Tax Credits Don't Spur College Attendance

The federal tax credits had little apparent effect on the probability of attending college for any group. Instead, the tax credits may have given colleges incentives to increase their tuition.

The Tax Relief Act of 1997 created the Hope and Lifetime Learning Tax Credit program, which was promoted as a way to increase access to college. By 2000 the program cost $4.9 billion a year, slightly more than half as much as the Pell Grant program. In The Impact of Federal Tax Credits For Higher Education Expenses (NBER Working Paper No. 9553, a study commissioned for an NBER Project on "College Choices: The Economics of Which College, When College, and How to Pay for It"), author Bridget Terry Long examines the program's results. She finds that the federal tax credits had little apparent effect on the probability of attending college for any group. Instead, they tax credits may have given colleges incentives to increase college their tuition.

Colleges were fully aware of the effect of the program on students' ability to pay. In fact, California,, , Minnesota, North Carolina, New York, and Washington were among the states that responded to the introduction of the tax credits by studying how they could change their tuition policies to substitute federal funds for state funds. After controlling for state appropriations and other characteristics, Long finds that tuitions grew 19 percent faster at low-cost two-year colleges with many students who were eligible for these credits than at more expensive schools with fewer potential beneficiaries. Among public four-year colleges, "schools in states with large financial aid programs increased their prices relative to similar institutions in other states after the introduction of the credits."

The credits were aimed at middle class families, and that group does seem to have taken the most advantage of them. Although they make up only 35 percent of eligible returns, half of the households who took advantage of the program had an adjusted gross income of between $30,000 and $75,000. However, by 2000, only half of the tax returns that were eligible for the credits claimed them. Insufficient tax liability probably kept many low-income families from participating. And, income ceilings theoretically kept high-income families out.

-- Linda Gorman