Tax Preferences for Higher Education and Adult College Enrollment

Abstract

The federal government delivers substantial college aid through the tax code, after introducing education tax credits in 1998 and a tuition deduction in 2002. The design of the Lifetime Learning tax credit and the tuition deduction may make them particularly useful to older students. This paper investigates how these provisions have affected college attendance of individuals in their 30s and 40s. For most adults, there is no effect on college attendance. Among men whose 1998 educational attainment falls short of earlylife educational expectations, eligibility for an education tax preference is associated with a 2.5 to 3.4 percentage point increase in the probability of college attendance. Starting in the late 1990s, the U.S. federal government has substantially expanded the amount of college aid it provides through the tax system. Two higher education tax credits, the Hope and Lifetime Learning tax credits, were introduced in 1998, and a tuition deduction was introduced in 2002. Many authors have pointed out that tax-based aid is targeted to a different group of students than is traditional federal college aid: While Pell grants are primarily for low-income individuals, tax-based aid tends to benefit the middle class. The possibility that tax-based college aid may be particularly useful to older students has been largely overlooked. In this paper I investigate the role of recent federal tax incentives for higher education on the college attendance decisions of adults in their 30s and 40s. The Hope tax credit is designed for those who fit the profile of a traditional college student. It is available only to students who are enrolled half-time or more in the first two years of an