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Extending the American Opportunity Tax Credit Was A Mistake
03 Jan 2013
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As part of the deal to avoid the fiscal cliff, the expiring American Opportunity Tax Credit (AOTC) was extended through 2017. This is unfortunate for three reasons.

First, while the AOTC is too new to have an academic literature yet, its close cousins, the Hope and Lifetime Learning Tax Credits have been studied, and have been found to be ineffective. As Bridget Terry Long found

“although the tax credits were promoted as a means of increasing college access, this analysis found no enrollment response.”

In other words, the tax credits did not accomplish their goal of increasing the number the students enrolled in college.

Second, the tax credits did not lower net price at all schools. In fact, Long also found “some evidence to support that public two-year colleges responded to incentives created by the tax credits by raising tuition price.”

While these first two results are for the Hope and Lifetime Learning tax credits, not the AOTC, there is no reason to expect the AOTC to have different effects (the main differences between AOTC and Hope/Lifetime Learning are refundability and income cutoffs, neither of which are realistically driving Long’s findings). This means that just like for the Hope and Lifetime Learning tax credits, the AOTC is unlikely to increase college enrollment and probably encourages some schools to raise their tuition.

Third, due to higher income cutoffs, the AOTC is not as targeted as the Hope and Lifetime Learning credits were. The result is that much more of the tax credits are now being claimed by the relatively affluent. As former Education Sector analyst Stephen Burd wrote,

“The introduction of the Obama administration’s American Opportunity Tax Credit (AOTC) in 2009 has proven to be a bonanza for the highest income group.”

At a time when the country is running huge deficits, it seems strange to devote $67 billion over the next 10 years (see Clare McCann’s table) to keep a program that does not achieve its intended goal of increasing college enrollment, may actually be counterproductive in regards to college affordability, and results in a windfall for the relatively affluent.

Photo Credit: Time Out New York

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4 Comments

Comments

The primary goal in creating the Hope tax credit was not about increasing enrollment, so suggesting that now and then measuring success against a different goal seems like a faulty exercise. The Hope Tax Credit was targeted primarily on middle class tax relief to help middle class families deal with increasing college sticker costs in the early 1990’s that was disproportionally squeezing them. It also was enacted in the wake of the 1994 elections where the President was seeking ways to reach out to the new Republican majority in supporting investments in education. One legislative compromise outcome of the Hope Tax Credit was that it also helped boost appropriations in Pell funding at that time as well -bringing tax relief to some middle income families and more grant aid to lower income families than otherwise would have happened in that difficult budget environment. The AOTC was born out of several bipartisan legislative proposals by Democrats and Republicans over several Congresses in an effort to enhance Hope to better serve lower income students and more of the middle class through four years of college. Your assertion that the main difference was higher income and the refundable portion ignores the major differences. AOTC is available now for the first four years instead of just the first two years of college which is what Hope covered. Congress also expanded expense eligibility to include course materials for the first time, which expands the eligible expenses students on financial aid can claim if that aid is not meeting all of their academic costs, which helps reduce their out of pocket and loan costs. Four years versus two years is by far the most significant reform particularly considering for many students aid may be reduced in the later years of college and replaced with loans. You can quibble about income thresholds and refundability and certainly those issues can be revisited in tax reform, but make no mistake lower income and middle income families overwhelmingly value the AOTC and supported President Obama and Congress in extending the program. In fact in a national post election poll 82% of voters supported extending AOTC with similar support across all income levels.

Thank you Andrew. This is insightful as it was not aware of the comparison to Hope and Lifetime Learning Credits.

Thank you Andrew, very insightful as I was not aware of the comparison and outcome of the Hope and Lifetime Learning Credits. All the best.

I have to disagree at least on the point that this is making it affordable for me to get an online master\'s degree. At my stage of my career (mid-career), that\'s invaluable.

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