Many of the white papers sponsored by the Bill & Melinda Gates Foundation’s Reimagining Aid Design and Delivery project have focused on modifications to the Pell program and/or student loans and repayment (including the two I summarized previously, found and ). However, the released on Wednesday by the Center on Postsecondary and Economic Success takes a different approach.聽 It argues that by making tax-based student aid more beneficial to low and middle-income students, the federal government could save billions of dollars, direct those savings to the Pell program and improve the financial aid system as a whole.
Current tax-based financial aid provides high-income families with much larger tax deductions, since the value of the deductions is linked to a family鈥檚 marginal tax rate.聽As notes, 鈥渁 $100 tax deduction, for example, is worth early $40 to a high-income household but only $10 to a lower-earning family.鈥澛� To remedy this issue and refocus the benefits of aid onto low-income families, the Center proposes increasing the refundable portion of the American Opportunity Tax Credit (AOTC).聽The Center also recommends eliminating nonrefundable tax credits, such as the Lifetime Learning Credit (LLC), since they do not benefit households that pay no income tax (i.e. low-income families).
The table below shows the percent distribution of student aid by type and income category in 2013.聽As you can see, Pell Grants (in blue) primarily benefit low-income families, whereas tax-based student aid (in purple) does the opposite.聽 Another interesting table from the Tax Policy Center can be found .
The paper includes three alternative proposals for making tax-based aid more helpful to low-income students and simultaneously boosting college access and completion.聽 It also discusses three options for improving performance measures used in student-aid policies.