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Getting Serious AboutLifelong Learning:

Improving the Use and Valueof the Hope and LifetimeLearning Tax Credits ForWorking Adult Students

Full Report

By Victoria Choitz, Laura Dowd,and Bridget Terry Long

March 2004

Getting Serious

About Lifelong Learning:

Improving the Use and Value of the Hope and LifetimeLearning Tax Credits for Working Adult Students

Full Report

By Victoria Choitz, Laura Dowd, and Bridget Terry LongFutureWorks

March 2004

We would like to thank the Annie E Casey Foundation for supporting the research that made this report possible.

FutureWorks

11 Water StreetArlington, MA 02476

781.574.6607www.futureworks-web.com

Getting Serious About Lifelong Learning

FutureWorks ~ page 2

Background

The demand for skilled workers in today’s economy is clear.

Changes in technology and how companies do business have resulted in increased demand for skilledworkers. This demand for employees with at least some post-secondary education will be evengreater in the future. The link between increased demand for skills and a growing wage gap also isclear. Over the last 20 years, workers with higher levels of education have seen their real wagesincrease, and those with a high school diploma or less have experienced real wage declines. Thecompounding effects of significant wage gains for more educated workers and the real wage lossesfor high school graduates have resulted in a significant wage gap. Over a lifetime, this wage gap is $1million between workers with bachelor’s degrees or higher and high school graduates with no post-secondary credentials.

This trend toward more education and higher skills is a wake-up call for workers and issignificant for employers and our economy.

Employer surveys continually report that they cannot find the skilled workers they need.Employment projections predict the skills squeeze will not be alleviated with our current post-secondary education strategy. Even if more secondary students attend college directly after highschool and graduate, they will add only a net gain of perhaps 3 million workers with collegecredentials to the workforce by 2020. Given the Bureau of Labor Statistics projection of 15 millionnew jobs requiring at least some post-secondary education by then, employers and this country willface a skills gap of 12 million workers without post-secondary education.

Workers know they need more education, and millions are pursuing it. However, if this country is toaddress the looming gap between the supply and demand for educated workers, we will need to domore to assist even greater numbers of workers in investing in their own career education.

Unfortunately, low skilled working adults do not receive much support for post-secondaryeducation.

Most federal and state student financial aid programs are not designed to assist working adult studentsseeking post-secondary education. Employer-based tuition reimbursement programs may in factexacerbate the wage gap as they target better educated and higher paid workers. Research findingspresented in this report show that, as currently structured, the Hope Scholarship and LifetimeLearning Tax Credits also fall far short in meeting this challenge.

An aggressive policy response from federal and state governments is needed to help workersaccess and succeed in post-secondary education.

• Individual workers need better information about the returns to post-secondary education andinformation on how to get it, as well as financial and other supports.

• Employers must better understand the productivity returns to investments in workforce skillsand must see clear incentives to make these investments and to help their workers make them.

• Post-secondary educational institutions need strong encouragement and assistance indeveloping the programs and credentials that work for working adults.



Key Findings

The Hope Scholarship (Hope) and Lifetime Learning Tax Credits (LLTC) were introduced by TheTaxpayer Relief Act of 1997 to increase college affordability and to encourage lifelong learning. Thetwo credits were designed to complement each other by targeting different groups of students.

While the Hope may be used only for a student’s first two years of post-secondary education, theLLTC is available for unlimited years to those taking classes beyond their first two years of collegeincluding college juniors and seniors, graduate students, and working adults pursuing lifelonglearning.1

Eligible expenses for each credit include only tuition and required fees at an educational institutioneligible for aid administered by the federal Department of Education (DOE). Tax filers may claimtuition and fee amounts after subtracting grants, scholarships, and other tax-free educationalassistance including Pell Grants, employer-provided education assistance, and Veteran’s educationalassistance.2

The Hope provides a credit equal to 100% of the first $1,000 plus 50% of the next $1,000 of nettuition and fees paid during the tax year, for a maximum credit of $1,500. The student must beenrolled at least half-time (at least six credit hours per semester, which typically is two classes) andpursue a degree or other recognized educational credential in order to be eligible.

In contrast, individuals are not required to enroll at least half-time or pursue an educational credentialin order to be eligible for the LLTC. This makes the LLTC available to adults taking an occasionalcollege course or to those enrolled in any course aimed at acquiring or improving job skills and itcould include adult basic education and English for speakers of other languages. Currently, theLLTC is equal to 20% of the first $10,000 of net tuition and fees, for a maximum credit of $2,000.Both credits reduce the amount of taxes filers owe.

The Hope credit can be claimed for multiple eligible students in a family; whereas, the LLTC iscapped at $2,000 per tax return, no matter the number of students in the family or the amount of theircombined educational expenses. Families are allowed to claim the LLTC for some members and theHope credit for others in the same year. However, the same student cannot take both credits.

The benefits of the tax credits phase out for higher-income taxpayers. The phase out begins at anadjusted gross income (AGI) of $83,000 for a joint return ($41,000 for single filers) with no benefitfor families with incomes above $103,000 ($51,000 for single).3 With these relatively highthresholds, tax credits for higher education expenses have the most extensive eligibility of any federalprogram. In comparison, Pell Grants are strictly limited to families with incomes below $40,000.Nearly 90 percent of Pell Grant funds are awarded to families with incomes under $30,000 and 54percent of those families have incomes under $10,000.4

FutureWorks investigated the current use of the Hope and LLTC using three primary data sources:Internal Revenue Service’s Statistics of Income, the National Household Education Survey, and theNational Postsecondary Student Aid Survey.

Overall, we found that the tax filers who benefited the most from these higher education tax creditswere those who claimed them on behalf of dependent college students. Those who benefited theleast were students who claimed the credit(s) for their own or their spouse’s educational expensesand who did not indicate that they were “students” on their income tax return.



Based on our research findings, we conclude that the Hope and LLTC are not working effectively toaddress the significant education and skill shortages in America’s workforce. They are not inducinggreater numbers of working adults who need to upgrade their education and skills to earn post-secondary credentials. They are not supporting those who are currently enrolled to any significantdegree. As a policy device to address the employment and economic challenges discussed above, thehigher education tax credits as currently marketed and structured do not work well.

