Tuition Tax Credit benefits affluent

by Cathy Wu | 9/28/06 5:00am

A recent study by the National Center for Education Statistics revealed that wealthier families are the primary beneficiaries of college tuition tax credits, the latest report of growing difficulties facing low-income students. Recent changes in federal aid have placed a heavier financial strain on such students.

The NCES study looked into federal education tax credits reportedly established to help ease that burden. The HOPE Scholarship and Lifetime Learning Credits were created in 1997 with the intention of helping mid-income families afford the high cost of college education. Yet due to the nature of the tax credits, higher-income families are receiving a larger share of the pie.

The HOPE scholarship provides up to $1,500 in tax credit for the first two years of college while the Lifetime Learning Credit provides up to 20 percent tax credit for any time after the initial two years. Tax credits, unlike tax deductions, are directly subtracted from the final tax amount that a family owes. For a low-income family that does not pay a significant overall amount in the first place, tax credits offer little to no help for tuition needs. Therefore, low-income families often look to grants and other forms of scholarship for help with their college bills.

"The reason that it doesn't help low-income people is that they're not paying any taxes," Virginia Hazen, Director of Financial Aid at Dartmouth, said.

In the NCES's report, federal credit savings averaged $700 for those families earning $92,000 or more and $600 for families earning $32,000 or less. About 43 percent of all federal education tax credit go to those families earning $50,000 or more.

This lopsided distribution of funds may be attributed to the political intentions behind the education tax credits.

"It was probably a largely political reason that it was put into place and it was meant to address mid-income families," Hazen said.

Hazen also suggested that a better way of dispersing the money to poorer families would be to put money into the Pell program, a federal grant fund for college students.

With college tuitions on a steady rise, the government has made efforts to help students pay for higher education. Extra money, however does not always translate into extra help. Federal grants have increased by 86 percent over the last ten years, a College Board's Trends in Financial Aid report concluded. This past school year, however, the Pell Grant only increased by three percent.

Rate increases are usually not beneficial to students. On July 1, when loan rates are adjusted each year, the federal government increased rates on student loans by 1.84 percentage points, pushing the Stafford loan's interest rate up to 6.54 percent.

Dartmouth Financial Aid Office offered students Perkins loans instead of the usual Stafford loans this year as a way to reduce the burden of the increased loan rate.

"What we do is we start by giving our neediest students Perkins loans," Hazen said. "Perkins loans have no interest at all [during the students enrollment at college] and the rate after your grace period is five percent."

The increased cost of college education, the inability of federal grants to supply sufficient aid, and the hike in federal interest rate loans all spell trouble for those students currently enrolled who struggle to pay for college. Once out of college, students often find themselves saddled with a large amount of debt and graduates of for-profit educational institutions have more debt when compared with their peers at non-profit institutions. A student graduating with a bachelor's degree, for instance, graduates with an average of $24,000 in debt compared to $16,000 for non-profit institutions.