Office of Planning and Budgeting

Tax Benefits Increasingly Key to College Affordability

Note that the report summarized in this post reflects data through 2007-08. We know from more recent data that 2009’s expansion of the American Opportunity Tax Credit (formerly the Hope tax credit) has more than doubled both benefit and participation rates, so we anticipate future reports to reflect similar but magnified findings.

In its latest Stats in Brief report, the US Department of Education analyzed the impact of federal education tax benefits on college costs for families in 2007-08. The report analyzes three different types of education tax benefits that applied in that year: the Hope tax credit, the Lifetime Learning credit, and the tuition and fees tax deduction.

Eligibility for the credits and deductions was based on student enrollment status, family income level, and citizenship status, and benefits could only be claimed based on the net tuition paid, after grant aid and veterans’ benefits had been taken into account. During the time period analyzed, the Hope credit could be deducted multiple times for multiple children, with a maximum of $1,650 per dependent student. The Lifetime Learning credit and the tuition and fees deduction could only be claimed once per return, with maximums of $2000 and $4000, respectively. The report showed that higher education tax benefits have become an increasing source of student aid: total benefits reached $6.85 billion in 2007-08, and comprised 6 percent of the federal government’s aid dollars that year.

Other interesting findings include:

  • 47 percent of all students in 2007-08 were estimated to have received a federal education tax benefit, reducing college expenses for the year by an average of $700. By contrast, only 27 percent of students received a Pell Grant the same year.
  • Tax credits were most beneficial for low-middle and high-middle income families: low-income families generally do not have enough after-grant net tuition expenses to qualify for benefits, and most high-income families exceed income limits. Of low-middle income families, 56 percent received tax benefits in 2007-08, compared to 63 percent of high-middle income, 48 percent of high income and 29 percent of low income families.
  • While the average benefit for families  in 2007-08 was $700, high-middle income families received an average of $1000 and low-middle income families received $900 in tax benefits.
  • On average, tax benefits decreased the cost of college attendance by about 5 percent.

For more information, check out the full report. To learn more about available tax credits, visit UW’s Office of Student Financial Aid or the IRS’ website.

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