[Today, Higher Ed Watch is running a guest post from our colleagues in New America's College Savings Initiative responding to recent criticism of 529 college savings plans and their ability to benefit low- and moderate-income families. The author of this post is Mark Huelsman, a Program Associate with the College Savings Initiative, a joint project between New America and the Center for Social Development at Washington University in St. Louis.]
By Mark Huelsman
Recently, 529 college savings plans have come under criticism. Like many stakeholders in the economy, 529 plan owners have not been isolated from financial pain, and many critics have used recent market volatility and plan underperformance to call for reform. Others, however, have gone further and called for policymakers to abandon 529s in particular, and savings overall, as a plausible conduit to help families afford college. As New America's recently launched College Savings Initiative is charged with examining and improving 529 plans, we feel that it is important to respond to some of these arguments.
To their credit, many critics of these plans share our general goal -- to increase postsecondary access and affordability for low- and middle-income students. We simply differ over whether or not 529 plans provide a promising tool for helping students attend and complete college who could not otherwise afford to go.
Consider this: A recent Gallup survey from Sallie Mae indicates that, while 62% of parents are saving for college, only 32% of those making less than $35,000 have put any money aside for this purpose. Furthermore, half of those low-income families are saving even less (or in some cases not at all) in light of the recession. This is, quite obviously, cause for concern. But is encouraging savings -- and college savings plans as vehicles to do so -- really the answer? We believe so.
Barack Obama's signature higher education campaign proposal was the creation of a new $4,000 fully refundable American Opportunity Tax Credit. Now with the former Illinois Senator in the White House, Congress is poised to implement a modified version of the credit as part of the stimulus package that is being fast-tracked this week.
Congress proposes that the new credit would temporarily replace the existing HOPE higher education tax credit, which was created during the Clinton administration. While it would be a marked improvement over existing tuition tax credits and deductions, the American Opportunity Tax Credit still has some flaws, especially with regard to targeting low-income students and interacting with other federal aid.
- Length of Eligibility: The new credit would be available for the first four years of higher education -- two years longer than is currently allowed by HOPE.
- Deductible Amount: Students and parents would be able to take a deduction of up to $2,500 for tuition, fees, and qualified expenses -- $700 more than the maximum HOPE award.
Education Secretary-Designate Arne Duncan will appear before the Senate Heath, Education, Labor, and Pensions Committee for his confirmation hearing on Tuesday morning. While Higher Ed Watch won't be there to grill Duncan, we do have some tough questions on higher education policy for the Chicago Public Schools chief. Feel free to suggest ones of your own.
(1) Do you believe that the federal student aid programs, as currently designed, are appropriately targeted and work both efficiently and effectively in expanding college access, or do you believe that the programs need to be overhauled to ensure that the doors of college remain open for low-income and working-class students?
(2) Do you expect the administration to continue supporting both the Direct and Guaranteed Student Loan Programs or instead push for a 100 percent Direct Lending model given research that shows this program is less costly to run?
(3) As currently designed, federal higher education tax credits disproportionately favor middle- and upper-income families and are largely unavailable to low-income families due to the fact that they are nonrefundable and have limitations on the costs that they cover (tuition and fees versus cost of attendance). Given that the federal student aid system was created to increase the enrollment rates of those who could not otherwise afford to attend, are tax credits an efficient way to deliver limited student aid resources? Has the administration given any thought to revamping the current tax credits so they are available to lower-income families? What steps do you anticipate taking to ensure that the President-elect's proposed American Opportunity Tax Credit is available to low-income students who may have trouble meeting the 100 hour service requirement due to family and work responsibilities?
On January 20, 2009, Sen. Barack Obama (D-IL) will be sworn in as the 44th president of the United States. Around the same time, millions of college students across the country will be beginning their spring semesters. And these classes will arrive with sizeable tuition bills. Obama has a plan for helping students tackle these costs -- a tax credit for students who perform community service. But the president-elect should take note. Tinkering with the tax code is a less than ideal way to promote college access and affordability.
The cornerstone of Obama's college plan is the American Opportunity Tax Credit. Worth $4,000 annually, it is available to all college students, regardless of income, so long as they complete 100 hours of public service during the academic year. The tax credit is fully refundable, meaning that if a student's tax liability is less than $4,000, they will have their tax bill paid off and then receive a rebate for any leftover credit amount.
On paper at least, the American Opportunity Tax Credit (AOTC) appears far better than existing higher education tax credits. This is especially true with respect to the Hope and Lifetime Learning tax credits, which were championed by Obama's Democratic predecessor Bill Clinton. The Hope credit is worth up to $1,650 (100 percent of the first $1,100 spent on higher education and 50 percent of the next $1,100) for the first two years of postsecondary enrollment. The Lifetime credit, meanwhile, is worth up to $2,000 (20 percent of the first $10,000 spent on higher education) and may be taken so long as students are enrolled.
Barack Obama wants to give families a refundable $4,000 tax credit for college if their children complete a required amount of community service. It's a fine, conventional Democratic idea. It could be a lot more powerful, though, if Obama coupled it with an old Republican favorite -- depositing his $4,000 credit into private accounts like the so-called 529 plans that so many upper-income families use to save for college.
There are already 12 higher education-related tax credits and deductions on the books, including the Clinton administration's HOPE and Lifetime Learning tax credits. To varying degrees they make college more affordable for those with taxable income who get over the hump of initially enrolling in school.
But the current education tax benefits are a mess of different eligibility standards, confusing forms, delayed delivery, and regressive rewards. One in four eligible families claims the wrong amount, according to the Government Accountability Office. And financial aid specialists agree none of them do a good job at promoting college access for those who otherwise wouldn't go.
By Art Hauptman
Both Sens. Barack Obama (D-IL) and Hillary Clinton (D-NY) have made achieving greater college affordability a high profile issue in their Presidential campaigns. To reach this goal, the two Democratic candidates have proposed expanding Pell Grants and consolidating the current set of tax breaks for college into a single refundable tuition tax credit. Sen. John McCain (R-AZ) has thus far been strangely silent on the topic, despite its importance to so many millions of Americans.
The reach of the Democratic contenders' proposals does not match their rhetoric, however. To truly make college more affordable, the next President will need to push for a much fuller integration of student aid and tax provisions for higher education, as I suggested in my guest post last week.
Any effort to change the current system (or non-system) of student financial assistance should first recognize that federal higher education policy has two distinct goals. The first is to eliminate the chronic gaps in the rates at which students from low-income and high-income families (and between minority students and white students) enroll in and graduate from college. Call this the accessibility problem. The second big goal is to make college more affordable for millions of students from middle class and upper middle class families who have found the ever growing price of college to be a real strain on their budgets. Call this the affordability problem.
On August 9, 2007, President Bush noted that he'd be ok with reducing corporate income taxes and simplifying the tax law. On that same day, he signed H.R. 2272 - America COMPETES Act and called for Congress to finish the work and make the R&D tax credit permanent.
He is not alone in this tendency to call for simplification and lower rates, while also calling for new tax breaks. In his remarks about corporate tax rates he observed that "it's much easier to get something in the code than get it out of the code." A very true statement!
So, how do we simplify when we also want to use the tax law to solve all kinds of problems from health insurance to encouraging innovation?
This post was originally published at http://21stcenturytaxation.blogspot.com.