Tax Incentives for Higher Education

In this paper, Caroline Hoxby investigates the economic effects of provisions related to higher education in the Taxpayer Relief Act of 1997. This timely paper summarizes the major initiatives: Hope Tax Credits, Tax Credits for Lifelong Learning, Education IRAs, and tax deductibility of interest on student loans. The paper describes the incentives that these provisions generate for attending college and discusses the question of whether the people who most need to attend college are the ones most likely to be induced to attend by the new initiatives. It then synthesizes the existing literature on how federal government funds for higher education affect the tuition charged by colleges and universities, and it assesses the likely consequences of the new provisions for tuition. Finally, the paper discusses the probable effects of the initiatives on family saving and on the degree of effort and planning that students put into college.