Higher Education Tax Credits: Targeting, Value, and Interaction with Other Federal Student Aid

Report for Congress
Higher Education Tax Credits:
Targeting, Value, and Interaction with
Other Federal Student Aid
July 2, 2002
Adam Stoll
Specialist in Social Legislation
Domestic Social Policy Division
James B. Stedman
Specialist in Social Legislation
Domestic Social Policy Division

Congressional Research Service ˜ The Library of Congress

Higher Education Tax Credits: Targeting, Value, and
Interaction with Other Federal Student Aid
Summary
The Taxpayer Relief Act of 1997 (P.L. 105-34) authorized two new tax credits
for family postsecondary education expenses. The Hope Scholarship Credit
provides up to $1,500 in annual tax relief to defray the cost of the first 2 years of
undergraduate studies. The Lifetime Learning Credit provides up to $1,000 in tax
relief to defray the cost of any year of postsecondary study. The Hope and Lifetime
Learning Credits were enacted to help preserve and enhance access to postsecondary
education for students from middle-income families.
There are no national data that provide the comprehensive information needed
to thoroughly analyze the distribution of the education tax credits and their
interaction with traditional student aid awarded under the Higher Education Act
(HEA). This report examines these issues by using two different modeling
approaches to estimate the benefits potentially offered by the credits to young adults
who are currently out-of-school, and the eligibility of currently enrolled aided
students for the tax benefits and how much they might receive. Modeling is also
used to estimate changes in the targeting of federal “obligation-free” aid (grants and
tax credits), and the distributional effects of changes to the credits.
The results from this analysis are legislatively relevant because the 107^th
Congress is considering proposals to change the size and targeting of the education
credits. Further, the interaction of the credits and HEA student aid will likely be of
legislative interest during the 108^th Congress when the HEA is up for reauthorization.
Briefly, the major findings from this analysis are as follows.
The Hope Credit provides a substantial benefit to recipients and spreads these
benefits relatively broadly. By design, these credits target the bulk of their benefits
to middle- and upper middle-income students. But, these benefits also reach down
the income scale and provide assistance to some low-income students, overlapping
with the major source of federal grant aid — Pell Grants.
The Lifetime Learning Credit, in contrast, provides relatively little benefit.
Students attending higher priced institutions are much more likely to maximize the
amount of Lifetime Learning Credit they receive.
The Hope and Lifetime Learning Credits have tended to shift the focus of
federal postsecondary obligation-free aid. Such aid is no longer principally need-
based aid targeted to the lowest income students, but is now available to the broad
expanse of middle- and upper middle-income students.
There is current congressional interest in modifying the distribution of the tax
credit benefits. The current patterns of distribution are a function of often complex
interaction among the credits’ award rules. For instance, to extend tax credit benefits
to low-income students at lower priced institutions concurrent changes to several of
the award rules may be required.

Contents
In troduction ......................................................1
Analytic Approaches to Examining the Value of Tax Credits............2
Populations Being Analyzed.................................2
Analytical Approach — Case Simulation Modeling...............3
Analytical Approach — Survey Data Modeling..................3
What Benefits Do the Credits Offer Prospective Students?.................4
Summary of Findings...........................................5
Award Rules..................................................5
Pell Grants...............................................6
Education Tax Credits......................................7
Who in the Young Out-of-School Population is Potentially Served by
Hope Credits?............................................9
Married Independent Student With a Child Across Institutional
Categories ..........................................10
Single Independent Student Across Institutional Categories........11
Half-time Enrollment......................................13
Who in the Young Out-of-School Population is Potentially Served by
Lifetime Learning Credits?.................................13
Married Independent Students With a Child Across
Institutional Categories................................13
Single Independent Students Across Institutional Categories.......15
Half-time Enrollment......................................17
What Benefits Do the Credits Offer Aided Students?.....................18
Summary of Findings..........................................19
Higher Education Tax Credits In Aggregate........................20
Hope Credits................................................22
Lifetime Learning Credits......................................24
Distribution of Federal Obligation-Free Aid........................25
How Has the Introduction of Tax Credits Affected the Targeting of
Federal Obligation-Free Aid?...........................28
Why Do the Credits Allot Their Benefits the Way They Do and How
Would Proposed Changes Affect That Allotment?...................33
Interplay of Coverage of Costs and Nonrefundability for Low-Income
Students ................................................34
Conclusions .....................................................39
Technical Appendix...............................................40

Higher Education Tax Credits: Targeting,
Value, and Interaction with Other Federal
Student Aid
Introduction
The Taxpayer Relief Act of 1997 (P.L. 105-34) authorized two new tax credits
for family postsecondary education expenses. The Hope Scholarship Credit
provides up to $1,500 in annual tax relief to defray the cost of the first 2 years of
undergraduate studies. The Lifetime Learning Credit provides up to $1,000 in tax
relief to defray the cost of any year of postsecondary study.¹ The Hope and Lifetime
Learning Credits were enacted to help preserve and enhance access to postsecondary
education for students from middle-income families.
Since being introduced, the tax credits have rapidly become major sources of
assistance for postsecondary students nationwide. They have also added considerable
complexity to the student aid picture largely because it has been difficult to assemble
precise information about the population of students receiving each credit, and about
how the credits interact with other forms of aid.
There are no national data that provide the comprehensive information needed
to address the issues of the distribution of the education tax credits and their
interaction with other forms of aid. The tax credits operate outside of the systems
used for packaging and awarding student financial aid. Consequently, information
on the receipt of tax credits is not available in the large-scale national surveys on aid
received by students — which are reliant on institutional reporting of aid packages
“awarded” to students. Additionally, available data from the Internal Revenue
Service (IRS) have serious limitations and are not well suited for use in examining
the tax credit benefits received in particular academic years, or for making
comparisons between those benefits and other financial aid.
Adding to this challenge, tax credit values cannot be easily inferred. The actual
value of the credits is often less than the maximum possible value, due in large part
to a series of offsets and limitations built into the design of the credits.²

¹For a detailed discussion of the features of the Hope Credit and Lifetime Learning Credit,
see CRS Report RL31129, Higher Education Tax Credits and Deduction: An Overview of
the Benefits and Their Relationship to Traditional Student Aid, by Adam Stoll and James
Stedman.
²These offsets and limitations are considered in detail below.

Despite the growing importance of tax credits, higher education analysts and
policymakers have had a difficult time assessing the value of the credits for varied
groups of recipients, and pinpointing how the credits interact with other forms of aid.
These are important issues to resolve because there currently are a number of
proposals under consideration in the 107^th Congress that would affect the size and
targeting of the Hope and Lifetime Learning Credits. Additionally, the interaction
between tax credits and other forms of federal student aid will likely be of particular
legislative interest during the 108^th Congress when the Higher Education Act will
next be up for reauthorization.
In an effort to add clarity to this situation, this report presents newly generated
estimates of the value of the credits available to varied eligible recipients. In the
absence of actual data, modeling approaches that simulate tax credit values offer
perhaps the most promising way to examine the targeting of the education tax credits.
Two different modeling approaches are applied in the analysis presented in this
report. These models, described later, are used to provide the following:
!the estimated benefits potentially offered by the credits to young adults who
are currently out of school;
!estimated eligibility of currently enrolled aided students for the tax benefits;
!estimates of changes in the targeting of federal obligation-free aid (discussed
later in this report); and
!estimates of the effects of possible changes in the award rules of the credits
on expanding the distribution of the benefits to lower income students,
thereby, potentially increasing their impact on access.
The Hope and Lifetime Learning Credits are premised on the assumption that
tax benefits reaching a maximum of between $1,000 and $1,500 will enhance access
to postsecondary education. This analysis delineates how these benefits might be
distributed to current and potential student populations for whom access is likely to
be an important issue. Nevertheless, it is beyond the scope of the present report to
determine whether tax benefits of these amounts will, in fact, expand access to
postsecondary education for these populations.
Analytic Approaches to Examining the Value of Tax Credits
The Hope and Lifetime Learning Credits were intended to enhance or help³
preserve college access. In keeping with the aims of the credits, this examination
will focus on the level of assistance they can provide to populations for whom access
may be an issue.
Populations Being Analyzed. The first group is the broad population of
college-age individuals who, although they have graduated from high school, are not

³The Clinton Administration first proposed the Hope Credits in 1997 in order to “provide
tax relief to middle-income families struggling to pay for college” and to “help make 14
years of education the standard for all Americans.” (Letter dated March 20, 1997 to Speaker
of the House Newt Gingrich from Secretary of Education Richard W. Riley and Secretary
of the Treasury Robert Rubin.)

currently participating in postsecondary education. It is considered to be comprised
of “potential postsecondary education students.” The second group is the population
of postsecondary students who are currently receiving federal financial assistance to
help support their studies. This group includes the preponderance of higher
education students receiving need-based aid. Students enrolled in postsecondary
education, but not receiving financial aid, are not being studied since access is not
dependent on federal financial aid for this population.
Analytical Approach — Case Simulation Modeling.⁴ The initial
analysis focuses on the broad population of potential postsecondary students who are
not currently enrolled in postsecondary education, and uses a case simulation model.
Case simulations are used to explore how the following factors affect the tax credit
levels: income, offsets, family composition, cost of education, and type of institution
attended. This examination explores what the tax credits might really be worth to
different kinds of prospective students.
We explore these issues by first analyzing Current Population Survey (CPS)
data from the Bureau of the Census to construct a set of cases that typify
characteristics of the current potential postsecondary student population. These cases
were then run through the model to determine the level of tax credit assistance likely
to flow to them. A sufficient number of cases were run to map thresholds, cut-off
points, gaps in coverage, and to thoroughly explore issues related to offsets.
Analytical Approach — Survey Data Modeling.⁵ The second approach
focuses on aided enrolled postsecondary students. This analysis utilizes the National
Postsecondary Student Aid Study (NPSAS) data on students’ tax liability, income,
attendance status, enrollment status, grant aid, and tuition and fee levels to construct
estimated tax credit values for students receiving financial aid. NPSAS provides
comprehensive nationally representative data on the financial aid packages received
by students. Under this approach, once estimated tax credit values are computed for
students, it is possible to examine the level of tax credit benefits potentially available
to students possessing different characteristics, and how the tax credits complement
other sources of aid in helping students meet tuition costs.

⁴For additional information, see the technical appendix to this report.
⁵ Ibid.

What Benefits Do the Credits Offer Prospective
Students?
This section of the report considers the estimated distribution for 2001-2002 of
the tax credit benefits, as well as Pell Grant aid, to out-of-school young adults who
have at least graduated from high school but who have not attained a bachelor’s
degree (BA).⁶ This is a population which, if it enrolled in postsecondary education,
could be eligible for the tax credits and Pell Grants. The Pell Grant program is the
largest federal grant program for postsecondary undergraduates, providing some $9.9
billion in grant aid for the 2001-2002 academic year and $10.7 billion for 2002-2003.
As is delineated below, Pell Grant aid has a critical impact on the distribution of the
education tax credits.
As noted earlier, this portion of the report utilizes a case simulation model
which shows how the distribution of tax credit benefits and Pell Grant assistance
changes as adjusted gross income (AGI) changes. The results generated by this case
simulation model are linked to the young out-of-school population through an
analysis of data gathered by the Bureau of the Census’ CPS for March 2000.⁷
Analysis of CPS data identified primary groups within the pool of young out-of-
school prospective students. The distribution of aid to two of the primary groups of
prospective students is considered throughout the remainder of this section:
!young out-of-school married individuals who are at least high school
graduates but who have not earned a BA, and who are independent for need
analysis purposes⁸ and federal income tax purposes; and
!young single (no spouse or other dependent) out-of-school independents with
the same educational attainment as the first group.⁹

⁶These individuals may have never attended postsecondary education or may have some
postsecondary enrollment without attaining a degree higher than an associate’s degree.
⁷The March CPS is a survey of approximately 50,000 households, collecting detailed data
on labor force participation and income. Information on current educational activity is
collected for individuals aged 16 to 24. The March 2000 survey was used to estimate the
characteristics of the portion of this young population who were high school graduates, not
currently enrolled in college, and had not earned a BA (if they had enrolled in college
previously).
⁸For federal student aid, an individual is considered independent of his or her parents (i.e.,
parental income and assets are not considered in determining the assistance), if the
individual is at least 24 years old by December 31 of the award year, is an orphan or ward
of the state (or was until age 18), is a veteran of the armed forces, is a graduate or
professional student, is married, has dependents others than a spouse, or is deemed
independent by a financial aid officer for “other unusual circumstances.” To distinguish the
financial aid dependents from independents in the CPS young out-of-school population, all
of these factors were applied, except whether the individual was or had been an orphan or
ward of the state, and whether a financial aid officer might make a determination that the
individual was financially independent.
⁹According to CPS data, an estimated 2.0 million individuals are in the first group (young
out-of-school married independents); 65% of these individuals are high school graduates
(continued...)

