You’ve Been Accepted to College, but How Do You Pay for It? A Proposal to Streamline Federal Financial Aid

From 2008 to 2013, the number of full time students enrolled at degree-granting institutions receiving financial aid rose from 80 to 85 percent. Federal aid represents a large portion of this aid. 33 percent of students received federal aid at private nonprofit schools, while 38 percent of students at public universities received federal aid in 2013.

Financial aid is often crucial to making college attendance feasible, as the cost of attendance can deter many students from applying. These statistics are reflected in college enrollment and graduation rates. As of 2014, 34 percent of adults had obtained college diplomas. However, there is much disparity in those who receive degrees: 77 percent of adults with families in the top income quartile earned bachelors degrees, while only nine percent of those with families in the lowest income bracket completed college. There are many potential explanations for this divergence, but as the price tag of college continues to rise, it is important that policymakers understand who is applying for and receiving federal aid in order to realize more equitable college enrollment.

Even as the types of aid and tax credits for college education grow, every year there is still money left on the table. Pell Grants, which target low-income students, had an estimated expenditure of $32.3 million in 2013. While this number may seem large, even more students could have qualified for assistance. In 2014, an estimated 1.4 million high school students failed to complete a FAFSA application. Over 700,000 of these students would have likely received a Pell Grant, averaging $1,681 lost in missed aid per student.

A recent report titled “Tax Benefits For College Attendance” conducted by Susan Dynarski and Judith Scott-Clayton investigates how the federal government could streamline the federal financial aid system, and increase application and uptake for college tax benefits. The authors’ proposal to streamline the application process could both clarify incentives and decrease administrative costs.

Given the high cost of a college education, the authors demonstrate that, without subsidies and tax benefits, society would not consume the ideal amount of college. They also show that a college-educated population has positive externalities, such as improved health and civic participation. Tax subsidies help maximize these benefits, as they encourage students who may not initially realize the full benefit of college education to enroll. Federal aid helps offset the underestimation of benefit and overestimation of cost.

The largest component of higher education tax benefits is tax credits. The authors highlight the importance of these tax credits, as they extend federal assistance to many middle and upper income families whose students are not eligible for Pell Grants but still need financial assistance. However, the authors note that it is difficult to directly estimate the impact of tax benefits alone, as this is directly correlated with income eligibility, and income also has a direct effect on the decision to enroll. The multiple types of tax credits and exemptions at work make it confusing for students and families to determine their eligibility for funding options and how to apply for them.

The authors propose a more comprehensive approach to aid applications by creating one single grant program. The Internal Revenue Service (IRS) would use tax data to determine eligibility for this consolidated program automatically, and funds would still be delivered by the Department of Education. The authors argue that this structure would ease the burden on the federal government, students’ application confusion, and families’ tax claiming. This proposal would eliminate duplicative processes completed by the Treasury and Education Department and simplify the process for families of future college students.

The authors envision that eligibility could be automatically determined when a family with a college aged student files its taxes, simply by checking off a box to apply for the aid. The families would likely already be completing this tax data, and under this structure, the data could be used to simultaneously determine eligibility for aid. Under this proposal, actual distribution of aid would be handled by the Department of Education. Rather than having to apply for federal aid separately and have a previous knowledge of the tax credits, this system would streamline the process, easing it for all involved. However, this proposal would require the integration and cooperation of two separate government branches, which would likely result in a slow and complicated transition.

The advantages of a college education affect both individuals and society as a whole. A college education increases employment rates and wages. These higher wages in turn increase tax revenues for the government. Further, college-educated individuals are more likely to receive insurance and pensions from their employers, lowering their burden on the state. Given the outlined benefits of a college-educated population, it is important that governments at the local and federal level seek policy strategies that encourage application for and uptake of aid programs that are already in place.

Article Source: Dynarski, Susan, and Judith Scott-Clayton, “Tax Benefits for College Attendance,” The National Bureau of Economic Research. No. 22127 (2016).

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