Increasing Complexity

With dozens of tax and aid programs available, two-thirds of students are now eligible for some sort of discount on their college costs. The increasing scope and diversity of subsidies for education implies increased complexity—both for students trying to estimate their college costs and for policymakers trying to ensure coherence across programs. The proliferation of programs, each well-intentioned, has created a system that makes it difficult for families—especially “first-generation” families in which neither parent has attended college—to know just how affordable college can be. Calculating the net price of college for a given family requires understanding their finances as well as the rules ofthe Pell Grant, student loans, the tuition tax credits, state grant programs, and aid offered by individual colleges. Evidence suggests that students are quite poor at estimating net prices.

A symptom of the general confusion is that some aid goes unclaimed: the Government Accountability Office recently calculated that 14% of families eligible for an education tax benefit failed to claim it. Forty percent of filers who used the tuition tax deduction would have been better off claiming one of the tax credits instead.

The Government Accountability Office has found that many families do not choose the tax advantage that would most benefit them. Families can choose among the AOTC, LLC, tuition tax deduction, or disbursement from a 529 or Coverdell to cover current expenses. Different types of expenditures (tuition, books, living expenses) qualify for some of these but not others. GAO found that about 15% percent of filers made a suboptimal choice, suggesting substantial confusion among filers and tax preparers (US Government Accountability Office 2012).

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