Quintile distributions of the AGI of the target subgroups of this young out-of-school
population are mapped to the case simulation results to show what the potential
benefits are for different income quintiles.¹⁰
Summary of Findings
Briefly, the findings presented in this section include the following:
!The distribution of assistance reflects the basic design of the credits which, by
virtue of their nonrefundability and grant aid offset (these features are
discussed below), are targeted to students in the middle to upper middle
income quintiles. The credits will not affect access for the lowest income
students because they provide no benefit to such students.
!Nevertheless, the tax benefits, particularly the Hope Credits, may be received
by some low-income students who also receive Pell Grants. This may boost
federal aid to a portion of the low-income population.
!Under most circumstances, the Hope Credit appears to offer a much greater
benefit than does the Lifetime Learning Credit. The size of a Lifetime
Learning Credit is generally insignificant relative to the absolute benefit
derived from a Pell Grant or a Hope Credit, or relative to tuition and fees or
the cost of attendance (for delineation of tuition and fees, and cost of
attendance, see footnote17).
Award Rules
The analysis of the distribution and value of the Hope and Lifetime Learning
Credits in this and the following sections of the report depends, in part, on an
understanding of how the credits are calculated for an individual. This involves an
explanation of the award rules for the credits. As delineated below, a key rule
concerns the interaction of the credits with other grant aid an individual might
receive. The primary source of federal grant aid to undergraduates is the Pell Grant
program. As a consequence, information on how Pell Grant aid is determined is also
important for a fuller understanding of the operation of the education credits. This

⁹ (...continued)
only, 35% have some college but not a BA. An estimated 2.9 million individuals are in the
second group (young out-of-school single independents); 62% are high school graduates
only; 38% have some college but less than a BA. A third group, whose benefits were
analyzed, but for whom results are not displayed, are dependent young individuals living
with two parents. There are approximately 660,000 individuals in this group (32% are high
school graduates only; 68% have some college but less than a BA). The simulated
distribution of Pell Grants and education tax credits to this third subgroup parallels to a
substantial degree the results for the young married independent population.
¹⁰The AGI quintile breaks shown in the figures in this section are point estimates based on
CPS survey data and are meant to be illustrative. Given sampling and nonsampling errors,
actual quintiles for the populations analyzed might differ from those shown here. The
March 2000 CPS survey provides estimates of 1999 AGI. These were inflated to 2001 using
the CPI-U (a 6.3% increase).

portion of the report provides an overview of the award rules for the Pell Grants and
the education credits.
Pell Grants. In general, the amount of Pell Grant assistance an individual
receives is the difference between the maximum Pell Grant being awarded in any
particular year and the individual’s expected family contribution (EFC).¹¹ For all
simulated cases, this is the award rule applied. As the EFC rises (generally, as the
family’s AGI increases), the Pell Grant shrinks. Among the key features of the Pell
Grant calculation most relevant for this analysis are that the grant is not affected by
the receipt of other student financial aid, and that the poorest individuals (those with
zero EFCs) receive the maximum Pell Grant ($3,750 for award year 2001-2002).
Further, the Pell Grant assistance can cover all postsecondary education expenses (as
noted below, the education tax credits currently can only cover qualified tuition and
fee expenses).
Figure 1 below shows the estimated amount of Pell Grant assistance for award
year 2001-2002 to which a married independent student with a child might be entitled
based on AGI and other characteristics.¹² In this case, the student is a high school
graduate who has never previously enrolled in college (a candidate for receipt of a
Hope Credit). The Pell Grant aid is represented by the lightly shaded area. The thick
vertical bars overlaid on the figure show the distribution of AGI by quintiles based
on data for individuals with these characteristics (for this and all subsequent figures,
the 4^th and 5^th quintiles are grouped together).

¹¹A student’s EFC is based on consideration of his or her income and other financial
resources, as well as those of a spouse (if married) or of parents (if considered dependent
for need analysis). The amount of a student’s Pell Grant is the least of the following three
calculations: annual maximum Pell Grant minus EFC; cost of attendance minus EFC; or the
tuition sensitivity rule (applicable only when tuition is very low). As noted in the text, for
most students, the first calculation determines the size of the Pell Grant.
¹²According to the March 2000 CPS data, the median family size of the young out-of-school
independent with a spouse was 3. As a result, the case simulations of Pell Grant and Hope
Credits were based on this family size.

Figure 1. Pell Grant for 16-24 Year Old Married Independent High
School Graduate (with a Child) Enrolling Full-time at a
Community College

^$4^,⁰⁰⁰¹^s^t^A^G^I^Q^uⁱⁿ^t^ile²ⁿ^d^A^G^I^Q^uⁱⁿ^t^ile³^r^d^A^G^I^Q^uⁱⁿ^t^ile⁴^t^h^aⁿ^d⁵^t^h^A^G^I^Q^uⁱⁿ^t^ile^s
^$3^,⁵⁰⁰
^$3^,⁰⁰⁰
^$2^,⁵⁰⁰
^$2^,⁰⁰⁰^P^e^{ll G}^r^aⁿ^t
^$1^,⁵⁰⁰
^$1^,⁰⁰⁰
^$5⁰⁰
^$0^$⁰^$¹⁰^,⁰⁰⁰^$²⁰^,⁰⁰⁰^$^30,000^$^40,000^$^50,000^$6^0,⁰⁰⁰^$⁷⁰^,⁰⁰⁰^$8^0,⁰⁰⁰^$⁹⁰^,⁰⁰⁰^$10^0,⁰⁰⁰
^Ad^j^u^s^t^e^d^G^r^o^s^s^Iⁿ^c^o^m^e
As shown in Figure 1, this type of student realizes the maximum Pell Grant
when AGI is between $0 and an estimated $16,000. As AGI increases above $16,000
and EFC for the student begins to rise above $0, the amount of Pell Grant aid
declines, until it reaches $0 when AGI is $40,000. Across the first quintile (i.e., the
students falling into the lowest 20% of this group by AGI), the Pell Grant is at its
maximum. In the 2^nd quintile of AGI, the Pell Grant begins to decline.
Education Tax Credits. The Hope and Lifetime Learning Credits are
nonrefundable tax credits, meaning they are available only to the extent that the
taxpayer has income tax liability. Further, they are applied against “qualified” higher
education expenses. Qualified expenses are tuition and fees required as a condition¹³
for enrollment. These expenses are reduced by the amount of non-taxable
educational assistance received by the student, which includes Pell Grants. We call
the reduction in qualified expenses the grant aid offset.
For individuals, both credits begin to be phased out after AGI exceeds $40,000
and are completely phased out when income reaches $50,000. For those who are¹⁴
married filing joint returns, these income thresholds are $80,000 and $100,000.
The credits differ in several key ways. To be eligible for a Hope Credit, an
individual must be enrolled on at least a half-time basis in a program leading to a

¹³As noted below, the tuition and fees, and cost of attendance levels used for this analysis
are annual averages determined by the College Board. It was assumed that the estimated
average tuition and fees constituted qualified expenses for these case simulations. That is,
all fees included in these estimates were assumed to be required as a condition for
enrollment.
¹⁴The thresholds for phasing out the tax credits are based on modified AGI which for most
taxpayers is equivalent to their AGI. No adjustment to AGI was made for these simulated
cases. These various income thresholds for the phase-outs will be indexed to inflation
beginning after tax year 2001.

degree, certificate, or credential; and he or she cannot have finished the first 2 years
of undergraduate education. In contrast, the Lifetime Learning Credit is available for
individuals enrolled in one or more courses of undergraduate or graduate instruction
to acquire or improve job skills, and there is no limit on the number of years for
which the credit may be claimed.
Perhaps most significantly, the reimbursement rules for qualified expenses
differ between the two credits. For the 2001 tax year, the Hope Credit is equal to
100% of the first $1,000 in qualified expenses and 50% of the second $1,000 in
qualified expenses, capped at a maximum credit of $1,500.¹⁵ For that same year, the
Lifetime Learning Credit is equal to 20% of the first $5,000 in qualified expenses,
for a maximum credit of $1,000.¹⁶
Figure 2 shows the distribution of the Hope Credit to the same type of student
as considered in Figure 1. Tax credit assistance is depicted by the darkly shaded
area. The Hope Credit distribution has been adjusted, as necessary, by the Pell Grant
assistance received (which is not shown in the figure).
Figure 2. Hope Credit for 16-24 Year Old Married Independent
High School Graduate (with a Child) Enrolling Full-time at a
Community College (Adjusted for Pell Grant Aid)

^$4^,⁰⁰⁰¹^s^t^A^G^I^Q^uⁱⁿ^t^ile²ⁿ^d^A^G^I^Q^uⁱⁿ^t^ile³^r^d^A^G^I^Q^uⁱⁿ^t^ile⁴^t^h^aⁿ^d⁵^t^h^A^G^I^Q^uⁱⁿ^tⁱ^l^e^s
^$3^,⁵⁰⁰
^$3^,⁰⁰⁰
^$2^,⁵⁰⁰
^$2^,⁰⁰⁰^Ho^p^e^C^r^e^dⁱ^t
^$1^,⁵⁰⁰
^$1^,⁰⁰⁰
^$5⁰⁰
^$0^$⁰^$¹⁰^,⁰⁰⁰^$^20,000^$^30,000^$4^0,⁰⁰⁰^$⁵⁰^,⁰⁰⁰^$60^,⁰⁰⁰^$70^,⁰⁰⁰^$⁸⁰^,⁰⁰⁰^$^90,000^$1^00,000
^A^d^j^u^st^e^d^G^r^{oss I}ⁿ^c^o^m^e
For this type of student, the Hope Credit can first be realized when AGI reaches
approximately $31,000. The credit rises to $1,369, the maximum that this student
can receive, when AGI reaches $40,000. This is not the full $1,500 ceiling for the
Hope Credit because of the credit’s reimbursement rules. In this case, the student is
assumed to be enrolling at a community college where, on average for academic year
2001-2002, the tuition and fees are $1,738 (see footnote 17). The Hope Credit
provides 100% reimbursement of the first $1,000 of this average tuition and fee level
and 50% of the remainder (i.e., $738) or $369, for a maximum credit of $1,369 for

¹⁵After tax year 2001, the maximum Hope Credit will be indexed for inflation.
¹⁶For qualified expenses paid after December 31, 2002, the credit will be a maximum of
$2,000, calculated as 20% of the first $10,000 in qualified expenses.

this student. This type of student can receive this maximum Hope Credit until AGI
reaches $80,000 where the credit’s phase-out rule applies. At $100,000, the benefit
is fully phased out.
The Hope Credit provides no benefit to the lowest 2 quintiles; provides some
assistance in the 3^rd quintile; and provides the maximum benefit across the 4^th and 5^th
quintiles.
The aggregate Hope Credit and Pell Grant aid received by this type of student
is shown in Figure 3. The top line that traces areas covered by the Pell Grant and the
Hope Credit is the aggregate aid being realized by this type of student as AGI
changes. In the zone where the credit and the grant overlap, the Hope Credit
provides some modest compensation for the decline in Pell Grant aid.
Figure 3. Hope Credit and Pell Grant for 16-24 Year Old Married
Independent High School Graduate (with a Child) Enrolling Full-
time at a Community College

^$4^,⁰⁰⁰¹^s^t^A^G^I^Q^uⁱⁿ^t^ile²ⁿ^d^A^G^I^Q^uⁱⁿ^t^ile³^r^d^A^G^I^Q^uⁱⁿ^t^ile⁴^t^h^aⁿ^d⁵^t^h^A^G^I^Q^uⁱⁿ^tⁱ^l^e^s
^$3^,⁵⁰⁰
^$3^,⁰⁰⁰
^$2^,⁵⁰⁰
^$2^,⁰⁰⁰^Ho^p^e^C^r^e^dⁱ^t^Pe^l^l^G^r^aⁿ^t
^$1^,⁵⁰⁰
^$1^,⁰⁰⁰
^$5⁰⁰
^$0^$⁰^$¹⁰^,⁰⁰⁰^$^20,000^$^30,000^$4^0,⁰⁰⁰^$⁵⁰^,⁰⁰⁰^$60^,⁰⁰⁰^$70^,⁰⁰⁰^$⁸⁰^,⁰⁰⁰^$^90,000^$1^00,000
^A^d^j^u^st^e^d^G^r^{oss I}ⁿ^c^o^m^e
Who in the Young Out-of-School Population is Potentially
Served by Hope Credits?
The analysis considers the differences in distribution of benefits across three
categories of institutions in which most students are found — community college, 4-
year public college, or 4-year private college; these institutional categories differ
markedly with regard to average tuition and fees, and average cost of attendance.¹⁷

¹⁷The costs of attendance and tuition and fees for each type of institution are sample
undergraduate budgets, derived from the College Board’s Trends in College Pricing 2001.
For community colleges, the average cost of attendance was $10,367 and average tuition and
fees was $1,738; for 4-year public colleges, the respective averages were $11,976 and
$3,754; for 4-year private colleges, the respective averages were $26,070 and $17,123. The
cost of attendance includes not only estimates of the average tuition and fees, but also the
average expenses for room and board, books and supplies, transportation, and other
(continued...)

