Obama pushes for student tax credit changes

By Anastassios Adamopoulos, Daily Staff Reporter
Published January 29, 2015

Several education initiatives announced by President Barack Obama in his annual State of the Union address earlier this month have garnered both negative and positive reactions from the higher education community.

During the address, Obama announced his intention to both expand the American Opportunity Tax Credit beyond 2017 and to establish two years of free tuition for community college.

The AOTC is part of the American Recovery and Reinvestment Act of 2009. It was originally set to expire in 2017, but the president’s proposal calls for making it a permanent part of the tax code.

Students who want to use the AOTC must be paying tuition and/or book expenses. To be eligible, the student’s parents or guardians need to make less than $80,000 if they are a single parent or under $160,000 if there are two parents filing a joint tax.

A student can earn a credit of up to $2,500 per year. This amount would consist of 100 percent of the first $2,000 paid on tuition or books and up to 25 percent of the next $2,000. Furthermore, 40 percent of the tax credit is refundable if the total amount of taxes is lower than the credit amount received. The president is also proposing to make this refundable amount up to $1,500 on a fixed rather than a percentage scale.

Mark Kantrowitz, publisher of the Edvisors Network, an organization that consults parents and students on managing college expenses, said tax subsidies have some benefits, but do not target many students in the most effective manner. He added that middle and lower-high income students mostly enjoy AOTC benefits.

Instead, he said, more effective relief for lower-income students, who the president identified as a target population for his reforms, can be found through the Higher Education Act. The Higher Education Act is the mechanism through which federal financial aid programs such as Pell Grants are regulated.

“If they wanted to really target this at low-income students, the people who have the need, what they should do is get rid of the American Opportunity Tax Credit, the Lifetime Learning Tax Credit and Tuition and Fees Deduction and take the 16 or 17 billion dollars, whatever the figure is, and redirect it to the Pell Grant program” Kantrowitz said.

The University’s Office of Financial Aid said they couldn’t say how many students use the AOTC because those deductions are filed through IRS, not the University.

In light of the president’s second proposal, which would make two years of community college free, Kantrowitz noted that in community colleges — where more than half of the students are typically lower income — tuition is already effectively free because they already use the Pell Grant and AOTC. Thus, the president’s second proposal would lead to low-income students using less of the credit they would be eligible for under AOTC.

“So that would actually lead to a decrease in the tax credits used by low-income students despite the expansion of the amount for which they are eligible,” Kantrowitz said. “It’s difficult to say what the impact would be, but I believe it sounds good on paper, but the reality after implementation might be substantially different.”

Peter Riley Bahr, associate professor of education at the University, said reducing the cost of college is an important goal, as cheaper or free tuition makes access to higher education easier. However, he also noted that tuitions are not the only costs community college students incur, as many of them face living expenses, family and childcare responsibilities.

“We have to remember that making a college less expensive is a good thing but it’s not a complete solution to the financial barriers that students face,” he said.

Bahr noted that students who enroll in community college do so for a diverse range of reasons. Some students are not full time and not all are seeking to complete credentials, but may be retraining and getting certificates and licenses. Therefore, the way the program is implemented is also important.

“I would hate to see free college with strings attached, like ‘You must be a full time student, you must be these other things,’ that may or may not fit, or will not fit the college going model for some segments of the population,” he said.

Bahr said he’s not optimistic that the legislature actually implements the plan due to the political climate, but praised Obama for highlighting the issue.

“He has done many things well, but one thing he has done really well in his administration is draw attention to the value and significance of community colleges in our society today,” Bahr said. “There is no question that community colleges are playing a larger educational training role in our society and our economy.”