1. Higher Education: Improved Tax Information Could Help Families Pay for College (GAO-12-560) Presentation at the 30 th Annual SFARN Conference June 21, 2013 Page 1

2. Research Objectives 1)Assess the extent to which tax filers select higher education provisions that maximize their tax benefit. 2)Describe the size and distribution of Title IV student aid and tax expenditures available to assist students and their families with higher education expenses. 3)Summarize what is known about the effect of student aid and tax expenditures on student outcomes. Page 2

3. Scope and Methodology Analyzed data from the Department of Education, the Internal Revenue Service (IRS), and the Board of Governors of the Federal Reserve. Conducted a literature review for original empirical research. Page 3

4. Background The federal government provides billions of dollars in assistance each year to help millions of students and families meet the costs of higher education. We reviewed a variety of Title IV programs and tax expenditures administered by the Department of Education and the Department of Treasury. Page 4 Amount of Benefits from Selected Title IV Programs and Tax Expenditures That Pay for Current Expenses, 2006 – 2009

5. Objective 1: Tax Benefits Received by Tax Filers Claiming the Tuition Deduction, Hope Credit, LLC, and AOC, 2006–2009 Page 5

6. Objective 1: Suboptimal Choice Analysis Some taxpayers may not maximize benefits Failure to claim any credit or deduction Choosing a credit or deduction that yields less of a tax benefit than another provision would Included calculation of impact on state tax liability Page 6

7. Objective 1: Limitations Couldn’t analyze all returns tax filers who appeared eligible for the LLC or tuition deduction in 2009 had a 1098-T with information on the student’s education expenses had a tax liability after claiming other tax benefits. Couldn’t analyze American Opportunity Credit because of lack of information Page 7

8. Objective 1: Limitations (2) Assumption of accurate information on the 1098-T. Some students may not have been eligible to claim credits because expenses were covered by other sources (529 distribution, employers, outside scholarships) Page 8

9. Objective 1: Federal Tax Benefit Page 9

10. Objective 1: Federal Tax Benefit (2) Page 10 *Sample size is too small to estimate the average amount the tax filers failed to increase their tax benefit.

11. Objective 1: State Tax Benefit Choosing deduction lowers AGI, which can reduce state income tax liability enough to compensate for higher federal income tax paid. About one third of those that made a suboptimal federal choice by choosing a deduction actually maximized their combined federal and state tax benefit. Page 11

12. Objective 1: Factors Contributing to Suboptimal Decisions Unaware of tax provisions or misunderstanding eligibility rules. Number of provisions. Similarity of provisions. Differences in key definitions. Coordination with other tax provisions. Page 12

13. Objective 1: Reducing Suboptimal Choices Educating tax filers Educating tax preparers Developing tools to help tax filers make better choices Improving tax preparation software Page 13

14. Objective 2: Substantial Aid to Populations Across Income Levels In 2009, 12.8 million students received Title IV aid and approximately 18 million tax filers claimed a higher education tax benefit for current expenses. Title IV grants tend to benefit students and families with incomes below the national median, while loans and work- study also benefit those with income above the median. The tuition and fees deduction and parental exemption mostly benefit households with incomes above $60,000, whereas the majority of benefits from other tax expenditures went to households with lower incomes. Page 14

15. Objective 3: Research on Effects of Federal Assistance for Higher Education Remains Limited Some forms of assistance and student outcomes remain largely unstudied Page 15 Research We Reviewed is Limited and Cannot be Generalized

16. Objective 3: Data and Methodological Challenges Remain Persistent Obstacles to Research Data on Title IV programs are fragmented and not routinely available; data on tax expenditures are subject to privacy restrictions or are not collected by IRS. Opportunities to measure the effects of federal assistance are limited. Page 16

17. Recommendations 1) GAO recommends that IRS and the Department of Education work together to develop a strategy to improve information provided to tax filers who appear eligible to claim a tax provision but do not. 2) GAO recommends that the Department of Education take advantage of recent and anticipated program changes to sponsor and conduct evaluative research into the effects of Title IV programs and higher education tax expenditures at improving student outcomes. Page 17

18. Page 18 Related work: 2013 Annual Report: Actions Needed to Reduce Fragmentation, Overlap, and Duplication and Achieve Other Financial Benefits. GAO-13-279SP. Washington, D.C., April 9, 2013.GAO-13-279SP Higher Education: Improved Tax Information Could Help Pay for College. GAO-12-863T. Washington, D.C.: July 25, 2012.GAO-12-863T. Higher Education: Multiple Higher Education Tax Incentives Create Opportunities for Taxpayers to Make Costly Mistakes. GAO-08-717T. Washington, D.C., May 1, 2008.GAO-08-717T Postsecondary Education: Multiple Tax Preferences and Title IV Student Aid Programs Create a Complex Education Financing Environment. GAO-07-262T. Washington, D.C., December 5, 2006.GAO-07-262T Student Aid and Postsecondary Tax Preferences: Limited Research Exists on Effectiveness of Tools to Assist Students and Families through Title IV Student Aid and Tax Preferences. GAO-05-684. Washington, D.C.: July 29, 2005.GAO-05-684

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