Married Independent Student With a Child Across Institutional
Categories. Figure 3 above depicts the distribution of Pell Grant and Hope Credit
assistance for this type of student enrolled at a community college. The next two
figures show the benefits if the student attended a 4-year public college or a 4-year
private college.
Figure 4. Hope Credit and Pell Grant for 16-24 Year Old Married
Independent High School Graduate (with a Child) Enrolling Full-
time at a 4-Year Public College

^$4^,⁰⁰⁰¹^s^t^A^G^I^Q^uⁱⁿ^t^ile²ⁿ^d^A^G^I^Q^uⁱⁿ^t^ile³^r^d^A^G^I^Q^uⁱⁿ^t^ile⁴^t^h^aⁿ^d⁵^t^h^A^G^I^Q^uⁱⁿ^tⁱ^l^e^s
^$3^,⁵⁰⁰
^$3^,⁰⁰⁰
^$2^,⁵⁰⁰
^$2^,⁰⁰⁰^Ho^p^e^C^r^e^dⁱ^t^Pe^l^l^G^r^aⁿ^t
^$1^,⁵⁰⁰
^$1^,⁰⁰⁰
^$5⁰⁰
^$0^$⁰^$¹⁰^,⁰⁰⁰^$²⁰^,⁰⁰⁰^$^30,000^$4^0,⁰⁰⁰^$⁵⁰^,⁰⁰⁰^$60^,⁰⁰⁰^$⁷⁰^,⁰⁰⁰^$^80,000^$^90,000^$1^00,000
^A^d^j^u^st^e^d^G^r^{oss I}ⁿ^c^o^m^e
Figure 5. Hope Credit and Pell Grant for 16-24 Year Old Married
Independent High School Graduate (with a Child) Enrolling Full-
time at a 4-Year Private College

^$4^,⁰⁰⁰¹^s^t^A^G^I^Q^uⁱⁿ^t^ile²ⁿ^d^A^G^I^Q^uⁱⁿ^t^ile³^r^d^A^G^I^Q^uⁱⁿ^t^ile⁴^t^h^aⁿ^d⁵^t^h^A^G^I^Q^uⁱⁿ^tⁱ^l^e^s
^$3^,⁵⁰⁰
^$3^,⁰⁰⁰
^$2^,⁵⁰⁰
^$2^,⁰⁰⁰^Ho^p^e^C^r^e^dⁱ^t^Pe^l^l^G^r^aⁿ^t
^$1^,⁵⁰⁰
^$1^,⁰⁰⁰
^$5⁰⁰
^$0^$⁰^$¹⁰^,⁰⁰⁰^$^20,000^$^30,000^$4^0,⁰⁰⁰^$⁵⁰^,⁰⁰⁰^$60^,⁰⁰⁰^$70^,⁰⁰⁰^$⁸⁰^,⁰⁰⁰^$^90,000^$1^00,000
^A^d^j^u^st^e^d^G^r^{oss I}ⁿ^c^o^m^e
The key points that can be made about the distribution of benefits are the
following:

¹⁷(...continued)
miscellaneous expenses. All tuition and fees are for in-state students.

!The higher average tuition and fee levels of 4-year institutions compared to
those at community colleges allow the maximum Hope Credit of $1,500 to be
claimed.
!For each institutional category, there is a range of income across which both
Pell Grant aid and Hope Credit benefit may be received. This income range
is relatively narrow at the community college level ($31,000 to $39,000)
because of its lower average tuition and fees.¹⁸ In contrast, the income range
where the benefits overlap is significantly wider at 4-year institutions ($17,000
to $39,000), primarily a function of the higher average tuition and fees.¹⁹ As
a result of these higher charges, the Hope Credit reaches down into the 2^nd
AGI quintile. Indeed, for this income quintile, the Hope Credit effectively
replaces Pell Grant assistance that was lost as AGI rose.²⁰
!Coverage of average tuition and fees by the maximum Hope Credit that can
be realized is highest at the community college level (79%) and drops
precipitously at the 4-year public and 4-year private college levels (40% and

9%, respectively).²¹

Single Independent Student Across Institutional Categories. The
following figures show the distribution, across institutional categories, of Pell Grant
and Hope Credit benefits for a single independent individual.²² The 4-year public
college and 4-year private college categories are displayed in a single figure since the
distribution of aid for this case is identical for these two categories of institution.²³

¹⁸The Pell Grant does not fall below $1,738 (the tuition and fees being paid) until AGI
reaches $30,000; only at that juncture are there remaining qualified expenses that can be
covered by the Hope Credit.
¹⁹The $17,000 starting point of this income range is where this type of student’s EFC first
exceeds $0. There are substantial qualified expenses remaining after the grant aid offset
that can be covered by the Hope Credit at these institutions.
²⁰At some points in the 2^nd AGI income quintile, the combination of Hope Credit and Pell
Grant exceeds the maximum Pell Grant which students in the 1^st income quintile receive.
This is clearer in the figure showing benefits at the 4-year private college.
²¹Each of these percentages is calculated using the maximum credit that can be realized for
each simulated case and the relevant average tuition and fees delineated in footnote 17.
²²For these figures, the X-axis (adjusted gross income) extends only from $0 to $50,000 (not
$100,000 as with the married independent student) because that is the range of income
across which the Hope Credit can be claimed by this type of student who is ineligible to file
a joint return.
²³The early loss of Pell Grant assistance and the nonrefundability of the Hope Credit explain
why there is no difference between the distribution for these students in a 4-year public
college and in a 4-year private college. As the Pell Grant is reduced, more tuition and fees
remain to be covered by the credit. But, at and beyond the lower AGI where the Pell Grant
phases out, it is tax liability that dictates how much credit can be claimed. Tax liability does
not differ across categories of institutions. As a result, there is no difference in the benefits
realized.

Figure 6. Hope Credit and Pell Grant for 16-24 Year Old Single
Independent High School Graduate Enrolling Full-time at a
Community College

^$4^,⁰⁰⁰¹^s^t^AG^I^Q^uⁱⁿ^tⁱ^l^e²ⁿ^d^AG^I^Quⁱⁿ^tⁱ^l^e³^r^d^A^G^I^Quⁱⁿ^tⁱ^l^e⁴^t^h^aⁿ^d⁵^t^h^AG^I^Quⁱⁿ^tⁱ^l^e^s
^$3^,⁵⁰⁰
^$3^,⁰⁰⁰
^$2^,⁵⁰⁰
^$2^,⁰⁰⁰^Ho^p^e^C^r^e^dⁱ^t^Pe^l^l^G^r^aⁿ^t
^$1^,⁵⁰⁰
^$1^,⁰⁰⁰
^$50⁰
^$0^$⁰^$5,000^$^10,000^$^15,000^$2^0,⁰⁰⁰^$²⁵^,⁰⁰⁰^$3^0,⁰⁰⁰^$35^,⁰⁰⁰^$⁴⁰^,⁰⁰⁰^$⁴⁵^,⁰⁰⁰^$^50,000
^A^d^j^u^st^e^d^G^r^{oss I}ⁿ^c^o^m^e
Figure 7. Hope Credit and Pell Grant for 16-24 Year Old Single
Independent High School Graduate Enrolling Full-time at Either a
4-Year Public College or a 4-Year Private College

^$4^,⁰⁰⁰¹^s^t^A^G^I^Q^uⁱⁿ^tⁱ^le²ⁿ^d^A^G^I^Q^uⁱⁿ^tⁱ^l^e³^r^d^A^G^I^Q^uⁱⁿ^tⁱ^le⁴^t^h^aⁿ^d⁵^t^h^A^G^I^Q^uⁱⁿ^t^ile^s
^$3^,⁵⁰⁰
^$3^,⁰⁰⁰
^$2^,⁵⁰⁰
^$2^,⁰⁰⁰^Ho^p^e^C^r^e^dⁱ^t^Pe^l^l^G^r^aⁿ^t
^$1^,⁵⁰⁰
^$1^,⁰⁰⁰
^$5⁰⁰
^$0^$0^$⁵^,⁰⁰⁰^$1^0,⁰⁰⁰^$¹⁵^,⁰⁰⁰^$2^0,⁰⁰⁰^$²⁵^,⁰⁰⁰^$3^0,⁰⁰⁰^$³⁵^,⁰⁰⁰^$⁴⁰^,⁰⁰⁰^$⁴⁵^,⁰⁰⁰^$⁵⁰^,⁰⁰⁰
^Ad^j^u^s^t^e^d^G^r^o^s^s^Iⁿ^c^o^m^e
Analysis of these figures reveals that the distribution of Pell Grant and Hope
Credit benefits to single independent students differs from that of married
independent students. Among the important differences are the following:
!The maximum Pell Grant assistance is provided over a much narrower range
of AGIs and declines to zero much sooner (at approximately $16,000 AGI
versus $40,000 AGI for the married independent student case). This in turn
permits the Hope Credit to be claimed lower down the income range because
the rapid diminution of the Pell Grant aid frees up tuition and fees for
potential coverage by the credit.²⁴

²⁴The dip in aggregate assistance at an income of approximately $16,000 is a function of a
(continued...)

!The income quintiles are more clustered at the lower end of the income scale
than they are for the married independent student, somewhat changing the
relative balance of grant aid and credit benefit in the income quintiles. The
Hope Credit offers less assistance in the 2^nd and 3^rd quintiles to the single
independent student than to the married independent student.
!Coverage of average tuition and fees by the maximum Hope Credit that can
be realized is the same for this type of student as for married independent
students (see above).
Half-time Enrollment. When either of these student cases is enrolled on a
half-time basis at a 4-year public or private college, Pell Grant assistance can be
markedly reduced while the Hope Credit remains relatively unchanged. As a
consequence, at these kinds of institutions, the amount of benefit provided by this tax
credit may be closer to the size of the Pell Grant benefit.²⁵ In contrast, at community
colleges, the Pell Grant and Hope Credit are both likely to be reduced, roughly
proportionately.
Who in the Young Out-of-School Population is Potentially
Served by Lifetime Learning Credits?
In general, the Lifetime Learning Credit delivers markedly less benefit than does
the Hope Credit. This is primarily a function of the different reimbursement rules
between the two credits. The maximum Hope Credit is 50% larger than the
maximum Lifetime Learning Credit. Further, when tuition and fee levels that can be
covered by the credits are relatively low, the Lifetime Learning Credit can be
substantially less than the Hope Credit. For example, if remaining tuition and fees
are $2,000, a $1,500 Hope Credit might be claimed given sufficient tax liability but
the maximum Lifetime Learning Credit at that tuition and fee level is only $200.
Married Independent Students With a Child Across Institutional
Categories. The analysis below focuses on the distribution of Pell Grant and
Lifetime Learning Credit benefits to a married independent student with a child. This

²⁴(...continued)
Pell award rule not considered previously — when a student’s calculated Pell Grant falls in
the $200 to $400 range, a $400 grant is awarded. This means there is a sudden decline from
a $400 Pell Grant to $0 when the calculated Pell Grant is below $200. Where this occurs
for these independent students, there is not sufficient tax liability for the Hope Credit to
cover the marked increase in remaining tuition and fees.
²⁵Under the Pell Grant program, the award for a half-time student is calculated based on a
ratable reduction of the full-time award. In contrast, the Hope Credit was calculated by
reducing the average tuition and fees for each category of institution by 50%. At lower
priced institutions, such as community colleges, this reduces the allowable credit since
initial tuition and fee levels are at or below the $2,000 tuition level at which the maximum
Hope Credit can be claimed (given the credit’s reimbursement rules). At higher priced
institutions, tuition is sufficiently large that a 50% reduction need not affect the maximum
Hope Credit benefit.

individual has some college but has not earned a BA. This student is assumed to be
a candidate for the Lifetime Learning Credit and not eligible for the Hope Credit.²⁶
Figure 8. Lifetime Learning Credit and Pell Grant for 16-24 Year
Old Married Independent (with a Child) Having Some College
Enrolling Full-time at a Community College
^$4^,⁰⁰⁰¹^s^t^A^G^I^Q^uⁱⁿ^t^ile²ⁿ^d^A^G^I^Q^uⁱⁿ^tⁱ^l^e³^r^d^A^G^I^Q^uⁱⁿ^t^ile⁴^t^h^aⁿ^d⁵^t^h^A^G^I^Q^uⁱⁿ^t^ile^s
^$3^,⁵⁰⁰
^$3^,⁰⁰⁰^Lif^e^tⁱ^m^e
^$2^,⁵⁰⁰^L^e^a^r^ning^Cr^e^dⁱ^t
^$2^,⁰⁰⁰^P^e^{ll G}^r^an^t
^$1^,⁵⁰⁰
^$1^,⁰⁰⁰
^$50⁰
^$0^$⁰^$^10,000^$2^0,⁰⁰⁰^$³⁰^,⁰⁰⁰^$40^,⁰⁰⁰^$⁵⁰^,⁰⁰⁰^$^60,000^$7^0,⁰⁰⁰^$⁸⁰^,⁰⁰⁰^$90^,⁰⁰⁰^$¹⁰⁰^,⁰⁰⁰
^Ad^j^u^s^t^e^d^G^r^o^s^s^Iⁿ^c^o^m^e
Figure 9. Lifetime Learning Credit and Pell Grant for 16-24 Year
Old Married Independent (with a Child) Having Some College
Enrolling Full-time at a 4-Year Public College

^$4^,⁰⁰⁰¹^s^t^A^G^I^Q^uⁱⁿ^t^ile²ⁿ^d^A^G^I^Q^uⁱⁿ^tⁱ^l^e³^r^d^A^G^I^Q^uⁱⁿ^t^ile⁴^t^h^aⁿ^d⁵^t^h^A^G^I^Q^uⁱⁿ^t^ile^s
^$3^,⁵⁰⁰
^$3^,⁰⁰⁰^Lif^e^tⁱ^m^e
^$2^,⁵⁰⁰^L^e^a^r^ning^Cr^e^dⁱ^t
^$2^,⁰⁰⁰^P^e^{ll G}^r^an^t
^$1^,⁵⁰⁰
^$1^,⁰⁰⁰
^$50⁰
^$0^$⁰^$^10,000^$2^0,⁰⁰⁰^$³⁰^,⁰⁰⁰^$40^,⁰⁰⁰^$⁵⁰^,⁰⁰⁰^$^60,000^$7^0,⁰⁰⁰^$⁸⁰^,⁰⁰⁰^$90^,⁰⁰⁰^$¹⁰⁰^,⁰⁰⁰
^Ad^j^u^s^t^e^d^G^r^o^s^s^Iⁿ^c^o^m^e
²⁶In the March CPS, the educational attainment variable does not permit one to identify the
specific number of years of attainment the out-of-school 16-24 year old might have — the
undergraduate categories are some college, AA (academic) degree, AA (vocational) degree,
and BA. For this analysis, the first three categories were collapsed in order to identify the
undergraduate who might be eligible for the Lifetime Learning Credit. Limiting
educational attainment in this manner was dictated by the fact that almost without exception
the Pell Grant is available only to undergraduates (i.e., individuals without a BA degree).