These conclusions lead us to recommend the following changes to the education tax credits. Thesechanges are aimed at making both credits more accessible and beneficial for working adults whopursue the post-secondary educational credentials needed in today’s economy.

Our recommendations are based on maintaining the Hope and LLTC as two separate credits.However, as we studied the myriad of alternative structures, we considered the potential advantagesand feasibility of simply merging the two credits into one. This is not one of our formalrecommendations below; however, it is an option for expanding the credits and simplifying the taxcode that could be considered.

Highlights from the Research

• 7.2 million filers received $5.2 billion in credits in 2001 (the latest year withavailable data);

• Only 21% of adults in the general population had heard of the credits in2001;

• Of adult students enrolled in college, only 1/3 had used or planned to use thecredits in 2001;

• 44% of the filers received a Hope credit only and they received 60% of thetotal benefits; 52% received a LLTC only and they received 31% of thebenefits; and 5% received both credits and they received 9% of the benefits;

• The mean credit for Hope recipients was $969 and the mean for LLTC was$432;

• Filers who received the credit on behalf of a dependent college studentreceived the highest credits ($1,104 mean Hope and $578 mean LLTC);

• Filers who received the credit for their own or their spouse’s educationalexpenses and indicated that they were primarily students received the nexthighest ($935 mean Hope and $536 mean LLTC); and

• Filers who received the credit for their own/spouse’s expenses but did notindicate that they were primarily students received the lowest amounts($881 mean Hope and $361 mean LLTC).



Recommendations

Recommendation 1:

Raise Awareness of the Hope Scholarship

and Lifetime Learning Tax Credits

Specifically, work with employers to market and improve the take-up rate of the education tax creditsamong workers. Also, implement a national media campaign with targeted mailings from thegovernment, post-secondary schools, community-based organizations, and other institutions toincrease awareness of both the need to earn post-secondary credentials and the credits available tohelp fund this education.

Justification: Only 21% of all adults in the general public in 2001 had heard of the education taxcredits, and only 17% of working adults without a bachelor’s degree had heard of them. Thesepercentages decline with lower levels of education and income as well as among Hispanic adults andthose for whom English is not their primary language. Also, among enrolled college students, onlyone-third of independent students - many of whom are working adults - who were apparently eligibleactually claimed an education tax credit in the 1999-2000 school year. Clearly, if these tax credits areto have any impact on helping workers engage in lifelong learning, more adults will need to knowabout and use them.

Estimated Projected Cost: If we assume that marketing increases the take-up rate by 30%, this wouldincrease the number of filers who received a credit from 7.2 million in 2001 to 9.36 million andincrease the tax expenditure from $5.2 billion to $6.76 billion – an increase of just over $1.5 billion.5

Recommendation 2:

Increase the Percentage of Qualified Educational Expenses

Allowed Under the Lifetime Learning Tax Credit

Specifically, increase the percentage from the current 20% of the first $10,000 spent on qualifiedexpenses (tuition and fees) to 50% and cap the credit at $2,000.

Justification: The current structure of the Lifetime Learning Tax Credit limits most of the benefit tofull-time students who attend higher cost institutions. It minimally benefits students who attendlower cost institutions, i.e., community colleges, and who are enrolled less than full-time, i.e., manynon-traditional students, especially working adults. For example, traditional full-time students atpublic colleges spend an average of $3,750 for tuition and fees – well below the $10,000 maximumallowed for the Lifetime Learning Tax Credit. Working adult students often attend school part-timeor less-than-half-time and spend closer to $500 to $700 in eligible expenses (tuition and fees)annually.

With an increase in the percentage of qualified expenses allowed as a tax credit from 20% to 50%,traditional students at public institutions would receive an average benefit of around $1,875 instead ofonly $750 and working adult students would receive an average benefit of closer to $250 to $350instead of the current $100 to $140. This change would increase the benefit to students attendinglower-cost institutions and to those attending less than half-time without harming currentbeneficiaries of the program, including, those who already get the maximum $2,000 credit.



IRS data from 2001 underscores the need for this change to the LLTC. The mean tax credit amountsreceived by filers who appear to be working adults are high enough that we conclude that theseworking students are spending closer to $2,000 on tuition and fees, which is considerably higher thanthe national averages of $500 to $700. This indicates that the current recipients of the credits areattending more expensive institutions and/or enrolled closer to full-time. To better reach workingadult students who can only afford to pay lower tuition and fees, better marketing is needed, andworking adults need to anticipate enough benefit from the credits to incur education costs and thenfile for the credit.

This change in the structure of the LLTC is especially important for working adult students whorarely benefit from traditional forms of federal or state student financial aid such as Pell Grants andStafford and direct student loans. Because they have relatively high earnings compared to traditionalcollege students and because they often attend school on a limited part-time basis, they do not qualifyfor most aid programs. Working adults with modest incomes also rarely receive help from theiremployers through tuition reimbursement programs for post-secondary education. Making theeducation tax credits useful for this group is especially important and promising.

This change also brings the Lifetime Learning Tax Credit into parity with the Hope ScholarshipCredit. The current disparities in the structure of the two credits are inequitable and confusing. Thischange will bring them more in line with each other and could help to simplify the filing process fortaxpayers.

Estimated Projected Cost: An increase in the LLTC percentage from 20% to 50% (capping the totalcredit to $2,000) is a 250% increase for individual credits. The mean LLTC in 2001 was $431, and a250% increase would result in a mean credit of $1,078. This is within the $2,000 credit cap;therefore, we can apply the percentage increase to the aggregate with some confidence. A 250%increase on the $1.6 billion total LLTC credits in 2001 results in a total increase of $2.4 billion forthis recommendation.

Caveat: Current law allows for a credit of up to $2,000 under the Lifetime Learning Tax Credit (20%of the first $10,000 spent on qualified expenses of tuition and fees). This structure presents a possiblepoint of contention regarding the Hope Scholarship Tax Credit, which allows for only a $1,500 credit.Under current law, if eligible for either credit, the astute tax filer will claim the higher of the twocredits – the Lifetime Learning Tax Credit – if he or she has more than $7,500 in qualified expenses.At this level, this filer currently could receive either a maximum $1,500 Hope Credit or a minimum$1,500 up to a maximum $2,000 Lifetime Learning Tax Credit.

