Students and their families do not always select tax breaks that could help them afford the cost of college tuition, possibly because tax filers are unaware of their eligibility for the tax credit or deduction or are confused about their use, according to a government report.

The report, released last week by the Government Accountability Office, analyzed IRS data for 2009 tax returns with information on education expenses and found that approximately 14 percent of filers (or 1.5 million out of nearly 11 million eligible returns) failed to claim a credit or deduction for which they appear eligible. On average, these filers lost a tax benefit of $466.

The Internal Revenue Service and the Department of Education have taken steps to provide information on these provisions, the GAO acknowledged, but the number of filers failing to claim a higher education tax provision suggests that more could be done. Developing a coordinated, comprehensive strategy to better inform eligible students could improve take-up of these tax provisions, said the report.

Despite efforts by the Education Department, research on the effects of federal assistance for higher education on student outcomes—such as the likelihood students will continue their education—remains limited. Researchers have examined the effects of federal assistance on a limited basis, such as only for certain states or groups of students, but these studies provide an incomplete view of the effects of federal assistance.

Continuing gaps in research on the effectiveness of federal assistance may be due, in part, to data and methodological challenges that have proved difficult to overcome. Recent changes in Title IV aid and tax expenditures—such as the introduction of the American Opportunity Tax Credit in 2009—may provide opportunities for evaluative research, but Education Department officials told the GAO they have not conducted such research.

In an environment of constrained budgets, evaluative research can help inform policy decisions.
Multiple Title IV programs and tax expenditures provided substantial aid to populations across income levels, the GAO noted. In 2009, 12.8 million students received Title IV aid, and approximately 18-million tax filers claimed a higher education tax benefit for current expenses. Recent increases in both programs from 2008 to 2009 may be because of enrollment increases and legislative actions, among other factors.

Title IV grants tend to benefit students and families with incomes below the national median (about $52,000 from 2006–2010), while loans and work-study serve these students and those with family incomes above the median. Most tax benefits from the tuition and fees deduction and the parental exemption for dependent students went to households with incomes above $60,000, whereas the majority of benefits from the other higher education tax expenditures in GAO’s review—such as the American Opportunity Tax Credit—went to households with lower incomes.

The GAO identified several factors that contribute to effective and efficient higher education assistance programs to help policymakers allocate limited government resources among multiple programs. Those factors include assessing whether a program achieves its goals and contributes to demonstrable results and whether it facilitates use by program beneficiaries. The GAO also developed a framework of questions that can be used as a policy tool for considering improvements to current programs or designing features of new programs. Questions include, “Does the program have clearly defined and measurable goals or objectives?” and “To what extent does the program produce benefits that are timely and sufficient to achieve its purpose, e.g., encouraging choice, attendance, persistence and completion?”

“Higher education tax provisions should be transparent and understandable,” the GAO concluded. “Students and families need sufficient and timely information on these provisions to ensure they are aware of their eligibility and understand how to claim the tax benefits. The multiple higher education tax expenditures available to help offset current education expenses fall short of this principle in that tax filers must be aware that they are eligible to claim tax expenditures and understand the provisions’ eligibility requirements as well as the interaction of those provisions. Identifying the key characteristics of filers who appear eligible for higher education tax expenditures but fail to claim them could provide important information on why some filers are not claiming these benefits.”

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