Figure 10. Lifetime Learning Credit and Pell Grant for 16-24 Year
Old Married Independent (with a Child) Having Some College
Enrolling Full-time at a 4-Year Private College
^$4^,⁰⁰⁰¹^s^t^A^G^I^Q^uⁱⁿ^t^ile²ⁿ^d^A^G^I^Q^uⁱⁿ^tⁱ^l^e³^r^d^A^G^I^Q^uⁱⁿ^t^ile⁴^t^h^aⁿ^d⁵^t^h^A^G^I^Q^uⁱⁿ^t^ile^s
^$3^,⁵⁰⁰
^$3^,⁰⁰⁰^Lif^e^tⁱ^m^e
^$2^,⁵⁰⁰^L^e^a^r^ning^Cr^e^dⁱ^t
^$2^,⁰⁰⁰^P^e^{ll G}^r^an^t
^$1^,⁵⁰⁰
^$1^,⁰⁰⁰
^$50⁰
^$0^$⁰^$^10,000^$2^0,⁰⁰⁰^$³⁰^,⁰⁰⁰^$40^,⁰⁰⁰^$⁵⁰^,⁰⁰⁰^$^60,000^$7^0,⁰⁰⁰^$⁸⁰^,⁰⁰⁰^$90^,⁰⁰⁰^$¹⁰⁰^,⁰⁰⁰
^Ad^j^u^s^t^e^d^G^r^o^s^s^Iⁿ^c^o^m^e
Several key points can be made about the simulated distribution of these
benefits:
!The Lifetime Learning Credit is maximized when tuition levels are highest.
The credit offers little absolute assistance to a student attending the
community college or even the 4-year public college. It is only at the much
higher tuition and fee levels at the 4-year private college that the maximum
Lifetime Learning Credit can be claimed.^st
!The Lifetime Learning Credit reaches down into the 1 income quintile only
at relatively high tuition levels. At the 4-year private college for this student,
the credit more than offsets the loss of Pell Grant aid for the upper reaches of
the 1^st income quintile.
!The level of estimated Lifetime Learning Credit assistance received by these
students is significantly less than the Hope Credit benefits received by the
other subset of married independent students (those with only a high school
diploma). The coverage of average tuition and fee charges by the maximum
Lifetime Learning Credit that can be realized is markedly less — 20% at the
community college (compared to 79% by the Hope Credit for the other subset
of students), 20% at the 4-year public college (40% by the Hope Credit for the
other subset), and 6% at the 4-year private college (9% by the Hope Credit for²⁷
the other subset).
Single Independent Students Across Institutional Categories. The
figures below show the estimated distribution of benefits for a single independent

²⁷Given that the average tuition and fees at the community college and 4-year public college
are less than $5,000, the maximum coverage possible with the Lifetime Learning Credit
under its reimbursement rules is 20%. At the much higher average tuition and fee levels at
the 4-year private college ($17,123), the cap on the maximum Lifetime Learning Credit
($1,000) sharply reduces the percentage coverage of tuition and fees ($1,000 is 6% of
$17,123).

student case where the individual has some college but less than a bachelor’s degree
(BA).
Figure 11. Lifetime Learning Credit and Pell Grant for 16-24 Year
Old Single Independent With Some College Enrolling Full-time at
a Community College
^$4^,⁰⁰⁰¹^s^t^A^G^I^Q^uⁱⁿ^tⁱ^l^e²ⁿ^d^AG^I^Quⁱⁿ^tⁱ^l^e³^r^d^AG^I^Quⁱⁿ^tⁱ^l^e⁴^t^h^aⁿ^d⁵^t^h^AG^I^Quⁱⁿ^tⁱ^l^e^s
^$3^,⁵⁰⁰
^$3^,⁰⁰⁰^Li^f^e^tⁱ^m^e
^$2^,⁵⁰⁰^L^e^a^rⁿⁱ^ng^Cr^e^dⁱ^t
^$2^,⁰⁰⁰^Pe^l^l^Gr^aⁿ^t
^$1^,⁵⁰⁰
^$1^,⁰⁰⁰
^$5⁰⁰
^$0^$0^$5^,⁰⁰⁰^$1^0,⁰⁰⁰^$¹⁵^,⁰⁰⁰^$2^0,⁰⁰⁰^$²⁵^,⁰⁰⁰^$³⁰^,⁰⁰⁰^$³⁵^,⁰⁰⁰^$⁴⁰^,⁰⁰⁰^$⁴⁵^,⁰⁰⁰^$⁵⁰^,⁰⁰⁰
^A^d^j^u^st^e^d^G^r^o^s^s^Iⁿ^c^o^m^e
Figure 12. Lifetime Learning Credit and Pell Grant for 16-24 Year
Old Single Independent With Some College Enrolling Full-time at
a 4-Year Public College

^$4^,⁰⁰⁰¹^s^t^A^G^I^Q^uⁱⁿ^tⁱ^l^e²ⁿ^d^AG^I^Quⁱⁿ^tⁱ^l^e³^r^d^AG^I^Quⁱⁿ^tⁱ^l^e⁴^t^h^aⁿ^d⁵^t^h^AG^I^Quⁱⁿ^tⁱ^l^e^s
^$3^,⁵⁰⁰
^$3^,⁰⁰⁰^Li^f^e^tⁱ^m^e
^$2^,⁵⁰⁰^L^e^a^rⁿⁱ^ng^Cr^e^dⁱ^t
^$2^,⁰⁰⁰^Pe^l^l^Gr^aⁿ^t
^$1^,⁵⁰⁰
^$1^,⁰⁰⁰
^$5⁰⁰
^$0^$0^$5^,⁰⁰⁰^$1^0,⁰⁰⁰^$¹⁵^,⁰⁰⁰^$2^0,⁰⁰⁰^$²⁵^,⁰⁰⁰^$³⁰^,⁰⁰⁰^$³⁵^,⁰⁰⁰^$⁴⁰^,⁰⁰⁰^$⁴⁵^,⁰⁰⁰^$⁵⁰^,⁰⁰⁰
^A^d^j^u^st^e^d^G^r^o^s^s^Iⁿ^c^o^m^e

Figure 13. Lifetime Learning Credit and Pell Grant for 16-24 Year
Old Single Independent With Some College Enrolling Full-time at
a 4-Year Private College
^$4^,⁰⁰⁰¹^s^t^A^G^I^Q^uⁱⁿ^tⁱ^l^e²ⁿ^d^AG^I^Quⁱⁿ^tⁱ^l^e³^r^d^AG^I^Quⁱⁿ^tⁱ^l^e⁴^t^h^aⁿ^d⁵^t^h^AG^I^Quⁱⁿ^tⁱ^l^e^s
^$3^,⁵⁰⁰
^$3^,⁰⁰⁰^Li^f^e^tⁱ^m^e
^$2^,⁵⁰⁰^L^e^a^rⁿⁱ^ng^Cr^e^dⁱ^t
^$2^,⁰⁰⁰^Pe^l^l^Gr^aⁿ^t
^$1^,⁵⁰⁰
^$1^,⁰⁰⁰
^$5⁰⁰
^$0^$0^$5^,⁰⁰⁰^$1^0,⁰⁰⁰^$¹⁵^,⁰⁰⁰^$2^0,⁰⁰⁰^$²⁵^,⁰⁰⁰^$³⁰^,⁰⁰⁰^$³⁵^,⁰⁰⁰^$⁴⁰^,⁰⁰⁰^$⁴⁵^,⁰⁰⁰^$⁵⁰^,⁰⁰⁰
^A^d^j^u^st^e^d^G^r^o^s^s^Iⁿ^c^o^m^e
The distribution of Lifetime Learning benefits at all three institutional categories
are shown immediately above because, unlike the distribution of the Hope Credit, the²⁸
distributions at the 4-year public college and 4-year private college are different.
The key points to be made about the distribution of the Lifetime Learning Credit
for this student are the following:
!The Lifetime Learning Credit once again is maximized when tuition and fees
are high.
!In contrast to the distribution of Lifetime Learning aid to the married
independent student, at no point does it offset the loss in Pell Grant assistance
experienced by the single independent student as AGI grows.
!The coverage of average tuition and fees across types of institution is the
same as described above for the married independent student.
Half-time Enrollment. When either of these student cases is enrolled on a
half-time basis at a community college or 4-year public college, the Lifetime
Learning Credit is reduced largely proportionately. At the 4-year private college, the
credit is unaffected by half-time enrollment.

²⁸This a function of the reimbursement rules for the Lifetime Learning Credit which serve
to limit the size of the credit at the 4-year public college level; at the 4-year private college
level, tax liability is the limiting factor. In contrast, the Hope reimbursement rules for the
first $2,000 in remaining tuition and fees are more generous, as a result tax liability is the
limiting factor at both the 4-year public and 4-year private college levels.

What Benefits Do the Credits Offer Aided Students?
This section of the report considers the availability of the tax credit benefits to
the population of postsecondary students who are receiving federal financial aid from
programs authorized by Title IV of the HEA. Title IV aid programs provide loan,
grant, and work assistance to students. Title IV programs made an estimated $45.1
billion in federal financial assistance available to students and their families in
academic year 1999-2000, constituting roughly two-thirds of all non-tax based direct
financial assistance available to support postsecondary students. Title IV aid
recipients constitute the largest population of aided students for whom
comprehensive background data are available.
With the introduction of higher education tax credits in 1997 as a second major
approach toward providing federal student aid, considerable interest has arisen in the
complementarity between Title IV grant aid and tax credit assistance. Additionally,
as has been discussed throughout this report, considerable interest exists in more
accurately identifying the population of students eligible to benefit from the tax
credits.
The analysis presented below sheds light on the extent to which the students
who have traditionally been the focus of federal financial aid — those receiving Title
IV aid — are also able to benefit from the tax credits. Additionally it explores the
combined targeting of Title IV grant aid and tax credit assistance to these students.
The analysis upon which this portion of the report is based utilizes a NPSAS-
based tax credit estimation model. This model utilizes comprehensive background
information on Title IV recipients (e.g., information on tax liability, adjusted gross
income, tuition and fee levels, enrollment and attendance status) which is available
in NPSAS²⁹ and simulates tax credit benefits available to such students. In some
instances, only partial information on a student’s characteristic is available in
NPSAS. Consequently, some assumptions have been built into the modeling
approach. The information presented below on the value and availability of tax
credits should therefore be viewed as estimates of what aided students are potentially
eligible to receive in tax benefits — and not as precise reflections of actual aid
amounts. Readers are encouraged to review the Technical Appendix which outlines
the modeling approach and the assumptions embedded within it in greater detail.
It should be noted that tax credit values presented below are being estimated for
a national sample of Title IV recipients.³⁰ In the analysis that follows, these
estimated tax credit values are examined in relation to student characteristics and in
relation to other financial aid received by students. Findings are presented in a

²⁹NPSAS data come from a nationally representative sample of approximately 50,000
undergraduate and 12,000 graduate students enrolled in postsecondary institutions in the

1999-2000 academic year.

³⁰A sample of 23,450 was used for this estimation model. It is comprised of all members of
the nationally representative sample of 24,489 Title IV aid recipients (attending a single
postsecondary institution in 1999-2000) in NPSAS for which the information needed for tax
credit estimation was available.

manner that maps estimated tax credit assistance and other available aid across the
Title IV aided student population.
Summary of Findings
The analyses presented in the remainder of this section focus on Title IV
recipients’ access to: tax credits (in aggregate), Hope Credits, Lifetime Learning
Credits, and federal obligation-free aid. The primary findings emerging from this
examination of tax credit and other assistance available to Title IV recipients include
the following:
!Higher education tax credit assistance is widely available to Title IV recipients
— roughly 45% of Title IV recipients are eligible to receive tax credits.
Students in the lowest income quintile (earning less than $8,176), who are
much more likely to be affected by grant aid offsets and the credits’
nonrefundability, are much less likely to qualify for tax credit assistance than
are students in all other income quintiles.³¹
!The Hope Credit, available to approximately 38% of those undergraduates
receiving Title IV assistance who are in their first 2 years of study, carries a
median value of $1,276 — roughly 85% of the maximum potential value of
a Hope Credit. Nearly half of the Title IV recipients attending 4-year public,
4-year private, and proprietary schools are eligible for Hope Credits. Median
Hope Credit values are above $1,300 for eligible recipients at each of these
types of institutions.
!The Lifetime Learning Credit, available to approximately one quarter of the
combined pool of undergraduate and graduate Title IV recipients, carries a
median value of $556 — roughly 56% of the maximum potential value of a
Lifetime Learning Credit. Students attending 4-year public and 4-year private
institutions are much more likely to be eligible for a Lifetime Learning Credit
than are students attending other institutions. However, the median value of
a Lifetime Learning Credit available to those attending 4-year private
institutions ($907) is more than double the median value ($411) of the credits
available to those attending 4-year public institutions (who are much more
likely to have qualified expenses below the maximum allowed under the
credit).
!Federal obligation-free aid has become widely available to undergraduate Title
IV recipients across all income categories with the introduction of tax
credits.³² Such aid is now available to more than half of the financial aid
dependent Title IV recipients in each dependent student income quintile, and
more than 90% of financial aid independent Title IV recipients in each
independent student income quintile. The percentage of students with at least

³¹The income quintile distributions in this portion of the report are based on total income in
1998, not AGI as in the preceding portion of the report. Income is used here because a
significant portion of Title IV recipients do not pay federal income taxes. As a result, AGI
values, which are determined within the federal income tax system, are not included in the
NPSAS data for those recipients.
³²Obligation-free aid (defined in more detail below) is aid that does not have to be repaid or
worked for.

