Tax Credits and Grants for Undergraduates

The nation?s 16.5 million postsecondary students
can receive financial aid that does not need to be repaid
from federal and state governments, institutions, and
other private sources. During the 1970s and 1980s as
college costs increased dramatically, these grants
tended to focus on increasing access to college for lowincome
students. Since then, much of the grant aid
from states and institutions has shifted to rewarding
academic merit, which tends to help middle- and highincome
students more than in the past.
In 1997, federal tax credits emerged as another
source of aid for students that does not need to be
repaid. Tax credits can be used to offset required tuition
and fees. Under 2003 tax law, the HOPE credit, available
for the first two years of postsecondary education,
provides up to $1,500 and the lifetime learning credit
provides up to $2,000. Both are for students from
families with incomes less than $103,000 ($51,000 if
single), adjusted annually for inflation. Before 2003 the
maximum lifetime learning credit was $1,000. Students
may claim one educational credit per year.
Lower-income students may receive little or no
benefit from the tax credits for two reasons. First, only
tuition and fees not covered by another grant can be
applied toward credit eligibility. Second, the HOPE
and lifetime learning credits are not refundable, so only
a person who owes income tax can benefit from the
credit. Recent proposals have considered making the
tax credits refundable.
The table below shows the distribution of grant and
tax credit aid to undergraduates at various income
levels. In total, 70 percent of undergraduates received
some benefit from a grant or tax credit. Federal tax
credits provide aid to the largest number of people,
with the largest average credits going to students with
incomes between $50,000 and $100,000. The federal
grant programs (Pell and Supplement Education Opportunity
Grants) primarily assist students with incomes
below $30,000. Institutional aid provides a substantial
amount of assistance for higher-income
students. Institutional aid is distributed to all income
groups with the highest average amounts going to the
highest income students. A small amount of private aid
is also available (not shown). Public colleges and
universities provide a substantial amount of assistance
to all students by providing low-cost tuition, especially
to in-state residents.
The Tax Policy Center, a joint venture of the Urban Institute
and the Brookings Institution, provides independent, timely, and
accessible analysis of current and emerging tax policy issues for
the public, journalists, policymakers, and academic researchers.
For more tax facts, see http://www.taxpolicycenter.org/taxfacts.
Average Amount of Grants and Tax Credits to Undergraduates, 1999-2000, by Family Income
All
Students
Receiving
Grants or
Tax
Credits
Total
Grants
and Tax
Credits
(in
millions)
Federal Aid
Pell Grants
and SEOG
HOPE and Lifetime
Learning Credits
State Aid Institutional Aid
Number
of Students
Average
Grant
Number
of Students
Average
Credit
Number
of Students
Average
Grant
Number
of Students
Average
Grant
0 - $30,000 5,295,539 $12,266 3,016,409 $2,246 2,242,908 $423 1,251,787 $1,600 1,050,907 $2,415
$30,000 -
$50,000 3,196,849 5,252 695,381 1,415 2,435,588 505 510,636 1,821 543,631 3,875
$50,000 -
$100,000 4,290,255 6,896 82,125 1,204 3,496,135 575 421,483 1,773 848,781 4,761
$100,000 + 596,959 1,865 1,187 871 0 0 84,613 1,878 338,155 5,043
Total 13,379,602 $26,280 3,795,102 $2,071 8,174,631 $512 2,268,519 $1,692 2,781,474 $3,736
Source: 1999-2000 National Postsecondary Student Aid Survey (NPSAS). The NPSAS classifies grant aid as all grants, scholarships,
fellowships, and tuition reimbursements. The HOPE and lifetime learning credits are calculated using data from the NPSAS and
2000 tax law. Assumes all tax units use the standard deduction and take no other nonrefundable credits.
TAX NOTES, May 31, 2004 1183