Tax Savings for Higher Education
Students Often Miss Out
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“The federal government’s primary role with respect to higher education tax preferences is limited to the promulgation of rules; the provision of guidance
to tax filers; and to the processing of tax returns,” the GAO noted. And the hodge-podge of tax preferences and their complexity “may lead some not to claim a
credit because they judge the added costs of filing for the credit to outweigh its benefits,” the report concludes. The GAO also said no one has adequately studied the issue of how well tax credits actually make school affordable, affect choice of school, or keep students in school.

Internal Revenue Service spokesperson Bruce Friedland said the “IRS’ job is to administer the tax code. We don’t take stands on tax policy.” However, the IRS has provided a publication, Tax Benefits for Education, to assist filers.

Tom Ochsenschlager, vice president of the American Institute of Certified Public Accountants. suggested that Congress consider combining the Hope, Lifetime Learning Credit, and Coverdell and 529 plans “so people wouldn’t have to try to figure out each year which is best for them.” Winfield Crigler, executive director of the Student Loan Servicing Alliance, said “you almost need to have a spreadsheet and run your options or have a tax program and run your options before you can figure out which provision is the right one for you.” The alliance is trying to convince Congress to simplify the Student Loan Interest Deduction. The “rules are the most complicated rules in the entire (tax) code. It is sort of ridiculous to think you could figure it out for yourself.”

Shortly after the GAO issued its report, a federal panel came up with a specific idea to knock out at least some of the confusion. Last January, President Bush appointed a bipartisan President’s Advisory Panel on Federal Tax Reform, which offered at the start of November a series of recommendations for simplifying the tax code. The panel suggested that Congress knock out all education savings plans, as well as all retirement and health savings accounts. (Don’t worry if you’ve already got one; the panel said existing ones could continue although you couldn’t add more money to them.)

The panel would replace all tax free savings plans and educational tax deductions with Save for Family Accounts. Taxpayers could contribute up to $10,000 a year to one account to cover their choice of education, medical and retirement benefits as well as the cost of a new home. Savers could withdraw money from the accounts at any time.

“Overall, the (current) structure of the tax benefits for education expenses generally provides the largest benefit to families with students who attend schools with higher tuition. These tax benefits may allow educational institutions to increase tuition and fees because a portion of these costs is offset through the tax code,” the panel’s report, Simple, Fair and Pro-Growth: Proposals to Fix America’s Tax System, explained. “It is not clear that the structure of these benefits actually encourages individuals to obtain more education than they would have in the absence of these tax benefits." The panel also recommended creating a Family Credit allowance of $1,500 for families with full-time students 20 and under – but not for older students.

What's next? Leaders of the Senate Finance Committee, who requested the GAO study, issued a joint statement pledging to look into the matter. Congress needs to take a hard look at how to make these programs more accessible and therefore more effective.