The recommendation here – to increase the LLTC from 20% to 50% – exacerbates this tension. Withthis recommended change, filers who could qualify for either credit are likely to chose the LLTC ifthey have more than $3,000 in qualified expenses because it would yield a higher benefit (as opposedto $7,500 under current law). At $3,000 or more in qualified expenses, they could receive only a$1,500 Hope Credit, but they could alternatively receive at least a $1,500 LLTC and, to the extenttheir expenses are above that threshold, even more – up to $2,000.

This tension could make the Hope Scholarship Credit irrelevant for many filers. We would notrecommend reducing the current LLTC credit maximum from $2,000. The best option to preserveuse of the Hope Scholarship Credit for students in their first two years of post-secondary education isto re-structure it so that it is always slightly more beneficial for these tax filers. To accomplish that,the maximum Hope Credit should be increased to more than $2,000. In any case, this tension alreadyexists to some degree in the current tax law.



Recommendation 3:

Expand the Definition of “Qualified Expenses”

for Both Education Tax Credits

Specifically, include in the definition of “qualified expenses,” not only the direct costs of attendingschool, i.e., tuition, fees, and room and board; but also indirect costs, i.e., books, supplies, equipment,transportation, child care, and others as currently defined by the U.S. Department of Education inTitle IV student aid formulas. Currently the definition limits qualified expenses to tuition and feesonly.

Justification: Even by increasing the percentage of qualified expenses as recommended in #2 above,many working adult students will have no access to the maximum credit. The real costs of attendingcollege are those above and beyond tuition and fees; our research has found that these costs –including books, supplies, equipment, transportation, and child care – can be up to four times whatthese students pay in tuition and fees, amounting to $1,000 to $2,000 annually.

It is important to note that this change will benefit only those students who do not already receivefinancial aid to cover these expenses. Both education tax credits already stipulate that tax filers canonly include in “qualified expenses” those amounts above and beyond what is covered by tax-freeeducation assistance and refunds, including the tax-free parts of scholarships and fellowships, Pellgrants, employer-provided educational assistance, Veterans’ educational assistance, and any othernontaxable payments other than gifts or inheritances received as educational assistance. Therefore,the educational tax credits target well those students who do not already receive aid, and this changebrings tax credit aid into parity with other forms of student aid.

Estimated Projected Cost: Increasing the amount of eligible expenses must be considered for theHope and LLTC credits separately. In 2001, the mean Hope credit was $980, compared to themaximum credit of $1,500. Doubling the expenses that students claim does not double the meancredit because the maximum credit is still $1,500. If all 3.2 million filers (2001 Hope numbers)received the maximum Hope credit of $1,500, total Hope costs would be $4.8 billion. As many Hopefilers are already close to the maximum credit, we estimate only a 55% increase from the 2001 totalHope credits of $3.1 billion, or an additional $1.7 billion.

For the Lifetime Learning Tax Credit, the average individual credit was $431. If the expansion of thequalified expenses doubles the net costs on which a student can claim credit, this increases theaverage LLTC to $864 (based on the current 20% claim rate). This amount is within the $1,000credit cap in 2001 and the $2,000 current cap. If 3.7 million LLTC filers (2001 numbers) each claima mean credit of $864, the total cost of the credits is $3.2 billion, a $1.6 billion increase over the 2001cost of $1.6 billion in credits.

In total, this recommendation could cost roughly $8 billion, compared to the $4.7 billion spent onthese credits in 2001 ($5.2 billion minus the $500 million for filers who received both credits; thispopulation would have to be more closely analyzed to understand how the recommendation wouldaffect them and, therefore, total costs). This is a $3.3 billion increase over 2001 cost figures.



Recommendation 4:

Make Both the Hope Scholarship and

Lifetime Learning Tax Credits Refundable

Specifically, using the guidelines for the Earned Income Tax Credit, change the Hope and LifetimeLearning Tax Credits to allow low-income working adult students to keep their full credit, includingthe portion above any tax liability they have.

Justification: Because the education tax credits simply reduce filers’ tax liability, those working adultstudents who do not owe taxes will not benefit from the credits, even though they have paid fortuition and fees just as tax-owing working adult students have. At a minimum, in 2001, a married taxpayer with a family of four must have had at least $19,200 in adjusted gross income to owe taxes, andoften, this amount is closer to $22,000 after families qualify for child tax credits and dependent caretax credits. At this income level, families also would qualify for the Earned Income Tax Credit,wiping out even more of their tax liability.

Analysis of IRS data indicates that very lowest income recipients of the credits benefit very little fromthe credits. The mean Hope credit for filers who had an adjusted gross income of less than $10,000and who received the credit for their own or their spouse’s educational expenses was $195, comparedto the overall average for all income ranges of $892. The mean LLTC for these filers was $173,compared to the overall mean of $393. Filers with adjusted gross incomes of $10,000 to under$20,000 received a mean Hope credit of $758 and a mean LLTC of $446.

Of course, there are several reasons for this disparity, including the likelihood that low-incomestudents attend lower cost institutions. However, many of these students have such low tax liabilitiesthat they cannot receive full benefit from the education tax credits (the fact that they even owed anytaxes at this income level indicates that they probably are single adults with no dependents).

Most low-income working adult students receive aid for college only from the Lifetime Learningcredit, due to their limited enrollments, so it is most important to focus refundability on this credit.However, making the Hope Credit refundable would also be beneficial. Some low-income workingadults, especially those who are closer to traditional college age and do not have dependents, may beenrolled at least half-time and could use the financial support from a refundable Hope Credit. In fact,analysis of IRS data found that 58% of Hope recipients in 2001 filed their own taxes and received thecredit for their own educational expenses. Many were low-income, and could potentially gainsignificant benefit from a refundable credit.

Estimated Projected Cost: In 2001, 1.4 million of the 7.2 million (19%) of tax filers who received aneducation tax credit had incomes below $20,000. Due to their low incomes, almost all will qualifyfor some student financial aid. If all of the Hope and LLTC filers in 2001 with incomes below$20,000 received a maximum refundable credit ($1,500 for Hope and $2,000 for LLTC), the total costwould be $2.3 billion. This amount is just $1.5 million over the current cost for this group of $760million in 2001.



