “I encourage you to pursue that idea.”
Rep. Dan Kildee (D-Michigan) would like to help foster youth overcome unique barriers in college by providing more services such as counseling or helping with housing during academic breaks. He cited that the University of Michigan’s Blavin Scholars Program, which serves foster youths, has a graduation rate that is more than 95%. Kildee has co-introduced the Fostering Postsecondary Success for Foster and Homeless Youth Act that would identify and spotlight colleges that have tailored such campus-based programs for foster and homeless youths. The bill also would create a center to share best practices and provide technical help.
Dynarski said Michigan is a wealthy college and has endowments that can afford such a program. But other public colleges, especially those that serve many low-income students, run mainly off their tuition and fees, and may have seen their state funding gradually decline over the years. Among the cuts colleges often have to make is to support services.
“If you want to support foster children, we should be looking to support the schools that low-income students attend, and those are community colleges and public universities,” Dynarski said.
