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New Report Proposes Financial Aid Reform to Benefit Low-Income Students

A new report released by the Center for Law and Social Policy’s (CLASP) Center on Postsecondary and Economic Success (C-PES) argues that billions of dollars in federal funds could be saved by altering tax-based student aid in the United States.

In “Reforming Student Aid: How to Simplify Tax Aid and Use Performance Metrics to Improve College Choices and Complete,” the authors of the paper state that current tax-based financial aid does very little to help low-income students, as tax breaks are associated with marginal tax rates, which increase depending on income.

Furthermore, the authors of the report state that nonrefundable tax credits, such as the Lifetime Learning Credit (LLC), are largely useless for families that do not pay income taxes, with the paper suggesting that beefing up refundable portions of the American Opportunity Tax Credit (AOTC) would provide greater benefits for lower-income households.   

Almost $116 billion in loans were handed out by the federal government, representing more than 60 percent of all federal student aid during the 2012 FY. About $72 billion in Pell grants, work-study grants and tax-based aid were given during the same timeframe.

“The goal of federal higher education policy should be to increase educational and economic opportunity for all students, with a priority for low-income, underrepresented populations who cannot access and afford postsecondary education without federal assistance,” the executive summary of the report reads.

In order to make tax-based aid more simplistic and accessible, the authors of the report lay out three proposals, including one that lengthens the AOTC phase-out ranges while eliminating tuition and fees deductions and another that preserves the AOTC and LLC only for undergraduate students.

“Federal student financial aid reforms should preserve -- and even enhance -- the original purpose of these programs: to increase access,” the report states. “Student success and completion are worthy additions but should be pursued in ways that do not undermine access.”

Photo courtesy of CLASP.

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