Making Choices

Taken separately, these four recommendations would cost a total of roughly $8.7 billion (2001dollars). This estimate does not take into account the increased expenditures if all fourrecommendations were to be adopted simultaneously, which would result in a higher cost estimate.However, none of these recommendations rely on another other to have an impact on working adultstudents; therefore, the fiscal impact could be cushioned by phasing in their implementation or byimplementing only select recommendations.

We have presented our recommendations above in priority order. Under any circumstances, theeducation tax credits must be better marketed (recommendation #1). If the Hope and LifetimeLearning Tax Credits are to have any impact on addressing the education and skills challengedescribed above, more than one-fifth of working adults must know about them. This meansmarketing the higher education tax credits to potential students in order to draw more working adultsinto post-secondary education. Although it is also important to market the credits to currentlyenrolled working adults to inform them of additional financial support, it is most important to bringnew working adult students into higher education.

Recommendation #2 is designed to have a targeted and “high value” impact specifically for workingadult students, most of whom can attend college only less-than-half-time and will spend nowhere near$10,000 annually. Because they are more likely to benefit from the Lifetime Learning Tax Credit andnot the Hope, working adults will benefit the most by making this credit more valuable for students atlow-cost institutions.

Recommendation #3 does increase the value of the credits for working adult students, but it affectsHope as well and is less directly targeted to working adults. However, this recommendation alreadyhas been proposed in the Congress and is likely to have great political appeal precisely because itdoes benefit all students (or their parents) who are eligible for the credits.

Finally, recommendation #4 about refundability would certainly benefit low-income working adultstudents. However, if the goal is to impact as great a number of working adult students as possible,this recommendation as a stand-alone ranks last. The primary reason is that low-income workingadults often cannot afford to attend college even with tax credit aid. Secondarily, the tax creditsallowed are “net” of grants and scholarships; therefore, low-income students who receive this type ofaid may not qualify for any significant tax credit.

At the end of the day, if we are serious about supporting working adults in earning post-secondarycredentials and engaging in lifetime learning, we will find ways to make higher education policies,institutions, and systems more “working-adult friendly.” This nation will face a daunting educationand skills deficit challenge within the next two decades and we will solve it only by getting workingadults back into post-secondary education or in for the first time.

Many new student aid policy strategies will be required to “ramp up” the production of educated andskilled workers. The higher education tax credits are a promising strategy, and they could make a bigdifference. However, our research reveals that major changes in their marketing and structure areneeded in order to produce that greater impact.

Getting serious about lifetime learning will require getting more use and benefit out of the Hopeand Lifetime Learning Credits.



TABLE OF CONTENTS

Section Page

Executive Summary and Policy Brief 2

I. Introduction 11

II. Overview of the Hope Scholarship and Lifetime Learning Tax Credits 13

III. Working Adult Students 15

IV. The Availability and Potential Benefits of Education Tax Credits for Working Adult

Students

16

V. Usage of Education Tax Credits by Working Adult Students 20

VI. Potential Impact on Working Adult Students and Their Enrollment in Post-Secondary

Education

28

VII. Policy Recommendations 29

A. Raise Awareness of the Hope Scholarship and Lifetime Learning Tax Credits

B. Increase the Percentage of Qualified Educational Expenses Allowed Under the

Lifetime Learning Tax Credit

C. Expand the Definition of “Qualified Expenses” for Both Education Credits

D. Make the Hope Scholarship and Lifetime Learning Tax Credits Refundable

VIII. Conclusion 33

Appendix A: Additional Tables 34

Appendix B: Graphs 39

Appendix C: IRS Form 8863 43



I. Introduction

According to the 2000 U.S. Census, of the 110.5 million adults in the U.S. workforce, only about 40percent had any post-secondary degree (associate, bachelor’s, or advanced). About 10 percent of all adultworkers had not even finished high school, and 31 percent had not attempted college after high schoolgraduation. An additional 19 percent had “some college, but no degree.”6 Some of these adults may holdcertificates from programs shorter than two years or hold industry recognized credentials, but mostprobably attended college briefly after high school and dropped out before achieving any credential.7

These statistics suggest that about 60 to 65 million working Americans have no post-secondaryeducational degree or credential of any kind. Without it, they are at risk of slipping into the bottom ranksof the economy and staying there. Just a few decades ago, a high school diploma, a strong back, and agood attitude may have been adequate to guarantee entry to middle class occupations. But this is nolonger true. Over the last 20 years, men with only a high school diploma have seen their real wages fall bynearly one-fifth (from $679 per week to $559).8

Additionally, the wage premium for skills and credentials has grown. Average earnings for workers withassociate degrees are nearly one-third higher than earnings for workers with only a high school degree.Earnings for those with a four-year degree are nearly two-thirds higher than high school graduates with nocollege. Moreover, the earnings gap between those with college credentials and those without is growingat an accelerating pace. The Bureau of Labor Statistics estimates that the real wages of men in the bottomten percent of full-time workers fell by 22 percent from the late 1970's through the mid-1990's. In the late1990's, these workers earned an average of $275 per week, compared to $1,200 per week for the top 10percent of workers.9

Over a lifetime, these significant gaps in annual earnings translate to crushing disparities in theaccumulation of assets. The Census Bureau estimates that individuals with a bachelor’s degree will earnon average $2.1 million over their work-life (40 years of full-time, full-year work). This is about a thirdmore than workers with only some college education and nearly twice as much as those with only a highschool diploma.10 Consigned to low-wage labor markets, few non-college-educated workers will be ableto buy their own homes or send their children to college.

This is a serious economic problem for America. The next few decades will see growing skill gaps as thepercent of high school graduates gaining post-secondary credentials is edging up too slowly to meet thegrowing skill demands of employers and the American economy. Even if more students attend collegedirectly after high school and graduate, they will add only a net gain of perhaps 3 million workers withcollege credentials to the workforce by 2020.11

At the same time, the skill-based economy will continue to shift inexorably toward occupations requiringpost-secondary education. For example, the Bureau of Labor Statistics (BLS) projects a 22 percentincrease by 2008 in jobs that will require at least some college. As Anthony Carnevale of EducationalTesting Service (ETS) points out, the continuation of that trend until 2020 will produce about 15 millionnew jobs requiring college preparation and will result in a huge deficit of workers with post-secondarycredentials.12 This estimated gap of 12 million college-educated workers will have a crippling impact onthe U.S. economy.

