Roosevelt Institute | Cornell University

Death, Taxes, and Tuition

By Emil Kunkin Published January 1, 2017

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Paying for higher education is a topic on the minds of many American families today, as college costs have skyrocketed. While radical changes are politically or economically unfeasible, there are other ways to help families pay for college.
By Emil Kunkin
Paying for higher education is a topic on the minds of many American families today, as college costs have skyrocketed. Many reformers and activists have called for change- Senator Bernie Sanders based his upstart presidential campaign on the promise of free tuition at public colleges. While such radical changes are politically or economically unfeasible, there are other ways to help families pay for college. As it stands, higher education costs have more than tripled since the 1970s, far outpacing inflation. And while there are a litany of loans, grants, scholarships, and aid available from both the government and private sources, families still struggle to pay and a growing number of students and parents are forced to take on huge amounts of debt.

While the political firestorm about tuition rages on, many sensible policy ideas and practical issues are being shoved to the side and ignored. One such issue is the way the tax code treats college expenses. For example, increasing the limit on tax-deductible education expenses has the potential to make higher education more affordable for middle class families without the enormous cost of plans such as those proposed by Sen. Sanders.

Unsurprisingly, the tax code surrounding college costs is less than straightforward. There are two different tax credits which are available to help families paying for college: The American Opportunity credit and the Lifetime Learning Credit. They are broadly similar. The American Opportunity credit is partially refundable, worth up to $2,500 a year, and can only be claimed 4 times per student. And the Lifetime Learning is nonrefundable and worth only $2,000 per year, but can be claimed as many times as a student is eligible. Both are geared to the middle class, as they can only be claimed by families with less than $180,000 in annual household income. Moreover, families can opt to forgo the credits and simply deduct up to $4,000 worth of qualified educational expenses.

In addition to these credits and deductions, there is the 529 educational account: a tax-advantaged savings vehicle aimed at reducing the burden on families paying for college. While contributions are not deductible for federal taxes, they are for state taxes, and funds in a 529 account can be invested and allowed to grow tax-free. Furthermore, any money withdrawn to cover educational expenses is not taxed.

While many Americans utilize these tax benefits, they have not proved sufficient. Since one of the main purposes of taxation (other than revenue collecting) is incentivizing productive behavior, the tax code reasonably should do as much as possible to promote education. As it stands, it does not. While a $4,000 deduction or a $2,500 credit is certainly helpful, college cost have skyrocketed in the decades since those amounts were chosen.

Take an example student- he or she is a California resident attending UC Berkeley coming from a middle class family that earns, say, $100,000 a year. According to Berkeley's financial aid calculator, this model student's family would be expected to pay roughly $25,000 per year in tuition and  room and board. They can deduct a mere $4,000 of that from their taxes. The family is left paying taxes on the more than $20,000 used to pay for their child's college education. Given the incredible rise in college costs, it makes sense to raise the amount that families can deduct for educational expenses.

This raises another issue, because of another quirk of the tax code. What exactly is considered a qualifying educational expense? The answer varies. For distributions from a 529 account almost all educational related expenses qualify, including tuition, room and board, and mandatory fees. For the $4,000 tax deduction, however, the definition of qualifying expenses is narrower. Room and board do not qualify, even if they are expenses mandated by the college (e.g. all freshmen are required to live on campus and have a meal plan). Given that these expenses can be required and can reach nearly $20,000 as colleges build newer and nicer dormitories, it make sense to unify the definition of qualifying expense under the broadest measure, including room and board.

By raising the amount that families can deduct for higher education policymakers would be killing a whole flock of birds with one policy stone. It will help middle class American families afford college. It is far more feasible both from a fiscal and political standpoint than free college for all or most, one of the populist demands of the far left. It fixes a broken system where the very wealthy are able to skirt taxes on college by investing in 529 accounts which are not as accessible to families with less disposable income and financial literacy. And most importantly it incentivizes families to spend on education and invest in our country's future.