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Legislation that the U.S. House of Representatives is considering this week would significantly simplify higher education tax breaks for students and their families – but would do so at an exorbitant price.

First the good news: the Student and Family Tax Simplification Act includes provisions that are in line with the recommendations of the Consortium for Higher Education Tax Reform, of which New America was a member. Specifically, the bill would:

  • Preserve the American Opportunity Tax Credit (AOTC) and make it the primary vehicle for tax-based student aid. Currently, student aid delivered through the tax code includes multiple tax credits and deductions. Many of these tax breaks overlap, and taxpayers often do not choose the provision that would benefit them the most. This bill would make the AOTC — an annual income tax credit of up to $2,500 available to help students cover tuition, fees, and course materials for their first four years of college — permanent, while eliminating the Lifetime Learning Tax Credit and the highly regressive Tuition and Fees Deduction. It would also index the value of the AOTC to inflation, starting in 2018. Under current law, the AOTC will expire at the end of 2017 and will revert to the non-refundable Hope Tax Credit.
  • Increase the portion of the credit that is refundable. Today, low-income households that don’t earn enough to pay federal income tax can receive only up to 40 percent of the AOTC as a refundable credit. The consortium has called on Congress to make the AOTC fully refundable so low-income students and their families can receive the whole benefit. The legislation doesn’t go quite as far – it would increase the refundable portion of the grant to the first $1,500. This is a step in the right direction, as it would particularly help students attending the lowest-cost institutions, who currently do not receive even the full $1,000 refundable credit if they have less than $4,000 in qualified expenses.
  • Better coordinate the AOTC with the Pell Grant. As of now, Pell Grants and the AOTC often interact in a way that reduces their benefits, particularly for low-income students attending low-cost institutions, such as community colleges. Taxpayers can only use the AOTC to cover tuition, fees, and course material expenses. However, if a student receives a Pell Grant, those costs may already be covered, leaving them without the qualified expenses needed to claim the tax credit [unless the filer knows to claim that the Pell Grant covered the student’s living expenses]. The legislation would apply Pell Grants first to Pell-allowable expenses (such as room and board) that are not eligible for the AOTC so that low-income students can receive all the benefits for which they are eligible. In concert with this change, the bill would end the taxation of Pell Grants that are used to pay for living expenses, as the consortium recommended.

Now for the bad news. The legislation doesn’t fulfill one of the consortium’s top priorities: better targeting the tax credits to ensure that tax-based student aid goes to low- and modest-income students who have the hardest time affording college, rather than to higher-income income individuals who are already very likely to attend college without a tax incentive.

This wasn’t always so. The original version of the bill, which was introduced by Reps. Diane Black (R –TN) and Danny Davis (D-IL), would have significantly reduced the phase out limits for the AOTC to focus its benefits on low-and modest-income families, making the federal investment more effective by concentrating it on individuals whose college enrollment and persistence decisions are most sensitive to cost. Meanwhile, the lawmakers would have used the savings from lowering the limits to pay for making the refundable credit more generous.

However, Rep. Dave Camp (R-MI), the chairman of the House Ways and Means Committee, amended the bill when it reached his panel to keep the current phase out limits in place for the AOTC. That means that families making as much as $180,000 a year would remain eligible to receive a partial credit.

Keeping the current limits in place is not only wasteful but extremely costly. The Congressional Budget Office and the Joint Committee on Taxation estimated that the measure would increase the federal budget deficit by a whopping $96.5 billion.

The legislation makes some much-needed improvements in tax-based student aid. But is it worth the cost, especially considering that it doesn’t better target the aid? I’m sure we can all think of better ways to spend nearly $100 billion to help financially-needy students pay for college.