If the structure of the U.S. economy will depend on high-skilled jobs, then this country will need a highereducation structure that creates high-skilled workers for these jobs. It will be a necessity for workers, theiremployers, and our economy. It can be filled only by a new commitment to helping adults already in theworkforce get access to post-secondary education and gain the credentials associated with economicsuccess.



Millions of working Americans know that they need these additional skills and education and that theeconomy is producing good jobs for those with good skills. Unfortunately, their efforts to gain credentialsare not well supported by federal or state governments or by most of the institutions of higher educationthat ought to encourage adult students. Notwithstanding the rhetoric of "lifelong learning," highereducation financing, credentialing, and governance policies still are skewed narrowly toward traditionalstudents moving directly from high school into college. Working adults, because they have full-time joband family responsibilities, often lack the time, money, and flexibility of schedule to fit into thistraditional model of higher education.

Recent studies by FutureWorks and MDRC discovered that working adults get very little financial aidfrom federal or state sources.13 First, those that hold full-time jobs are typically able to attend school onlyon a less than half-time basis, which renders them ineligible for most aid. Loan programs authorized byTitle IV of the HEA are available only for those attending accredited institutions at least half-time.Eligibility guidelines and institutional practices preclude Pell Grants to all but a tiny group of very poorless than half-time working adult students.14 Most state financial aid programs follow federal eligibilityguidelines and, therefore, result in the same limitations for working adult students.15 The smallpercentage of employers who provide financial assistance for postsecondary education limit it to higherpaid and more educated employees.16 And, although they hold great potential, education tax credits arenot helping.

The report that follows first provides an overview of the Hope Scholarship and Lifetime Learning TaxCredits. Section II summarizes briefly what we know about the education-seeking behavior of workingadults and the characteristics of working adult students compared to traditional students. We then reviewthe availability and potential of the education tax credit for these working adult students, including anexploration of four primary factors that limit their ability to benefit: (1) lack of awareness; (2) limitedeligibility based on low enrollment intensity and year in school; (3) limited benefit based on low nettuition and fee costs; and (4) limited eligibility for low-income working adult students based oninsignificant tax liability.

The heart of the report in section five examines the usage of the education tax credits by working adultstudents, using three data sources. Section six briefly explores the potential impact on working adultstudents of the tax credits on their post-secondary enrollment. Finally, sections seven and eight providerecommendations for change to the education tax credits policy and a conclusion.



II. Overview of the Hope Scholarship and Lifetime Learning Tax Credits

The Taxpayer Relief Act of 1997 introduced the Hope Scholarship (Hope) and Lifetime Learning Tax(LLTC) credits to increase college affordability and to encourage lifelong learning. These two creditswere designed to complement each other by targeting different groups of students. While the Hope maybe used only for a student’s first two years of post-secondary education, the LLTC is available forunlimited years to those taking classes beyond their first two years of college including college juniorsand seniors, graduate students, and working adults pursuing lifelong learning.17 Eligible expenses foreach credit include only tuition and required fees at an educational institution eligible for aid administeredby the federal Department of Education (DOE). Tax filers may claim tuition and fee amounts aftersubtracting grants, scholarships, and other tax-free educational assistance including Pell Grants,employer-provided education assistance, and Veteran’s educational assistance.18

The Hope provides a credit equal to 100 percent of the first $1,000 plus 50 percent of the next $1,000 ofnet tuition and fees paid during the tax year, for a maximum credit of $1,500. The student must beenrolled at least half-time (at least six credit hours per semester, which typically is two classes) andpursue a degree or other recognized educational credential in order to be eligible. In contrast, individualsare not required to enroll at least half-time or pursue an educational credential in order to be eligible forthe LLTC; thereby, making the credit available to adults taking an occasional college course or enrolledin any course to acquire or improve job skills, i.e., could include Adult Basic Education and English forSpeakers of Other Languages. Currently, the credit is equal to 20 percent of the first $10,000 of nettuition and fees, for a maximum credit of $2,000. Both credits reduce the amount of taxes filers owe.

The Hope credit can be claimed for multiple eligible students in a family; whereas, the LLTC is capped at$2,000 per tax return, no matter the number of students in the family of the amount of their educationalexpenses. Families are allowed to claim the LLTC for some members and the Hope credit for others inthe same year. However, the same student cannot take both credits.

The benefits of the tax credits phase out for higher-income taxpayers. The phase out begins at an adjustedgross income (AGI) of $83,000 for a joint return ($41,000 for single filers) with no benefit for familieswith incomes above $103,000 ($51,000 for single filers).19 With these relatively high thresholds, taxcredits for higher education expenses have the most extensive eligibility of any federal program. Incomparison, Pell Grants are strictly limited to families with incomes below $40,000. Nearly 90 percent ofPell Grant funds are awarded to families with incomes under $30,000 and 54 percent of those familieshave incomes under $10,000.20 Table 1 provides a summary of these education tax credits.



Table 1: Summary of the Federal Hope Scholarship and Lifetime Learning Tax CreditsHope Scholarship Tax Credit (Hope) Lifetime Learning Tax Credit (LLTC)

TargetedGroup

• Students in their first two years ofpostsecondary education

• College juniors and seniors• Graduate and professional degree students• Adults upgrading skills or changing careers

RecipientEligibility

• Available for the first two years ofpostsecondary education and onlyfor two tax years

• Must pursue a recognized credential• Must be enrolled at least half time• Must not have a felony drug

conviction

• Available for any postsecondary education• Available for an unlimited number of years• Do not need to pursue a recognized

credential• Available for one or more courses• Felony drug conviction rule does not apply

Amount • 100% for the first $1,000 ofqualified expenses; 50% on thesecond $1,000 (Up to $1,500 creditper eligible student)

• 20% for the first $10,000 of qualifiedexpenses (up to $2,000 credit per return)

Claimant• Taxpayers may claim a credit for

their own tuition expenses or thoseof their spouse or dependentchildren

• Maximum credit is determined on a per-taxpayer (family) basis, regardless of thenumber of post-secondary students in thefamily

ExpensesCovered

• Tuition and required fees at an educational institution eligible for aid administeredby the DOE minus grants, scholarships, and other tax-free educational assistance(including Pell Grants, employer-provided education assistance, and Veteran’seducational assistance)

• Note: The expenses covered do not include the cost of insurance, medicalexpenses (including student health fees, room and board, transportation, or livingexpenses)

IncomeEligibility

• Phased out for joint filers with $83,000 to $103,000 of modified AGI ($41,000 to$51,000 for single filers)

• Married couples must file a joint return to claim a benefit• Phased out for single filers with $41,000 to $51,000 modified AGI• Individuals must modify their AGI to include income earned abroad

OtherDetails

• Families are able to claim the Lifetime Learning tax credit for some members andHope credit for others in the same year. However, the same student cannot takeboth credits.