10% of tuition and fees covered by available federal obligation-free aid has
risen dramatically with the introduction of tax credits.
Higher Education Tax Credits In Aggregate
Figures 14 and 15 and Table 1 present overview information on the higher
education tax benefits available to Title IV aid recipients. These figures and Table
1 illustrate, in aggregate, how the credits are targeted to serve the broad population
of undergraduate and graduate Title IV aid recipients.
Figure 14. Estimated Percentage of Title IV Aid Recipients Eligible to
Receive a Hope or Lifetime Tax Credit by Income Quintile, 1999-2000

¹⁰^0%
⁹⁰^%
⁷²^%⁶⁸^%⁸⁰^%
⁷⁰^%
⁶⁰^%
⁴⁴^%⁵⁰^%
³²^%⁴⁰^%
³⁰^%
²⁰^%
^7%¹⁰^%
^0%^Q^uⁱⁿ^t^ile¹^Q^uⁱⁿ^t^ile²^Q^uⁱⁿ^tⁱ^l^e³^Q^uⁱⁿ^tⁱ^l^e⁴^Q^uⁱⁿ^t^ile⁵
Figure 15. Estimated Median Value of Higher Education Tax Credits
Available to Title IV Recipients by Income Quintile, 1999-2000

^$1^,⁰⁰⁰
^$8⁹⁷^$1^,⁰⁰⁰
^$9⁰⁰
^$7²⁰^$8⁰⁰
^$7⁰⁰
^$5¹⁷^$6⁰⁰
^$5⁰⁰
^$4⁰⁰
^$²⁵⁹^$3⁰⁰
^$2⁰⁰
^$1⁰⁰
^$0^Q^uⁱⁿ^tⁱ^l^e¹^Q^ui^ntⁱ^l^e²^Q^uⁱ^ntⁱ^l^e³^Q^uⁱ^ntⁱ^l^e⁴^Q^uiⁿ^tⁱ^l^e⁵

The following key points can be made about the targeting of higher education
tax benefits based upon the data presented in these figures and in Table 1 (below):
!Tax credit assistance has been made available to a large group of Title IV
recipients — roughly 45 % qualify for credits which have a median value of
almost $800.
!The value of available credits rises steadily across income quintiles, peaking
for those in the top quintile. Student eligibility for credits also increases
steadily across income quintiles before tapering off a bit for those in the
highest quintile (where the benefit phase-out takes effect). It is only students
in the lowest income quintile (those earning less than $8,176), who are highly
unlikely to qualify for tax credit assistance. These students are much more
likely to be affected by grant aid offsets and the credits’ nonrefundability than
are students in all other income quintiles.
Table 1. Estimated Percentage of Title IV Aid Recipients with
Various Characteristics Who Were Eligible to Receive a Hope or
Lifetime Learning Tax Credit, and Median Value of the Credit
They Were Eligible to Receive, 1999-2000
^C^h^aracteri^s^tⁱ^c^s^Me^dⁱ^aⁿ
^{of T}ⁱ^tl^{e I}^V^Percent^{percent of}
^aⁱ^{ded st}^udent^elig^{ible f}^o^{r a}^Me^dⁱ^aⁿ^t^a^x^t^u^it^io^{n a}ⁿ^d
^po^pula^t^ioⁿ^tax^credit^{credit value}^fees^covered
^A^{ll T}^{itle I}^V^aid^100%^45%^$791^13%
^recipien^ts
^A^tten^d^an^{ce s}^t^atu^s
^Fu^ll-^tim^e^72%^46%⁸⁸⁰^12%
^P^a^r^t^-^tim^e^28%^42%⁵⁶³^19%
^Ag^e
²⁴^o^r^y^o^unge^r^64%^47%⁸³⁸^13%
^{25 or ol}^der^36%^41%⁷⁰¹^14%
^Sector
^P^u^b^{lic 2}^-^y^ear^22%^21%⁶⁹²^53%
^P^u^b^{lic 4}^-^y^ear^41%^48%⁵⁵³^18%
^P^r^iv^{ate 4-}^y^ear^25%^58%¹⁰⁰⁰^7%
^P^r^o^p^r^ietar^y^10%^49%¹⁰⁰⁰^14%
^Oth^e^r^2%^37%¹²²⁷^17%
^Depen^d^en^cy
^Dep^eⁿ^d^en^t^48%^51%⁹²⁴^13%
^In^depen^d^en^t^52%^38%⁶⁵⁴^14%

^C^h^aracteri^s^tⁱ^c^s^Me^dⁱ^aⁿ
^{of T}ⁱ^tl^{e I}^V^Percent^{percent of}
^aⁱ^{ded st}^udent^elig^{ible f}^o^{r a}^Me^dⁱ^aⁿ^t^a^x^t^u^it^io^{n a}ⁿ^d
^po^pula^t^ioⁿ^tax^credit^{credit value}^fees^covered
^Iⁿ^co^m^e^Quⁱⁿ^tile
^Fⁱ^rs^t^(l^ow^es^t⁾^7%²⁵⁹^4%
^Secon^d^32%⁵¹⁷^11%
^Thⁱ^r^d^44%⁷²⁰^14%
^Fo^ur^th^72%⁸⁹⁷^16%
^Fi^ft^{h (}^hⁱ^ghe^st⁾^68%¹⁰⁰⁰^14%
Hope Credits
The Hope Credit was introduced to help ensure students have universal access
to the first 2 years of postsecondary education. It is targeted toward undergraduate
students enrolled on at least a half-time basis in a higher education program leading
to a degree, certificate, or credential. Table 2 (below) provides comprehensive
information on the Hope Credit assistance available to undergraduate Title IV
recipients in their first 2 years of study. The following key themes emerge from the
data presented in Table 2.
!The Hope Credit is available to a relatively large share (approximately 38%)
of those undergraduates receiving Title IV assistance in their first 2 years of
study.
!Many of those Title IV recipients eligible to receive Hope Credits come close
to obtaining the credit’s maximum potential $1,500 value. Hope Credits
available to Title IV recipients carry a median value of $1,276 — roughly 85%
of the maximum potential value of a Hope Credit.
!Nearly half of the Title IV recipients in 4-year public, 4-year private, and
proprietary schools are eligible for the Hope Credit. Those eligible recipients
attending 4-year public, 4-year private, and proprietary schools have median
Hope Credit values above $1,300.

Table 2. Estimated Percentage of Undergraduate Title IV Aid
Recipients in Their First 2 Years of Study Who Were Eligible to
Receive a Hope Credit, and Median Value of the Credit They
Were Eligible to Receive, 1999-2000
^C^h^aracteri^s^tⁱ^c^s^of
^underg^ra^dua^t^e^Tit^l^e^Percent^Me^dⁱ^aⁿ
^{IV a}ⁱ^{ded st}^udent^elig^{ible f}^o^r^{percent of}
^po^pula^t^io^{n in f}ⁱ^rst²^{a Hop}^e^M^e^diaⁿ^H^o^pe^t^u^it^io^{n a}ⁿ^d
^years^{of s}^t^u^d^y^Credit^{Credit value}^fees^covered
^A^l^l^und^e^r^gr^a^d^ua^t^e^100%^38%^$1276^22%
^T^{itle I}^V^aid
^r^ecipⁱ^en^{ts in}^fⁱ^r^s^{t 2}
^y^e^a^r^{s o}^f^stud^y
^A^tten^d^an^{ce s}^t^atu^s
^Fu^ll-^tim^e^72%^41%¹³⁷⁵^18%
^P^a^r^t^-^tim^e^28%^30%¹⁰¹⁹^42%
^Ag^e
²⁴^o^r^y^o^unge^r^70%^41%¹³³⁸^21%
^{25 or ol}^der^30%^29%¹⁰⁵⁴^26%
^Sector
^P^u^b^{lic 2}^-^y^ear^38%^20%⁸²⁸^57%
^P^u^b^{lic 4}^-^y^ear^28%^46%¹³¹⁶^33%
^P^r^iv^{ate 4-}^y^ear^17%^54%¹⁵⁰⁰^9%
^P^r^o^p^r^ietar^y^15%^47%¹⁵⁰⁰^17%
^Oth^e^r^2%^40%¹⁵⁰⁰^19%
^Depen^d^en^cy
^Dep^eⁿ^d^en^t^55%^46%¹³⁸⁹^20%
^In^depen^d^en^t^45%^27%¹⁰³⁰^25%
^Iⁿ^co^m^e^q^uⁱⁿ^tile
^depen^d^en^t
^Fⁱ^rs^t^(l^ow^es^t⁾^7%⁵⁸⁷^10%
^Secon^d^26%⁷⁴⁷^15%
^Thⁱ^r^d^56%¹³⁶⁴^23%
^Fo^ur^th^79%¹⁵⁰⁰^26%
^Fi^ft^{h (}^hⁱ^ghe^st⁾^61%¹²⁶⁹^16%
^Iⁿ^co^m^e^q^uⁱⁿ^tile
ⁱⁿ^depen^d^en^t
^Fⁱ^rs^t^(l^ow^es^t⁾^1%^*^*
^Secon^d^15%³⁸⁸^10%
^Thⁱ^r^d^25%⁹⁰⁹^24%
^Fo^ur^th^32%¹¹⁷⁴^24%
^Fi^ft^{h (}^hⁱ^ghe^st⁾^62%¹³⁰³^30%
^*^T^{oo f}^e^w^cas^es^f^o^{r a reliable es}^tim^ate.

Lifetime Learning Credits³³
The Lifetime Learning Credit was designed to support traditional undergraduate
students in any year of study, graduate students, and “lifetime learners” (i.e., those
not necessarily pursuing degrees). Like the Hope Credit, the Lifetime Learning
Credit was intended to enhance and preserve middle income students’ access to
higher education. Table 3 presents comprehensive information on the Lifetime
Learning Credit assistance available to Title IV recipients. Some of the central
themes emerging from the data presented in Table 3 include the following:
!The Lifetime Learning Credit, available to approximately one quarter of the
combined pool of undergraduate and graduate Title IV recipients, carries a
median value of $556 — roughly 56% of the maximum potential value of a
Lifetime Learning Credit. Students attending public institutions, who are
much more apt to have qualified expenses below the maximum allowed by the
credit, have a difficult time maximizing the credit’s potential $1,000 value.
!Students attending 4-year public and 4-year private institutions are much more
likely to be eligible for a Lifetime Learning Credit than are students attending
other institutions. Approximately 39% of Title IV recipients attending 4-year
private schools are eligible to receive Lifetime Learning Credits, which have
a median value of $907 for this group. Roughly one third of Title IV
recipients in 4-year public institutions are eligible to receive Lifetime Learning
Credits, which have a median value of $411. Lifetime Learning Credits are
not very accessible to Title IV recipients attending 2-year public institutions
(an estimated 3%).
Table 3. Estimated Percentage of Title IV Aid Recipients with
Various Characteristics Who Were Eligible to Receive Lifetime
Learning Tax Credits, and Median Value of the Credit They Were
Eligible to Receive, 1999-2000
^Percent
^C^h^aracteri^s^tⁱ^c^s^elig^{ible f}^o^{r a}^Me^dⁱ^aⁿ
^{of T}ⁱ^tl^{e I}^V^Lif^e^tⁱ^m^e^Lif^e^tⁱ^m^e^M^e^dⁱ^an^s^h^are
^aⁱ^{ded st}^udent^Lea^r^ning^Lea^r^ning^o^f^t^u^it^io^{n a}ⁿ^d
^po^pula^t^ioⁿ^Credit^{Credit value}^fees^covered
^A^l^l^und^e^r^gr^a^d^ua^t^e^100%^25%^$556^10%
^an^d^g^r^ad^u^a^{te T}^{itle I}^V
^{aid recipien}^ts
^A^tten^d^an^{ce s}^t^atu^s
^Fu^ll-^tim^e^72%^25%⁶²⁷^8%
^P^a^r^t^-^tim^e^28%^27%⁴³⁸^14%

³³Students cannot receive both a Hope Credit and a Lifetime Learning Credit in any given
tax year. Students who were technically eligible to receive a Hope Credit or a Lifetime
Learning Credit are assumed in this analysis to pursue the more valuable Hope Credit.
Thus, they are not treated as being eligible Lifetime Learning Credit recipients.

