Many college students looking toward higher education taxcredits for help in funding their college education will find'hope' is lost, according to a new study.
The Tax Relief Act of 1997, under which the Hope and LifetimeTax Credit program was created, is under-utilized and poorlystructured according to the study commissioned by the NationalBureau of Economic Research. In the study researchers reported thatthe tax credits have not increased the probability of attendingcollege for middle- and lower-class families but that it has madeit more expensive in some states.
During a June 1996 commencement speech at Princeton Universityformer President Bill Clinton said the tax credits would be a steptoward making "the 13th and 14th years of education as universal toall Americans as the first 12 are today." However study authorBridget Terry Long found that only 35 percent of eligible taxpayerstake advantage of the credits.
Richard Ritzman, University of Memphis director of financial aidattributes the low numbers to the way the tax program isstructured.
"It's only helpful to those who file (taxes) and who have a taxliability," Ritzman said.
The credits, created to be tax reductions and not deductions,only lessen the load of tuition costs for middle-class familieswhose annual adjusted income fall between $30,000 and $70,000, Longsaid in the study.
For students in the first two years of college, taxpayers willbe eligible for a tax credit equal to 100 percent of the first$1,000 in tuition and fees and 50 percent of the second $1,000,said officials at the United States Department of Education. TheLifetime Learning Credit, established for those beyond the firsttwo years of college, allows the taxpayer to receive a 20 percenttax credit for the first $5,000 of tuition and fees and anadditional 20 percent on the first $10,000, officials said.
Because families whose annual income is less than $30,000 rarelyowe more in taxes than the amount of the tax credits, they do notget to claim their tuition expenses.
"Considering these families were touted as those who wouldreceive the most benefit from the tax credits, it is fair toconclude the program is not working as it was intended," Long saidin the study.
In addition to failing to alleviate part of the burden offunding a college education for middle- and lower-class families,the tax credits are also blamed for the raising cost of tuition atmany state funded institutions.
These colleges and universities, aware of the program's aim toincrease students' ability to pay tuition, raised their feesshortly after the program was introduced in 1997, according to thestudy.
This sudden hike in tuition costs, researchers found, compoundedthe need for some type of relief in funding a college education forthose families whose income is less than $70,000.
Researchers also found that many eligible taxpayers are nottaking advantage of the program because they are not aware of theireligible status or how to use the credit.
However some schools like The U of M, did not raise their feesafter learning of the tax credits. The U of M has also taken stepsto notify students by mail of the eligibility for these tax creditsafter the first of each year. Eligible students attending thoseschools, according to the study, benefited the most from the taxcredits.
Craig Langstraat, U of M accounting professor, said studentsshould seek tax advice now when determining if they are eligiblefor the tax credits.
"Get tax advice prior to the end of the tax year," Langstraatsaid. "Afterwards all you can do is see what the facts allow you totake (as a tax deduction or credit)."
Because tax law is very complicated and eligibility for taxcredits and deductions depend on many factors, students shouldconsult a tax accountant or the United States Internal RevenueService before claiming any credits or deductions.
"It's not a one-issue issue," Langstraat said. "You'll need aspecific analysis (of your tax information)."
