How higher education tax incentives work

By Leo Doran

While considerable attention is paid to the role Pell Grants play in subsidizing higher education, the federal government forgoes nearly as much revenue every year through tax incentives also aimed at making a postsecondary education more affordable. Unlike the Pell Grant program however, higher education tax incentives are not targeted specifically to parents and students from low-income families — in some cases, the highly complicated system actually results in greater benefits for wealthier Americans.

There are three main tax incentive programs that are designed to make higher education more affordable, the American opportunity tax credit, the lifetime learning credit, and the tuition and fees deduction. By law, taxpayers can only take advantage of one of these programs each year they file their taxes, meaning that savvy filers will calculate their tax burden multiple times applying the different incentives each time to figure out which program they should participate in. There is also a fourth program that allows taxpayers to take a student loan interest deduction, though this incentive is usually most relevant after a higher education degree has been completed.
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Gordon Mermin, a senior research associate at the Urban Institute’s Urban-Brookings Tax Policy Center and an expert in higher education tax incentives, spoke with InsideSoures about how the current system works and what kind of reform proposals are being discussed. Mermin also helps maintain a simulation model of the federal tax system that allows researchers to evaluate who would benefit and who would suffer from proposals to alter the tax code.
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