Notes: Summarized from Internal Revenue Service Publication 970, Tax Benefits for Higher Education (2003 tax year). Whenoriginally created, the LLTC was limited to $1,000 or 20 percent of the first $5,000 of qualified expenses. In addition, incomeeligibility was phased our for joint filers from $80,000 to $100,000 ($40,000 to $50,000 for single filers).



III. Working Adult Students

According to the National Household Education Survey (NHES), in 1999, an estimated 90 million peopleage 16 and older (who were not enrolled in primary or secondary education) reported that they hadparticipated in some form of formal learning activity.21 As Table 2 below shows, nearly half of the adultpopulation was enrolled in some form of formal learning activity in both 1999 and 2001. These activitiescould include anything from personal development courses - cooking or woodworking classes - toadvanced degree programs at accredited post-secondary institutions.

In 1999, 18 million were seeking a credential, most at accredited higher education institutions. Also, 43.2million were enrolled in "work-related" courses - short-term, concentrated work-specific programs, suchas computer training, time management, and sales training. These numbers have increased over the years,as shown in Table 2.

Table 2: Adults Enrolled in Adult Education 1991 to 20011991 1995 1999 2001*

# % # % # % # %Total adults in any adult educationactivity 58 32% 76 40% 90 46% n/a 47%

• Total adults seeking a credential n/a n/a 11.6 6% 18 9% n/a 7%• Total adults in work-related

courses n/a n/a 39.6 21% 43.2 22% n/a 30%

• Total adults in other courses n/a n/a 24.8 13% 28.8 15% n/a n/aSource: National Household Education Survey (NHES), 1991, 1995, 1999Note: numbers are in millions.* These percentages are taken from The Condition of Education 2003, by the U.S. Department of Education. See Section 1 –Participation in Education, Indicator 8.

In addition to the NHES, the DOE regularly conducts the National Postsecondary Study Aid Study(NPSAS). This survey provides a more complete and detailed understanding of students enrolled in post-secondary education because it relies on institutional reporting, as well as some student self-reporting.

During the 1999-2000 school year, about 16.5 million undergraduate students were enrolled in college.Forty-three percent, or 7.1 million, were age 24 or older and considered "adult students."22 These adultstudents were more likely to be working, to consider themselves as "employees who study" and not"students who work," to be married, to have dependents, and to lack a conventional high schooldiploma.23 In a recent study, the GAO found that 59 percent of adult students – 4.2 million - worked full-time while enrolled in school (worked 35 or more hours per week).24 Table 3 provides a summarycomparison of adult students to traditional students.

Table 3: Difference Between Students Under 24 Years of Age and Age 24 and OlderStudent Characteristics Students Under Age 24 Students 24 and OlderWork full-time 24% 59%Married 5% 50%Have dependents 8% 54%GED/No diploma 4% 9%Adapted from GAO report, 2003.



IV. The Availability and Potential Benefits of Education Tax Credits for Working AdultStudents

Several factors affect working adult students' use of and benefit from education tax credits. This sectionprovides information on four, including:

• Adults’ awareness of the Hope Scholarship and Lifetime Learning Tax credits;• Adult students’ eligibility for the tax credits, based on their enrollment intensity and year in

school;• Adult students’ potential tax credit benefit based on their net tuition and fee costs; and• Low-income working adult students’ tax credit benefit based on their tax liability.

Awareness

In the 2001 National Household Education Survey (NHES) of adult learning, respondents were asked ifthey had ever heard of the Hope or Lifetime Learning Tax credits.25 Analysis of this sample’s responsesas reported in Table A1 in Appendix A shows that most adults have not heard of these credits. Overallonly 21 percent of all adult respondents had heard of the education tax credits. Only 17 percent ofworking adults without a bachelor’s degree had heard of them.

Tax year 1998 was the first in which the credits could be claimed; therefore, the credits were stillrelatively new during the 2001 survey year. However, the relatively low take-up rates of the creditscompared to the projections reported by the National Center for Public Policy and Higher Education leadus to conclude that more could be done to increase awareness of these credits.26

Further analysis of the NHES data shows that awareness of the education tax credits was higher amongrespondents with higher levels of education and higher household incomes. Among all adults with lessthan a high school diploma, only 12 percent had heard of the credits, but 16 percent of those with a highschool diploma were aware of the credits. Among adults with some college education, 29 percent hadheard of the credits, and 32 percent of adults with bachelor’s degrees knew of the credits. Thesepercentages are similar for a sub-population of working adult students without bachelor’s degrees.

Awareness of the credits was also higher for those with higher household incomes. In general, thepercentage of adults who were aware of the credits increases with income, from 9 percent of those withhousehold incomes of $5,000 or less to 29 percent of those with more than $100,000 in householdincome.

Among all adults, only 16 percent of Hispanics and 17 percent of those for whom English is not their firstlanguage were aware of the credits. These percentages are even lower among working adults who do nothave a bachelor’s degree. Awareness of the credits for this segment of the population is importantbecause the LLTC could provide financial assistance for English language education. Unlike the Hopecredit, the LLTC does not require students to pursue a recognized credential; therefore, adults takingEnglish language courses at an accredited institution of post-secondary education, e.g., a communitycollege or an accredited community-based training center, could apply tuition and fees for the coursestoward the eligible expenses in the LLTC. Working adults taking these types of “non-credit” collegeclasses often have difficulty securing more traditional government student aid and rarely receiveemployer support. Therefore, this tax credit could be an important source of financial aid.



Among adults who are poor enough to receive public assistance, very few have heard of the credits.Fourteen percent receiving Medicaid, 16 percent receiving WIC, and 17 percent receiving food stampshave heard of the credits. These adults are the most in need of education and training to move into jobswith family-sustaining wages, and they could be an important target recipient group for these educationtax credits. However, as discussed in the following sections, the current non-refundability limitation ofboth tax credits would limit this population's ability to benefit.

