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March 09, 2014 11:15 AM College, Federal Financial Aid Increasingly Benefits the Rich

By Jon Marcus

It’s not just colleges and universities that are shifting their financial aid from lower-income to higher-income students.

Tuition tax credits and other tax breaks to offset the cost of higher education—nearly invisible federal government subsidies for families that send their kids to college—also disproportionally benefit more affluent Americans. So do tax-deductible savings plans and the federal work-study program, which gives taxpayer dollars to students who take campus jobs to help pay for their expenses.

The tax credits alone cost the government a combined $34 billion a year, or $1 billion more than is spent on Pell Grants, the direct government grants for low-income students. And even though only one-fifth of American households earn more than $100,000 per year, that group got more than half of the deductions for tuition, fees and exemptions for dependent students, according to the Tax Policy Center. This despite research showing that 13 out of 14 students whose families received tax breaks on tuition would have gone to college anyway.

“We might be sympathetic to those upper-income folks who are struggling with what are, yes, extremely expensive private colleges,” said Julie Strawn, a former senior fellow at the Center for Law and Social Policy, which advocates for greater access to college for the poor. “But do the tax credits really need to go to the wealthiest fifth of American households, which is what’s happening now?”

A new coalition of advocacy organizations, supported by the Bill & Melinda Gates Foundation, is pushing for the tax credits to be streamlined and redirected to the poor. (The Gates Foundation is among the funders of The Hechinger Report and the Education Writers Association, which co-produced this story.) And a bill in the U.S. House sponsored by Democrat Danny Davis of Illinois and Republican Diane Black of Tennessee, co-chairs of the Tax Reform Working Group on Education, would gradually lower the income eligibility to $86,000 from the current $180,000.

“In general, federal financial aid was created to help low-income students go to college, and the purpose of the tax credits was to make college more affordable for middle-income students,” said Stephen Burd, a senior policy analyst at the New America Foundation. “The problem is that the tax credits are going beyond the middle class.”

But even supporters say the prospects of Congress lowering the income eligibility are dim, even at a time of belt-tightening in Washington.

“It’s definitely an uphill fight,” Burd said. “It’s politics. Upper-income families tend to vote more than lower-income families.”

The higher-education lobby, too, opposes lowering the income eligibility for tuition tax credits.

“We think it’s important to have mechanisms in place to help those students go to college who otherwise wouldn’t go to college, but it’s also about being able to help all students pay for college, including middle-income students,” said Steven Bloom, director of federal relations for the American Council on Education, the preeminent association of U.S. colleges and universities.

Bloom said even families that earn more than $100,000 annually can be hard-pressed to pay for college without help, depending on how many children they have enrolled at one time, for instance, and at which institutions.

“We just don’t buy the argument that there isn’t enough room in the federal budget to help different families in different income brackets in different ways,” said Sarah Flanagan, vice president for government relations and policy at the National Association of Independent Colleges and Universities. And higher-income families, Flanagan said, “bring money to the table to keep the colleges going so they in turn can give more support to low-income students.”

The university associations “have a point,” said Deborah Santiago, co-founder and chief operating officer of Excelencia in Education, which advocates for Latino and other underrepresented students. It can be a stretch these days even for wealthy families to pay for college, Santiago said. But as far as government policy goes, “Are you going to get more value from helping a low-income person achieve social mobility, or from helping a middle-class person stay where they are?”

Karen Cooper, director of financial aid at Stanford University, chairs a committee of the College Board that is looking for ways to redirect federal aid to the neediest students.

“Those of us in the financial-aid profession would like to see more focus on our lowest-income students, especially federal and state aid,” Cooper said. “That needs to be the first focus.”

Tax-deductible college-savings plans, too, are disproportionally used by higher-income families; the median income of households with such plans is $120,000, according to the U.S. Government Accountability Office.

“The whole notion of college savings accounts creates a huge divide,” said Elissa Chin Lu, an institutional researcher at Harvard who has studied them. “Poor parents aren’t able to sock away money, or get those incentives or tax deductions.”

Much of the more than $1 billion a year from at least one direct financial-aid program paid for by federal taxpayers is also going to the children of the better-off.

Money for the federal work-study program is divided up under a 50-year-old formula based not on how many students at a university actually need it, but on how much the university received the year before, and how much it charges.

Jon Marcus is a higher education editor at the Hechinger Report, a nonprofit, nonpartisan education news outlet based at Teachers College, Columbia University.

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