^Percent
^C^h^aracteri^s^tⁱ^c^s^elig^{ible f}^o^{r a}^Me^dⁱ^aⁿ
^{of T}ⁱ^tl^{e I}^V^Lif^e^tⁱ^m^e^Lif^e^tⁱ^m^e^M^e^dⁱ^an^s^h^are
^aⁱ^{ded st}^udent^Lea^r^ning^Lea^r^ning^o^f^t^u^it^io^{n a}ⁿ^d
^po^pula^t^ioⁿ^Credit^{Credit value}^fees^covered
^Ag^e
²⁴^o^r^y^o^unge^r^64%^24%⁵⁴⁸^9%
^{25 or ol}^der^36%^29%⁵⁶⁹^12%
^Sector
^P^u^b^{lic 2}^-^y^ear^22%^3%¹⁴⁵^13%
^P^u^b^{lic 4}^-^y^ear^41%^32%⁴¹¹^14%
^P^r^iv^{ate 4-}^y^ear^25%^39%⁹⁰⁷^6%
^P^r^o^p^r^ietar^y^10%^15%⁹⁴⁰^12%
^Oth^e^r^2%^6%⁴⁰⁶^10%
^Depen^d^en^cy
^Dep^eⁿ^d^en^t^48%^25%⁵⁸⁴^9%
^In^depen^d^en^t^52%^26%⁵²⁷^11%
^Iⁿ^co^m^e^q^uⁱⁿ^tile
^depen^d^en^t
^Fⁱ^rs^t^(l^ow^es^t⁾^4%²⁰²^4%
^Secon^d^19%⁴⁵⁰^7%
^Thⁱ^r^d^32%⁵⁴⁷^10%
^Fo^ur^th^39%⁷⁸¹^13%
^Fi^ft^{h (}^hⁱ^ghe^st⁾^27%⁴⁹⁸^7%
^Iⁿ^co^m^e^q^uⁱⁿ^tile
ⁱⁿ^depen^d^en^t
^Fⁱ^rs^t^(l^ow^es^t⁾^3%²⁵⁹^3%
^Secon^d^19%³⁰¹^5%
^Thⁱ^r^d^28%⁵⁴¹^11%
^Fo^ur^th^33%⁶¹⁴^13%
^Fi^ft^{h (}^hⁱ^ghe^st⁾^51%⁶⁷⁶^13%
Distribution of Federal Obligation-Free Aid
This section of the report considers federal student grant aid, such as the Pell
Grant, and the federal education tax credits in tandem. The combined targeting of
federal grant aid and education tax credits is of widespread interest to policymakers
concerned about federal financial support for postsecondary students. Both sources
of aid aim to promote postsecondary education access by covering postsecondary
education expenses during periods of enrollment. Additionally, the credits and grant
aid share a fundamentally important feature — they are federal “obligation-free”
assistance.³⁴ That is, neither of these kinds of aid carries a post-award or post-receipt
non-academic obligation. Unlike loans, they do not have to be repaid. Unlike work
study awards, they require no work. As federal obligation-free assistance, grants and

³⁴Subsequent references in this report to obligation-free assistance are references to either
federal student aid grants, the postsecondary education tax credits, or both sources of aid.

education tax credits are the most desirable forms of federal aid from the recipient’s
perspective. As a result, it is important to consider how the advent of the education
tax credits has affected the distribution of federal obligation-free assistance.
“Generally available” federal obligation-free aid is disbursed in the form of
grants and tax credits.³⁵ Prior to the introduction of the Hope and Lifetime Learning
Credits, all such aid was disbursed as need-sensitive grant aid (i.e., Pell Grants and
Supplemental Educational Opportunity Grants – SEOGs). The introduction of tax
credits greatly expanded the pool of individuals eligible to receive federal obligation-
free aid.
Table 4 offers a depiction of the generally available obligation-free aid available
to Title IV recipients and the extent to which such aid defrays the cost of tuition and
fees. Figures 16 and 17 provide information on the composition of this kind of aid;
specifically, they illustrate the relative role being played by grants and tax credits in
assisting students in varying income quintiles. The following key points can be made
based upon the data presented below.
!Federal obligation-free aid is now widely available to Title IV recipients
across income categories. This aid is being made available to more than half
of the top income quintile of dependent students, and the median share of
tuition and fees covered by such aid available to these students is 10%. In all
other dependent and independent student income quintiles, more than 80% of
students are eligible to receive federal obligation-free aid, and the median
share of tuition and fees covered by such aid ranges from roughly 20% to
more than 100%.
!For dependent students, grants are the dominant form of federal obligation-
free aid for those in the two lower income quintiles. A fairly even balance
exists between available grant and tax credit assistance for those in the middle
quintile ($32,812 - $50,702), and tax credits are the dominant source of this
kind of aid for those in the upper quintiles. For independent students, grants
are the dominant source of this aid for each income quintile except the highest
quintile (earning $27,661 and above). For students in this quintile, a balance
exists between available grant aid and tax credit assistance.

³⁵“Generally available” aid is available to students attending eligible institutions regardless
of the specific kind of postsecondary education being pursued.

Table 4. Estimated Percentage of Undergraduate Title IV
Recipients by Income Quintile Who Were Eligible to Receive
Federal Obligation-Free Aid in 1999-2000
^{Percent eligible to}^M^e^{dian percent of}
^{receive federal}^M^e^dⁱ^an^am^ouⁿ^t^t^u^it^io^{n a}^{nd f}^ees
^{obligation-free aid}^avai^l^a^b^l^e^covered
^Iⁿ^co^m^e^q^uⁱⁿ^tile
^Dep^eⁿ^d^en^t
^Fⁱ^rs^t^(l^ow^es^t⁾^97%^$3075^100%
^Secon^d^97%²¹⁷⁴^68%
^Thⁱ^r^d^90%¹²²⁴^23%
^Fo^ur^th^84%¹⁰⁰⁰^19%
^Fi^ft^{h (}^hⁱ^ghe^st⁾^54%⁶⁸²^10%
^Iⁿ^co^m^e^q^uⁱⁿ^tile
ⁱⁿ^depen^d^en^t
^Fⁱ^rs^t^(l^ow^es^t⁾^95%²⁹⁷⁵^102%
^Secon^d^98%¹⁷⁰⁰^83%
^Thⁱ^r^d^95%¹⁵⁶³^81%
^Fo^ur^th^98%¹⁵⁰⁰^84%
^Fi^ft^{h (}^hⁱ^ghe^st⁾^94%¹⁰⁰⁰^31%
Figure 16. Estimated Composition of Aggregate Federal Obligation-
Free Aid Made Available to Dependent Undergraduate Title IV Aid
Recipients by Income Quintile, 1999-2000

^2.^0%^13.^3%^100%
^90%
^50.^4%^80%
^70%
^60%
^98.^0%^86.^7%^93.^9%^99.^2%^50%
^40%
^49.^6%^30%
^20%
^6.^1%^0.^8%^0%^10%
^Q^uⁱⁿ^t^ile¹^Q^uⁱⁿ^t^ile²^Q^uⁱⁿ^til^e³^Q^uⁱⁿ^til^e⁴^Q^uⁱⁿ^til^e⁵
^Gr^aⁿ^t^s^Ta^x^C^r^e^dⁱ^t^s

Figure 17. Estimated Composition of Aggregate Federal Obligation-
Free Aid Made Available to Independent Undergraduate Title IV Aid
Recipients by Income Quintile, 1999-2000
^0.^3%^3.^7%^12.^5%^100%
^18.^4%^90%
^55.^8%^70%^80%
^60%
^99.^7%^96.^3%^87.^5%^50%
^81.^6%^40%
^44.^2%^20%^30%
^10%
^0%^Q^uⁱⁿ^til^e¹^Q^uⁱⁿ^t^ile²^Q^uⁱⁿ^til^e³^Q^uⁱⁿ^til^e⁴^Q^uⁱⁿ^til^e⁵
^Gr^aⁿ^t^s^Ta^x^C^r^e^dⁱ^t^s
How Has the Introduction of Tax Credits Affected the Targeting of
Federal Obligation-Free Aid? Prior to the introduction of tax credits, the general
prevailing philosophy in the federal student aid effort, rooted in the basic tenets of
the original HEA of 1965, was to first award grants to cover the higher education
costs of those with high levels of need, and if necessary, supplement grants with
subsidized loans. The aid approach for middle-income students centered on
providing subsidized borrowing opportunities.
With the introduction of the Hope and Lifetime Learning Credits, two new
sources of obligation-free aid became available that serve middle income-students.
This expansion of the role played by such aid within the federal student aid effort has
sparked debate about how obligation-free aid is currently targeted, how the role of
such aid has changed, and about the role this aid should play within the overarching
federal aid effort.
The figures below have been produced to shed some light on how the targeting
of obligation-free aid across income brackets has changed. Figures 18 to 23
illustrate the targeting of this aid in 1995-1996 and 1999-2000, a period immediately
prior to the introduction of the tax credits and a period shortly after the tax credits³⁶
became available (in 1998). The 1995-1996 data reflect the estimated distribution
of Pell and SEOG awards in the 1995-1996 academic year. The 1999-2000 data

³⁶Undergraduate students are the focus of this examination because federal grant assistance
(the only form of generally available federal obligation-free aid available prior to 1998) is
only provided to undergraduates.

reflect the estimated distribution of federal grant aid and also include the estimated
Hope and Lifetime Learning Credit assistance made available.³⁷
Shifts in the targeting of obligation-free aid displayed in Figures 18 and 19 can
be thought of as largely reflecting the effects of the tax credits. This is because few
changes were enacted in federal grant eligibility requirements during this time period.
Shifts in the percent of tuition and fees covered by obligation-free aid depicted in
Figures 20 through 23 can be thought of as reflecting both increases in Pell awards
and the introduction of tax assistance for those in lower income quintiles, and as
primarily reflecting the effects of tax credits for those in higher income quintiles.
The central themes emerging from the data presented in the figures below
include the following:
!When Title IV recipients are examined by income quintile in academic years
1995-1996 and 1999-2000, it becomes apparent that targeting of federal
obligation-free aid has changed dramatically. Students in the upper three
income quintiles had far greater access to such aid in 1999-2000 than in 1995-
1996. This trend is most strongly accentuated in the 4^th and 5^th income
quintiles for dependent students. The majority of dependent Title IV
recipients in these quintiles (84% and 54%, respectively) in 1999-2000 had
access to federal obligation-free aid.
!The incidence of Title IV recipients having at least 10% of their tuition and
fees covered by generally available obligation-free aid has grown considerably
over the period. This is most evident for dependent students in the 4^th and 5^th
quintiles whose access to such federal aid covering one-tenth of their tuition
rose to 60% (from 7%) and to 27% (from 0%), respectively.

³⁷The 1995-1996 data utilized for this analysis are from the 1995-1996 NPSAS. The 1999-

2000 data are from the 1999-2000 NPSAS.

Figure 18. Estimated Percentage of Undergraduate Dependent Title
IV Aid Recipients by Income Quintile Eligible for Federal Obligation-
Free Aid, 1995-1996 and 1999-2000

⁹²^%
^Q^uⁱⁿ^t^ile¹⁹⁷^%
⁸⁷^%
^Q^uⁱⁿ^t^ile²⁹⁷^%
⁵³^%
^Q^uⁱⁿ^t^ile³⁹⁰^%
^Q^uⁱⁿ^t^ile⁴^9%⁸⁴^%
^Q^uⁱⁿ^t^ile⁵^0.5%⁵⁴^%
^0%²⁰^%⁴^0%⁶⁰^%⁸⁰^%¹⁰^0%
^D^e^p^eⁿ^d^eⁿ^t^s¹⁹⁹⁵^-⁹⁶^-^-^%^E^lig^ib^l^e^f^o^r^F^e^d^e^r^a^{l O}^b^lig^a^tⁱ^oⁿ^-^F^r^e^e^Aⁱ^d
^D^e^p^eⁿ^d^eⁿ^t^s¹⁹⁹⁹^-⁰⁰^-^-^%^E^lig^ib^l^e^f^o^r^F^e^d^e^r^a^{l O}^b^lig^a^tⁱ^oⁿ^-^F^r^e^e^Aⁱ^d
Figure 19. Estimated Percentage of Undergraduate Independent Title
IV Aid Recipients by Income Quintile Eligible for Federal Obligation-
Free Aid, 1995-1996 and 1999-2000

⁹³^%
^Q^uⁱⁿ^t^ile¹⁹⁵^%
⁹⁵^%
^Q^uⁱⁿ^t^ile²⁹⁸^%
⁷⁴^%
^Q^uⁱⁿ^t^ile³⁹⁵^%
^Q^uⁱⁿ^t^ile⁴⁶⁸^%⁹⁸^%
^Q^uⁱⁿ^t^ile⁵⁵²^%⁹⁴^%
^0%²⁰^%⁴^0%⁶⁰^%⁸⁰^%¹⁰^0%
^I^nde^pe^nde^nt^s¹⁹⁹⁵^-⁹⁶^-^-^%^E^lⁱ^gⁱ^b^l^e^f^o^r^F^e^de^r^a^l^O^b^lⁱ^ga^tⁱ^on-^F^r^e^e^Aⁱ^d
^I^nde^pe^nde^nt^s¹⁹⁹⁹^-⁰⁰^-^-^%^E^lⁱ^gⁱ^b^l^e^f^o^r^F^e^de^r^a^l^O^b^lⁱ^ga^tⁱ^on-^F^r^e^e^Aⁱ^d