Just as the percentage of all adults in the population who have heard of the education tax credits is fairlylow, so is the percentage of adult students who have or plan to use them. Analysis of the NHES 2001reveals that only one-third of adults enrolled in college have or planned to use the credits (see Table A4 inAppendix A).

Given the need for investment in the post-secondary education of the current workforce and the potentialimpact of the education tax credits to help finance working adults’ education, it seems clear that morethan a quarter to a third of adults should know about these credits.

Eligibility Based on Enrollment Intensity and Year in School

The education tax credits differ in terms of who is eligible based on enrollment intensity and on thestudent’s year in school. The Hope Scholarship credit stipulates that a student must have been enrolledhalf-time or more to claim the credit (typically 6 or more credit hours per semester, or two classes) and beenrolled in the first two years of pursuing a recognized credential. Therefore, by design, it is out of reachfor many working adult students. It was intended primarily for more traditional students who are enrolledat least half-time in their first two years of college. The Lifetime Learning Tax Credit has no suchrestrictions and is therefore a more viable option for working adults. It was designed to supporttraditional students studying beyond the first two years of college and for working adults pursuing career-enhancing education.

Many adult students must balance work, family, and school. The average workweek of 43.5 hourscombined with family obligations leaves little time for these adults to pursue an education.27 The GAOhas estimated that one-third of adult students were enrolled less than half-time during the 1999-2000school year or 2.3 million.28 Due to their limited enrollment intensity, these students would not beeligible to claim the Hope Tax Credit. However, they would be eligible for the Lifetime Learning TaxCredit. The other two-thirds of adult students who enrolled half-time or more may be eligible for theHope Scholarship if they are in their first or second calendar year of taking courses toward a recognizedcredential and have not already used a Hope tax credit for any two of those years. If these students havebeen taking courses for more than two years, they are no longer eligible for Hope, but can still claim theLifetime Learning Tax Credit.

A more detailed look at adult students balancing work, family, and school reveals that, in the 1999-2000school year, 2 million undergraduate students worked full-time, had dependents, and consideredthemselves "employees who study." Nearly half – 47 percent - of these students were exclusivelyenrolled less than half-time.29

This analysis indicates that only 2 million of the 7.1 million adult students in the 1999-2000 school yearwere attempting to balance work, family, and school. Half of them could manage only a less than half-time schedule. This means that only half of the working adult students with children would be eligible forthe Hope Scholarship Credit if they were in the first two calendar years of taking courses.

Potential Benefit Based on Net Tuition and Fee Costs

The Hope and LLTC vary markedly in their financial support for post-secondary education. Under Hope,students or their parents can receive a maximum $1,500 tax credit on $2,000 worth of eligible educationalexpenses (tuition and fees). Under the LLTC, students or their parents must spend $10,000 in order togain the maximum benefit of $2,000 in tax credit.



Because working adult students are more likely to attend part time or less and attend less expensiveinstitutions (e.g., community colleges), the amount of eligible expenses for an educational tax credit islow, usually resulting in an insignificant tax credit.30 The average tuition for a community collegestudent attending part time for a full year is about $700.31 At this rate, a part-time student could claimeither the Hope or the LLTC if s/he was in the first two years of the degree. Under the Hope, s/he couldqualify for a $700 tax credit; under the LLTC, s/he could qualify for a $140 credit. However, if this part-time student were actually enrolled less than half-time, as many working adult parents are, this studentwould have only $500 in eligible expenses and could qualify for only a $100 tax credit under the LLTC.32

This student would not be eligible for the Hope credit.

However, the real costs to attending school for most students, especially working adult students, are thoseoutside tuition and fees, including room and board, books and supplies, child care, transportation, etc.Although these costs can be significant, none are considered "eligible expenses" in the calculations for theeducation tax credits. The GAO has analyzed these estimated costs using NPSAS data and results arepresented in Table 4 below.

Table 4: Estimated Educational Costs for Less Than Half-time Adult Students, 1999 to 2000Costs Mean Total DollarsTuition $480.19Books $225.17Other $227.10Child care $147.90Transportation $885.43

Adapted from GAO study, based on GAO calculations of NPSAS 1999-2000 dataNote: dollar amounts are calculated means and do not add up to the total costs

These costs are based on what schools charge and/or estimate in standard student budgets used tocalculate student financial aid packages. Room and board are not included in this listing because studentswho attend school less than half-time cannot claim these expenses in their application for studentfinancial aid; therefore, they are not included in the budget for less than half-time students. Because thecosts outside of tuition are based on school estimates, it is impossible to determine actual costs from thisreport. However, based on our review of data from other surveys, it is reasonable to assume that costsassociated with school attendance above and beyond tuition and fees can run between $1,000 and $2,000,especially for working adult parents who have childcare needs. However, none of these costs can becounted toward a Hope or Lifetime Learning tax credit.



Potential Tax Credit Benefit for Low-income Working Adult Students

Many working adult students have enough earned income that they do not qualify for need-basedfinancial aid. Yet their income is still relatively low and their tax obligation is correspondingly low.Although these low-income adult students are working and balancing school like most other adultstudents, their low tax obligations preclude them from any benefit under the credits. In 2001, married taxfilers with a family of four must have had $19,200 in family income to overcome the standard deductionsand exemptions necessary to have tax liability.33 The working adult students on which our research isfocused also would qualify for a child tax credit and possibly a dependent care tax credit, which wouldfurther reduce their tax liability and their likelihood of benefiting from an education tax credit. In the boxbelow we provide two examples of how low-income working adult students are precluded from receivingeducation tax credit benefits.

Low-Income Families and The Tax Code:Two stories of how low-income families miss out on the benefits of education tax credits

Just missed a $100 LLTCA married couple with two elementary-school-aged children had a household income of $33,000 in 2001.One parent worked full-time, while the other worked part-time and took two community college coursestoward an Allied Health certificate in radiology. Tuition and fees were $500. After taking the standarddeduction of $7,600 for a married couple filing jointly and total exemptions for 4 family members of$11,600, this family had a taxable income of $13,800 and owed $2,074 in taxes. After claiming a childtax credit for two children of $1,200 and a credit for child care expenses of $960, this family owed notaxes and could not benefit from either educational tax credit. The less than half-time status precludedusage of the Hope and the fact that this family owed no taxes precluded the $100 tax credit that theymight have received under the LLTC.

