In his April 2001 analysis of the HOPE Scholarship Program, Thomas R. Wolanin, a senior associate for the Institute for Higher Education Policy, called the program “a cautionary tale” with a message that should inform and guide policymakers in federal higher education. Wolanin’s analysis also provides a cautionary message for policymakers in K-12 education who have embraced tax credits over school vouchers as a reform strategy for public education.
Although some policy analysts have claimed tuition tax credits for K-12 education are less likely to bring increased regulation to private schools than other reforms, such as school vouchers, a recent study of the effects and consequences of the 1997 HOPE Scholarship Program for higher education effectively refutes such claims.
As well as putting individual taxpayers under increased scrutiny from the Internal Revenue Service, the HOPE program has greatly increased the administrative burden imposed by the federal government on institutions of higher learning–a burden likely to increase as the revenue focus of the IRS supersedes the traditional educational focus of federal student aid programs.
“The burden imposed by the HOPE … tax credit … far exceeds any federally imposed burden that we have encountered previously,” complained Stanley O. Ikenberry, president of the American Council on Education, in a 1998 letter to then-Treasury Secretary Robert E. Rubin.
The IRS requires educational institutions to report the names, addresses, and Social Security numbers of all their students, as well as whether the students are enrolled at least half time. In addition, the institutions must supply all students with a copy of their individual statement (Form 1098-T).
According to the IRS, the annual reporting burden of producing Form 1098-T and sending it to the IRS and 21 million taxpayers is 2.4 million hours. The institutions found they also were burdened by a deluge of inquiries from students and their families when they first received the new Form 1098-T in the mail.
The IRS wants to increase the paperwork burden still further by requiring the institutions to report the names, addresses, and Social Security numbers of all persons who could claim the student as a dependent. The National Association of College and University Business Officers estimated complying with all the proposed IRS regulations would have cost institutions of higher education $137 million in 1999.
“In the longer term, it is likely that the regulatory burden will become significantly worse and the financial costs to institutions of higher education will increase, along with the threat to their flexibility, autonomy, and independence,” warns Thomas R. Wolanin, a senior associate for the Institute for Higher Education Policy in his April 2001 report, “Rhetoric and Reality: Effects and Consequences of the HOPE Scholarship.” Wolanin was a deputy assistant secretary for legislation and congressional affairs for the U.S. Department of Education during the Clinton administration.
Complexity and compliance burdens are not trivial for the individual taxpayer, either. Filing for the education credit is not the “simple one-line entry” promoted by tax credit advocates–but an 18-line supplemental tax form with two pages of instructions and an 18-page publication.
Although opposition from the higher education community and pressure from Congress has kept the IRS from imposing the full reporting requirements contained in the law, this situation is unlikely to endure indefinitely. Also, while the IRS has thus far deferred to the U.S. Department of Education for regulatory definitions of “undergraduate,” “academic year,” and “tuition,” Wolanin predicts the tax collection agency will likely issue definitions of its own in the future.
“Definitions and regulations devised by the IRS are … likely to be a particularly ill-fitting garment for institutions of higher education since they will be devised by tax experts interested in collecting revenue rather than experts in student aid concerned with serving students and institutions of higher education,” notes Wolanin. “Such duplicate, parallel, and ill-suited definitions would dramatically increase the complexity and costs of compliance for institutions.”
Confusion over definitions is inherent in the HOPE Scholarship Program, which was signed into law by President Clinton as part of the Taxpayer Relief Act of 1997. HOPE Scholarships are not “scholarships” at all, but tax credits. Despite the assertions of the Clinton administration, they are not modeled on the Georgia HOPE Scholarship Program–a real scholarship program.
Designed to Exclude
The federal HOPE “Scholarship” provides families with a federal income tax credit of up to $1,500 a year for two years if they pay at least $2,000 a year for higher education tuition and fees. Costing about $6 billion a year, the fledgling program already rivals the $9 billion cost of the quarter-century-old Pell Grant Program for low-income students.
The HOPE measure was promoted by Clinton as “opening the doors of college” to those who would otherwise be unable to attend. His Education Secretary, Richard W. Riley, predicted “an enrollment boost” from the program.
However, Wolanin’s analysis shows the program’s design excludes low-income students from participating and provides a “windfall” to middle-income students who would have enrolled in college without the tax credit.
Families who pay no federal income cannot benefit from the HOPE credit. Moreover, it is not refundable. Thus, a family with annual income less than $19,000 is not eligible for the credit. Families with incomes between $19,000 and $28,000 are eligible for a partial credit, and families with incomes above $28,000 and less than $80,000 are eligible for the full $1,500 credit.
Even if they do meet the income criteria, some low-income families still fail to qualify for a tax credit because HOPE regulations require eligible educational costs to be reduced by other grants and real scholarships first.
“Put most simply, low-income students do not qualify for the HOPE Scholarship,” explains Wolanin.” Therefore, it makes no contribution toward paying their higher education expenses.”
For middle-income families making between $28,000 and $80,000, the $1,500 tax credit reduces the cost of college as a percentage of income by an average of 2 percent. That is not enough to significantly change the likelihood of attending college, meaning “the HOPE Scholarship is simply a windfall to middle-income families,” according to Wolanin. Those families who face the biggest burden from large and rapidly increasing college costs–families with low incomes–receive no help at all from the HOPE Scholarships.
“Contrary to the intentions of the Clinton administration, there is no evidence to date that the HOPE Scholarship increases enrollments in higher education for any income category of students or potential students,” concludes Wolanin.
More Complex, Less Fair
Although it has not increased student enrollments, the HOPE program’s $6 billion has provided an incentive for private and public institutions of higher education to increase tuition or reduce student financial aid. Moreover, notes Wolanin, the HOPE Scholarship fragments higher education policymaking between the Treasury and Education Departments.
As a tax preference measure, this new program for middle-income families is not subject to annual review and appropriation, as are Pell Grants and other traditional aid programs for low-income students. The HOPE tax credit makes the federal tax system more complex and less fair, as well as distorting free-market decisions.
Since tax credits reduce government revenues for a given set of tax rates, the widespread use of a specific tax credit provides a perverse incentive to keep tax rates high–or even to increase tax rates–in order to produce sufficient revenue for other government purposes.
“The HOPE Scholarship squanders a substantial sum of federal tax resources by its failure to produce significant benefits for individuals, institutions of higher education, the states, the federal higher education policy process, or the federal and state tax systems,” Wolanin concludes. In fact, he adds, the program has negative consequences in each of these areas.
The HOPE Scholarship is “a wrong road taken,” concludes Wolanin, calling the program “a cautionary tale” that should be used to inform and guide future decisions about federal higher education policy.
For more information …
Thomas R. Wolanin’s April 2001 report for the Institute for Higher Education Policy, “Rhetoric and Reality: Effects and Consequences of the HOPE Scholarship,” is available at the Institute’s Web site at www.ihep.com/Pubs/PDF/Hope.pdf.