Figure 20. Estimated Percentage of Dependent Undergraduate Title
IV Aid Recipients by Income Quintile Having At Least 10% of Tuition
and Fees Covered by Available Federal Obligation-Free Aid, 1995-
1996 and 1999-2000

⁹¹^%
^Quⁱⁿ^tⁱ^l^e¹⁹⁶^%
⁸⁴^%
^Quⁱⁿ^tⁱ^l^e²⁹²^%
⁴⁵^%
^Quⁱⁿ^tⁱ^l^e³⁷⁴^%
^Quⁱⁿ^tⁱ^l^e⁴^7%⁶⁰^%
^0%
^Quⁱⁿ^tⁱ^l^e⁵²⁷^%
⁰^%²⁰^%⁴^0%⁶⁰^%⁸^0%¹⁰^0%
¹⁹⁹⁵^-⁹⁶
¹⁹⁹⁹^-⁰⁰
Figure 21. Estimated Percentage of Dependent Undergraduate Title
IV Aid Recipients by Income Quintile Having At Least One-Fourth of
Tuition and Fees Covered by Available Federal Obligation-Free Aid,

1995-1996 and 1999-2000

⁸⁰^%
^Q^uⁱⁿ^t^ile¹⁸⁶^%
^Q^uⁱⁿ^t^ile²⁶⁸^%⁷⁶^%
³¹^%
^Q^uⁱⁿ^t^ile³⁴³^%
^4%
^Q^uⁱⁿ^t^ile⁴²⁵^%
^0%
^Q^uⁱⁿ^t^ile⁵¹⁰^%
⁰^%²⁰^%⁴^0%⁶⁰^%⁸^0%¹⁰^0%
¹⁹⁹⁵^-⁹⁶
¹⁹⁹⁹^-⁰⁰

Figure 22. Estimated Percentage of Independent Undergraduate Title
IV Aid Recipients by Income Quintile Having At Least 10% of Tuition
and Fees Covered by Available Federal Obligation-Free Aid, 1995-
1996 and 1999-2000

⁹²^%
^Quⁱⁿ^tⁱ^l^e¹⁹⁵^%
^93%
^Quⁱⁿ^tⁱ^l^e²⁹⁵^%
⁷⁰^%
^Quⁱⁿ^tⁱ^l^e³⁹¹^%
⁶⁷^%
^Quⁱⁿ^tⁱ^l^e⁴^94%
⁴⁸^%
^Quⁱⁿ^tⁱ^l^e⁵⁸⁶^%
⁰^%²⁰^%⁴^0%⁶⁰^%⁸^0%¹⁰^0%¹⁹⁹⁵^-⁹⁶
¹⁹⁹⁹^-⁰⁰
Figure 23. Estimated Percentage of Independent Undergraduate Title
IV Aid Recipients by Income Quintile Having At Least One-Fourth of
Tuition and Fees Covered by Available Federal Obligation-Free Aid,

1995-1996 and 1999-2000

^Quⁱⁿ^tⁱ^l^e¹⁸⁴^%⁸⁸^%
⁸²^%
^Quⁱⁿ^tⁱ^l^e²⁸⁵^%
⁵⁹^%
^Quⁱⁿ^tⁱ^l^e³⁷⁴^%
⁶²^%
^Quⁱⁿ^tⁱ^l^e⁴⁷⁸^%
⁴⁰^%
^Quⁱⁿ^tⁱ^l^e⁵⁵²^%
⁰^%²⁰^%⁴^0%⁶⁰^%⁸^0%¹⁰^0%¹⁹⁹⁵^-⁹⁶
¹⁹⁹⁹^-⁰⁰

Why Do the Credits Allot Their Benefits the Way
They Do and How Would Proposed Changes Affect
That Allotment?
As shown by the preceding analyses of estimated distributions of the education
tax credit benefits to potential students and aided undergraduates, the credits are
primarily available to middle-income students. Although under some circumstances
they do reach down to lower income students, they are not available to the poorest
students under any circumstances. Students maximize their benefits from the tax
credits where tuition and fees are relatively high. At such institutions, this works to
increase the amount of the benefit and extend the coverage of the benefit further
down the income scale. Further, across some income ranges, students may receive
grant aid, such as Pell Grants, as well as an education credit. This may boost the
aggregate amount of federal obligation-free aid that these students receive above
what they would otherwise receive in the absence of the credits.
Why do the credits allot their benefits in this manner? As was discussed earlier,
the credits have several award rules that dictate eligibility and benefit amount. These
include:
!the education costs that may be covered by the credits,
!the grant aid offset,
!the reimbursement rules (with their caps on the maximum credit),
!nonrefundability, and
!phase-out rates.
It is useful to consider the award rules to have an implicit order of application
— the order in which they are listed above. Initially, one must determine which
postsecondary education expenses are eligible to be covered by the credits. If grant
aid, such as the Pell Grant, fully offsets the covered costs, there are no eligible costs
for which a credit might be claimed. Where eligible costs exceed grant aid, there are
remaining costs to be covered by the credits. At that juncture, the reimbursement
rules applied to those remaining costs dictate the potential maximum credit that can
be claimed. The nonrefundability rule determines what portion, if any, of that
potential maximum credit can actually be claimed, barring a reduction due to the
phase-out rates.
There is interest in the Congress in changing the distribution of these education
tax credit benefits and bills have been introduced that would modify some of these
award rules.³⁸ Each of these factors can exert some influence on who can claim a
credit and how much they claim, but each is not likely to have an equal effect on
different groups of potential claimants. Changes to certain of the award rules are
likely to benefit middle-income and higher income students; changes to others hold
out the promise of making the tax credit benefits available to more low-income

³⁸See, for example, H.R. 414, H.R. 928, H.R. 1777, H.R. 2219, H.R. 2482, S. 687, and S.

888.

students, including the poorest students.³⁹ Perhaps one of the most important features
of the award rules for any consideration of changes in the distribution of the tax
benefits is that they can interact. This is inherent in the order of application just
described. The interaction among multiple award rules may particularly affect the
benefits for low-income students. For those students, especially in lower priced
institutions, changes to only one of the award rules without concurrent modification
of others will not expand the benefits they may receive.
For upper middle-income and higher income students, nonrefundability is not
an issue since these students are likely to have sufficient tax liability to claim a credit.
Further, the grant aid offset may be inconsequential for the many who are unlikely
to receive substantial amounts of grant aid. Expanding the credits to cover other
costs, such as room and board, or books, or, indeed, the entire cost of attendance,
while maintaining all other current rules, would have an impact on such students
only if they are attending relatively low-priced institutions, particularly community
colleges. For instance, the average tuition and fees in the community college sector,
are not sufficiently high for the maximum Hope Credit to be claimed. Allowing the
credits to cover all other expenses in addition to tuition and fees would boost the
Hope Credit for such students to the maximum allowable. Raising the credit caps
while making no other changes would particularly benefit students enrolled at 4-year
private institutions where, as a result of higher tuition and fee levels, the caps limit
the amount of tax benefit that can be claimed. For high-income students, the phase-
out rates also directly limit benefits (e.g., at AGIs above $100,000 for those filing a
joint tax return, no benefit is available).
The primary limiting factor for middle-income students, particularly those
attending relatively high priced institutions, appears to be the reimbursement rules
and their caps. As with higher income students, expanding coverage of the credits
beyond tuition and fees while maintaining the current reimbursement rules will do
little to increase the tax benefits. Nonrefundability and the grant aid offset may affect
some students at the lower end of this income group.
Possibly more so than for any other income group, low-income students’
eligibility for the credits and the level of benefit they may claim are primarily a
function of an interaction among all of these award rules, save for the phase-out rates.
This appears to be particularly true at lower priced institutions. This interaction is
explored more fully below.
Interplay of Coverage of Costs and Nonrefundability for Low-
Income Students
In an effort to illustrate the complex interaction of the award rules for low-
income students, and in particular the lowest income students, the impact of the

³⁹Of the award rules delineated above, changes to the grant aid offset appear to be the most
problematic from a policy perspective given that such changes could raise the possibility of
a student receiving grant aid and a tax benefit for the same postsecondary education
expenditures. As a consequence, although we identify where this award rule might affect
a student’s tax credit, we do not simulate its modification or removal.

interplay of two rules — nonrefundability and coverage of costs — on the size of the
Hope Credits at the community college level is explored here. At these institutions
which charge relatively low tuition, a third rule — the grant aid offset — works in
tandem with the cost coverage rule to limit benefits.
This analysis provides a context for considering whether and how the credits
might be modified to extend the Hope Credit further down the income range,
possibly responding to concerns raised by some analysts that the Hope Credit will
have a limited impact on access because it does not benefit the families for whom
financial barriers are the primary impediment to postsecondary enrollment.⁴⁰ The
changes addressed here are intended primarily to extend to the lowest income
students at the community college level the tax benefits received by their higher
income colleagues, not to increase significantly the size of the benefits across the full
income spectrum.
The importance of the order in which the award rules are applied for low-
income students at relatively low-priced schools is that no one change appears to be
sufficient to extend the tax credit benefits down to the lowest income student. Given
that at low-income levels, students and their families are unlikely to have much if any
tax liability, attention is often likely to be focused on nonrefundability as the barrier
to receipt of tax credit benefits. But, as shown below, that is not the case where the
covered costs are relatively low.
The following figures based on the case simulation model show how two award
rules — the coverage of cost rule and nonrefundability rule — affect the size of the
Hope Credit, independently and together, for the single independent student⁴¹
considered earlier enrolled at a community college. The first figure below depicts
the distribution under current law (nonrefundable Hope Credit with the current cost
coverage rule). The next figures show, respectively, the impact of expanding the
coverage of costs to the full cost of attendance while maintaining all other award
rules; making the credit refundable only; or making both of these changes.

⁴⁰Wolanin, Thomas R. Rhetoric and Reality: Effects and Consequences of the HOPE
Scholarship. The Institution for Higher Education Policy, Working Paper, April 2001.
⁴¹As noted above, the precise interplay of the award rules will differ from case to case. The
single independent student at a community college was chosen for this analysis because this
type of student at this institution appears to realize less Hope Credit benefit than other
students considered in this report. As a result, expanding tax credit assistance to such a
student may be an important objective for efforts to modify the education credits. These
figures have an expanded Y-axis ($0 to $5,500) compared to earlier figures ($0 to $4,000)
to accommodate the increased aggregate level of assistance that may be realized.

Figure 24. Hope Credit and Pell Grant for 16-24 Year Old Single
Independent High School Graduate Enrolling Full-time at a
Community College

^$5^,⁵⁰⁰¹^s^t^AGI^Quⁱⁿ^tⁱ^l^e^2nd^A^G^I^Q^uⁱⁿ^tⁱ^l^e^3r^d^A^G^I^Q^uⁱⁿ^tⁱ^l^e^4t^{h a}ⁿ^d^5t^h^A^G^I^Q^uⁱⁿ^tⁱ^l^e^s
^$5^,⁰⁰⁰
^$4^,⁵⁰⁰
^$4^,⁰⁰⁰
^$3^,⁵⁰⁰
^$3^,⁰⁰⁰^H^ope^C^r^e^dⁱ^t
^$2^,⁵⁰⁰^Pe^l^l^G^r^aⁿ^t
^$2^,⁰⁰⁰
^$1^,⁵⁰⁰
^$1^,⁰⁰⁰
^$500
^$0^$0^$5,⁰⁰⁰^$^10,⁰⁰⁰^$15,⁰⁰⁰^$20,⁰⁰⁰^$25,⁰⁰⁰^$^30,⁰⁰⁰^$35,⁰⁰⁰^$40,⁰⁰⁰^$45,⁰⁰⁰^$50^,⁰⁰⁰
^A^d^j^u^st^e^d^G^r^o^{ss I}ⁿ^c^o^m^e
Figure 25. Hope Credit and Pell Grant for 16-24 Year Old Single
Independent High School Graduate Enrolling Full-time at a
Community College — Eligible Costs are the Cost of Attendance

^$5^,⁵⁰⁰¹^s^t^AGI^Quⁱⁿ^tⁱ^l^e^2nd^A^G^I^Q^uⁱⁿ^tⁱ^l^e^3r^d^A^G^I^Q^uⁱⁿ^tⁱ^l^e^4t^{h a}ⁿ^d^5t^h^A^G^I^Q^uⁱⁿ^tⁱ^l^e^s
^$5^,⁰⁰⁰
^$4^,⁵⁰⁰
^$4^,⁰⁰⁰
^$3^,⁵⁰⁰
^$3^,⁰⁰⁰^H^ope^C^r^e^dⁱ^t
^$2^,⁵⁰⁰^Pe^l^l^G^r^aⁿ^t
^$2^,⁰⁰⁰
^$1^,⁵⁰⁰
^$1^,⁰⁰⁰
^$500
^$0^$0^$5,⁰⁰⁰^$^10,⁰⁰⁰^$15,⁰⁰⁰^$20,⁰⁰⁰^$25,⁰⁰⁰^$^30,⁰⁰⁰^$35,⁰⁰⁰^$40,⁰⁰⁰^$45,⁰⁰⁰^$50^,⁰⁰⁰
^A^d^j^u^st^e^d^G^r^o^{ss I}ⁿ^c^o^m^e

Figure 26. Hope Credit and Pell Grant for 16-24 Year Old Single
Independent High School Graduate Enrolling Full-time at a
Community College — Refundable Credit

