Education Tax Credits: Refundability Critical to Making Credits Helpful to Low-Income Students and Families

Half of all non-loan federal student aid is now offered as tax benefits for educational costs in the form of credits, deductions, and college savings accounts. These benefits help students and families offset the costs of their postsecondary education with tax savings. Yet, as explained in the 2013 report, "Reforming Student Aid: How to Simplify Tax Aid and Use Performance Metrics to Improve College Choices and Completion," under current law, the benefits of these tax incentives overwhelmingly go to students from higher-income families who are already most likely to attend higher education institutions. Moreover, the multiple overlapping tax benefits for higher education add to the complexity of the tax code, and can result in taxpayers not claiming the benefits for which they are eligible. In both the initial report, and a follow-up report from "The Reimagining Aid Design and Delivery (RADD) Consortium for Higher Education Tax Reform," a set of changes is recommended, that would both simplify the package of education tax benefits and increase the extent to which they assist students in low- and moderate-income families. With the increased need to make college more affordable for low-income students and their families, policymakers are rightfully paying attention to this issue. In the previous Congress, Representatives Diane Black (R-TN) and Danny K. Davis (D-IL) introduced H.R. 3393, the Student and Family Tax Simplification Act, which combined several tax provisions into an enhanced American Opportunity Tax Credit (AOTC). President Obama's proposed budget for 2016, released in February, contains a proposal that builds on this bill. And in March, Representative Lloyd Doggett (D-TX) introduced H.R. 1260, The American Opportunity Tax Credit Act of 2015 and Senator Charles Schumer (D-NY) introduced S. 699, The American Opportunity Tax Credit Permanence and Consolidation Act of 2015 that takes the current AOTC one step further by increasing and expanding current eligibility limits. While all of these proposals are designed to make the AOTC permanent, to simplify the tax code by consolidating benefits, and to increase the extent to which students and their families who do not have federal income tax liability can benefit, they vary in the details. This brief explains the tax provisions that would be affected by these proposals, compares them all, and examines how different types of students would be affected under each proposal.