^$5^,⁵⁰⁰¹^s^t^AGI^Quⁱⁿ^tⁱ^l^e^2nd^A^G^I^Q^uⁱⁿ^tⁱ^l^e^3r^d^A^G^I^Q^uⁱⁿ^tⁱ^l^e^4t^{h a}ⁿ^d^5t^h^A^G^I^Q^uⁱⁿ^tⁱ^l^e^s
^$5^,⁰⁰⁰
^$4^,⁵⁰⁰
^$4^,⁰⁰⁰
^$3^,⁵⁰⁰
^$3^,⁰⁰⁰^H^ope^C^r^e^dⁱ^t
^$2^,⁵⁰⁰^Pe^l^l^G^r^aⁿ^t
^$2^,⁰⁰⁰
^$1^,⁵⁰⁰
^$1^,⁰⁰⁰
^$500
^$0^$0^$5,⁰⁰⁰^$^10,⁰⁰⁰^$15,⁰⁰⁰^$20,⁰⁰⁰^$25,⁰⁰⁰^$^30,⁰⁰⁰^$35,⁰⁰⁰^$40,⁰⁰⁰^$45,⁰⁰⁰^$50^,⁰⁰⁰
^A^d^j^u^st^e^d^G^r^o^{ss I}ⁿ^c^o^m^e
Figure 27. Hope Credit and Pell Grant for 16-24 Year Old Single
Independent High School Graduate Enrolling Full-time at a
Community College — Refundable Credit and Eligible Costs are
the Cost of Attendance

^$5^,⁵⁰⁰¹^s^t^AGI^Quⁱⁿ^tⁱ^l^e^2nd^A^G^I^Q^uⁱⁿ^tⁱ^l^e^3r^d^A^G^I^Q^uⁱⁿ^tⁱ^l^e^4t^{h a}ⁿ^d^5t^h^A^G^I^Q^uⁱⁿ^tⁱ^l^e^s
^$5^,⁰⁰⁰
^$4^,⁵⁰⁰
^$4^,⁰⁰⁰
^$3^,⁵⁰⁰
^$3^,⁰⁰⁰^H^ope^C^r^e^dⁱ^t
^$2^,⁵⁰⁰^Pe^l^l^G^r^aⁿ^t
^$2^,⁰⁰⁰
^$1^,⁵⁰⁰
^$1^,⁰⁰⁰
^$500
^$0^$0^$5,⁰⁰⁰^$^10,⁰⁰⁰^$15,⁰⁰⁰^$20,⁰⁰⁰^$25,⁰⁰⁰^$^30,⁰⁰⁰^$35,⁰⁰⁰^$40,⁰⁰⁰^$45,⁰⁰⁰^$50^,⁰⁰⁰
^A^d^j^u^st^e^d^G^r^o^{ss I}ⁿ^c^o^m^e
For this student, expanding eligible costs to the full cost of attendance extends
the Hope Credit further down the income scale, boosting aid for the upper end of the
2^nd AGI quintile (Figure 25). At these income levels, there is tax liability that can
be used to claim the credit. This change also boosts the maximum credit available
(from $1,369 to $1,500 — previously, the reimbursement rule interacted with the low
average tuition and fee level at the community college to restrict the maximum Hope
Credit). But, the credit does not reach the lowest income levels, where there is no tax
liability.
Alternatively, making the credit refundable, while leaving the current cost
coverage rule in effect, has a barely perceptible impact on the distribution of aid

because, for the lowest income student, the Pell Grant amount more than covers
tuition and fee charges (Figure 26). The cost coverage rule (coupled with the grant
aid offset) is curbing the amount of remaining tuition and fees for the credit to
reimburse.
Only when a refundable Hope Credit is available and eligible costs are
expanded to the full cost of attendance, can the absolute maximum Hope Credit of
$1,500 be claimed throughout the AGI range from $0 to $40,000 (Figure 27). This
combination of changes extends the Hope Credit all the way down the income
spectrum to the lowest-income student, and also slightly boosts the credit that higher
income students are eligible to claim.⁴²
Finally, we would note that expanding federal aid to low-income students to
address access needs might be accomplished, alternatively, through changes to
federal grant aid programs, particularly the Pell Grant program. An exploration of
such changes is beyond the scope of this report, but they would include such
modifications as an increase in the minimum Pell Grant which would more fully
focus Pell Grant funding on the poorest students (by reducing higher income
students’ eligibility for grants).

⁴²The pattern in the distribution of benefits simulated in these figures is similar to what the
distribution of benefits would be for this type of student at a 4-year public institution (at the
average tuition and fees and costs of attendance at that kind of institution). In contrast, at
a 4-year private college with substantially higher tuition and fee charges, making the Hope
Credit refundable with no simultaneous change in the cost coverage rule would extend the
tax credit benefit down to the lowest income student.

Conclusions
The Hope and Lifetime Learning Credits are now major components of the
federal effort to promote access to postsecondary education. Several significant
findings emerge from the preceding analysis of the potential distribution of these tax
benefits to out-of-school young adults and to federally aided undergraduates.
The Hope Credit provides a substantial benefit to recipients and spreads these
benefits relatively broadly. By design, the credit targets the bulk of its benefits to
middle- and upper middle-income students. But, it also reaches down the income
scale and provides assistance to some low-income students. As a result, the Hope
Credit overlaps with the other major source of federal obligation-free aid, the Pell
Grants.
In contrast, the Lifetime Learning Credit provides relatively little benefit even
to the populations on which it is targeted. With many of the same award rules as the
Hope Credit, it directs most of its benefits to middle- and upper middle-income
students. But, given the Lifetime Learning Credit’s reimbursement rule (20% of
qualified expenses with a $1,000 benefit cap), it is worth significantly less than the
Hope Credit. Its reimbursement rule also means that a student maximizes his or her
Lifetime Learning Credit by attending higher priced institutions.
The advent and growth of the Hope and Lifetime Learning Credits have
dramatically shifted the focus of federal obligation-free aid for postsecondary
education attendance. Previously, such federal aid was principally need-based aid
targeted to the lowest income students. The education tax credits provide their
benefits without regard to the traditional federal need analysis system and financial
aid packaging procedures on college campuses. As a consequence, federal
obligation-free aid is now available, not only to low-income students, but to the
broad expanse of middle- and upper middle-income students.
Efforts to change the targeting of the tax credits and their interaction with
traditional federal student aid are complicated by the interaction of the various award
rules of these financial resources. Single changes to the award rules may benefit only
some income groups and not others. In particular, expansion of these tax benefits to
the lowest income students attending lower priced institutions appears to depend
upon making changes to multiple award rules.

Technical Appendix
This appendix briefly describes some of the important technical features of the
estimation models used in this analysis.
Case Simulation Model
The case simulation model used for the analysis of the potential distribution of
tax benefits to the out-of-school population consists of two models — a Pell Grant
estimation model and a federal income tax model.
Pell Grant Estimation Model. For each case being simulated, the Pell Grant
estimation model calculated the appropriate EFC and applied the Pell Grant award
rules to determine the size of the Pell Grant for that case at any particular level of
AGI.
Certain assumptions were made to facilitate the analysis. As noted earlier, it
was assumed that the rule determining the size of the Pell Grant for every case was:
maximum appropriated Pell Grant minus EFC. Further, it was assumed for each case
that assets did not exceed the appropriate asset-related allowances specified for the
EFC calculation. Therefore, no contribution was expected from assets for any case
considered here. Assumptions about family size are delineated earlier in the text.
The EFC allowances, assessment rates, and other factors used in the Pell Grant
estimation model applied to award year 2001-2002 when the maximum appropriated
Pell Grant was $3,750. For that award year, the EFC calculation was based on 2000
calendar year income. The AGI levels considered by the federal income tax model
were for 2001 as were the levels depicted in the various figures in this report for the
out-of-school population. As a result, the AGI levels used for the EFC calculations
were deflated from the 2001 levels, using the change in the annual average CPI-U
from 2000 to 2001 of 2.8%.
Federal Income Tax Model. The federal income tax model utilized for this
analysis applied 2001 income tax rules to the cases being simulated, maintaining all
of the relevant characteristics utilized in estimating the Pell Grant. Further, based on
the estimated tax liability for each case, the model determined the level of the Hope
or Lifetime Learning Credits. To facilitate these estimates, it was assumed that none
of the cases simulated here claimed the foreign tax credit, the credit for child and
dependent care, or the credit for care of the elderly or the disabled.
The income tax model calculated the education tax credit using the appropriate
qualified tuition and fee expenses. For that calculation, it was necessary to make the
analysis specific to a particular academic year. To that end, it was assumed that the
student paid for his or her 2001-2002 postsecondary education entirely during
calendar year 2001. As a consequence, the estimated Pell Grant, which is also for
2001-2002, can be used in the application of the grant aid offset rule for the
education tax credits.

Survey Data Model
Methodology. The estimated Hope and Lifetime Learning Credits available
to 1999-2000 Title IV aid recipients shown in this report have been generated though
a NPSAS-based tax credit estimation model. This model utilizes comprehensive
background information on Title IV recipients which is available in NPSAS (e.g.,
information on their tax liability, adjusted gross income, tuition and fee levels,
enrollment and attendance status) and simulates tax credit benefits available to such
students. The estimates generated through this model are based on some
assumptions. The primary operating assumptions built into this Hope and Lifetime
Learning Credit estimation model are discussed below.
Time Period Assumptions (reconciling differences in benefit year
and academic year). The model assumes that the tax credits claimed in the 1999
calendar year tax will be claimed against tuition and fee expenses for the entire 1999-
2000 academic year. This is allowable under the benefit as long as payments are
made in calender year 1999 (i.e., we are assuming tuition for courses beginning in
January is paid in December).
The credits are thus treated as aid received for academic year 1999-2000 tuition
expenses and analyzed in relation to the rest of the aid package received in the 1999-
2000 academic year. The credits are also analyzed in relation to tuition and fees paid
in the 1999-2000 academic year.
Assumptions Related to Tax Liability. Information on tax liability used
in the model is taken from the 1998 return as reported by the student or parent on the
Free Application for Federal Student Aid (FAFSA) for 1999-2000. These tax
liability data have been inflation adjusted to 1999 dollars, and then treated as 1999
tax liability figures in the model.
Additionally, an adjustment was made to address a discrepancy in the tax
liability figure provided on FAFSA and the tax liability figure needed to calculate tax
credits. Basically, the figure provided on FAFSA can appropriately be thought of as
a “final” tax liability figure (i.e, total tax liability after the value of all tax credits —
even Hope and Lifetime Learning Credits — have been subtracted). Whereas, the
tax liability figure needed to determine whether one has sufficient tax liability for
Hope and Lifetime calculations is an “almost final” tax liability figure produced after
some but not all tax credits are subtracted from one’s available tax liability. The
effect of using the “final” as opposed to “almost final” tax liability information in an
estimation model could be to understate the value of the benefit some students are
eligible to receive (i.e., those students with limited tax liability for the credit to
offset).
For those cases, deemed through analyses to be adversely affected by the
missing information, tax liability values have been restored using information

available elsewhere in the FAFSA. These adjustments have affected the estimated
tax credit values of 3.2% of the population studied.⁴³
Assumptions Related to Number of Higher Education Credits
Claimed. It is possible that a family with more than one postsecondary student may
claim more than one higher education tax credit. If their tax liability is sufficient to
capture at least some of the value of one credit, but not sufficient to enable the filer
to capture the value of multiple credits, essentially the value of each credit to the
taxpayer is reduced. We estimate that roughly 2% of the population studied are at
risk of having some of the value of their credit “reduced” by the presence of another
credit-eligible family member. Tax credit estimates presented in this report make no
adjustments for this possible occurrence.
Assumptions Related to Dependency. In this model we assume that
individuals who are independent for student aid purposes are independent tax filers,
and those who are dependent for student aid purposes are treated as dependents for
another filer’s (presumably a parent’s) tax form. We have no actual information
about how closely tax filing dependency status mirrors student aid filing dependency
status. Thus, we cannot estimate the extent to which this assumption detracts from
the precision of our modeling.
The likely effects of having made inaccurate assumptions about the tax status
of some dependent students is that we have probably overestimated their tax credit
eligibility (by relying on their parents’ tax liability in our estimates as opposed to the
students’ tax liability). The effect of having made inaccurate assumptions about the
tax status of some independent students is that we have probably underestimated their
tax credit eligibility (by relying on their own tax liability in our estimates as opposed
to their parents’ tax liability).

⁴³To address this, we have added the FAFSA Worksheet B values to the FAFSA tax liability
figures. FAFSA Worksheet B contains the aggregate value of education (Hope and
Lifetime) credits claimed during the 1998 tax year by the tax filer, and this adjustment is
done to restore the tax liability levels against which the filer claimed 1998 education credits.
The median amount added through this adjustment was $1,022.
It should be noted though that Worksheet B values reported on FAFSA reflect more
than just education credit values. They also reflect child support payments being made for
a child living outside of one’s household, taxable earnings from Federal Work Study or
other need-based work-study programs, AmeriCorps awards, and grant aid in excess of
tuition and fees. A composite number reflecting all of these values is reported on FAFSA.
Because we add this composite value to restore tax liability values, it can be assumed that
we have inflated actual liability levels for some parents and students. In such instances, we
may exaggerate the tax credit benefit available. We took care in restoring values only for
those with sufficient incomes to qualify for credits.