Not even close to a $200 LLTCA single mother of one elementary school-aged child had a household income of $22,000 in 2001. Byrelying on extra child care, she found the time to take two community college courses at night toward aMicrosoft Network Administrator certificate, and the tuition and fees were $1,000 (she lived in a statewith high tuition and fee costs). After taking the standard deduction of $6,650 for a head of householdand total exemptions for a family of two of $5,800, she had a taxable income of $9,550. Her tax owedwas $1,436. After taking the child tax credit of $600, a credit for child care expenses of $576 (shemaxed out child care expenses to go to school at night), and an Earned Income Tax Credit of $1,000 (forwhich she is eligible by income, with one qualifying child) she owed no taxes. A portion of the EITC isrefundable to her. If she could have benefited from an education tax credit, based on her tuition and feescosts, she might have received a $200 LLTC. (Due to her limited enrollment intensity, she would notqualify for a Hope.)



V. Usage of Education Tax Credits by Working Adult Students

During tax year 2001, 7.4 million tax filers claimed an education tax credit for a total benefit of $5.2billion. The College Board estimates that the Hope and LLTC made up about 6% of all student aidduring both the 2000-2001 and 2001-2002 school years.34 The number and amount of education taxcredits claimed has increased over time, as indicated in Table 5 below. During the first year of the credit,4.7 million filers claimed $3.4 billion in credits and received a mean tax credit of $726 each. However,the 2001 take-up rate is just over half the estimated rate for 1998 as reported by The National Center forPublic Policy and Higher Education of 12.9 million students.35

Table 5: Education Tax Credits Claimed, 1998 to 2001Tax Year

1998 1999 2000 2001# credits claimed (in millions) 4.7 6.3 6.7 7.4$ amount (in billions) $3.4 $4.6 $4.9 $5.2Mean tax credit $726 $728 $731 $703Source: Internal Revenue Service, Information Services, Martinsburg Computing Center, Master File Service Support BranchNote: these figures are only for amounts claimed – not received; however, the majority of taxpayers claiming a credit receive one.

Tax year 2001 is the last for which there are detailed data available on the tax credits. Of the 7.4 millionfilers who claimed a credit on the Education Tax Credits worksheet, the vast majority - 7.2 million –actually received a credit in their final tax analysis. Forty-four percent received only Hope, 52 percentreceived only the LLTC and 5 percent received both. Sixty percent of the $5.2 billion in credits benefitedfilers who claimed the Hope only, 31 percent of this amount benefited filers who claimed the LLTC only,and 9 percent of the amount went to filers who claimed both credits.

Table 6: Number of Filers and Tax Credit Amounts, 2001

Credit # filers(millions) % of filers $ amount

(billions) % of filers Mean credit

Hope only 3.2 44% $3.1 60% $969LLTC only 3.7 52% $1.6 31% $432Both 0.3 5% $0.5 9% $1,666

TOTAL 7.2 101% $5.2 100% $722Source: IRS SOI sample, 2001

The percent differences between the filers for each credits and the amount of benefit for each creditreflect the relatively more generous design of Hope. Filers who spend $2,000 on tuition and fees andqualify for a Hope credit can receive a maximum tax credit of $1,500. However, those who qualify onlyfor the LLTC must spend $10,000 on tuition and fees to receive a maximum $2,000 credit. The result isthat Hope filers received a mean credit of $969, LLTC filers received a mean credit of $432, and filersreceiving both credits received $1,666.



Who Benefited From the Credits –– Parents of Dependent Students or Working AdultStudents?

Although the Hope and LLTC were each designed to benefit particular student populations, little researchto date has validated this. In our research, we wanted to understand if middle-income parents claimed theeducation tax credits for their dependent students or if independent working adult students claimed thecredits for their own education.

Overall, we found a surprisingly high percentage of filers who claimed the tax credits for their own ortheir spouse’s educational expenses. Slightly more than two-thirds of the credits were received by thistype of student compared to one-third of the credits going to filers who claimed them on behalf of adependent college student. Although more of the credits went to filers who claimed them for theirown/spouse’s educational expenses, these filers received smaller mean credit amounts. Most filers whoclaimed the credit for themselves or their spouses did not indicate that “student” was their occupation ontheir income tax return, which we used as a proxy to define them as “working adults.” These studentsconsistently received smaller mean credits than all other categories of filers (i.e., filer claiming credit onbehalf of a dependent, filer claiming credit for self/spouse and indicating “student” as occupation). Therest of this section reports on our methodology and detailed findings.

In order to access the data to answer this question, we requested a special data run from the InternalRevenue Service on its Statistics of Income (SOI) sample.36 We asked the IRS to match the socialsecurity numbers (SSN) of tax filers and their spouses found on the Individual Income Tax Return formsagainst those of the students listed on the Education Tax Credits form (8863) for whom the education taxcredits were claimed. 37 If the SSN of the tax filer and/or spouse matched that of the student(s) listed onform 8863, we knew that the filer was claiming the credit for their own or their spouse's educationalexpenses. In 32 percent of all returns with an education tax credit allowed, the credit was taken for adependent student (the SSN of the tax filer/spouse on the Individual Income Tax Return form did notmatch the SSN of the student listed on the form 8863). In 68 percent of returns, the credit was taken forthe tax filer or his/her spouse.

As table 7 indicates, the percentages of credits claimed for selves/spouses varied markedly by credit. Offilers who received only a Hope credit, 58 percent received the credit for their own educational expenses.A full 80 percent of filers who received only a LLTC received the credit for their own educationalexpenses. Based on this analysis, then, it appears as though the LLTC is reaching a significantpercentage of independent students.

Table 7: Education Tax Credits Received for Filer/Spouse and for Dependent, 2001Filers receiving credit for

self/spouseFilers receiving credit for

dependent

Credit # % Meancredit # % Mean

creditHope only 1.8 58% $892 1.3 42% $1,104LLTC only 3.0 80% $393 0.8 20% $578Both 0.07 21% $1,466 0.3 79% $1,375

All credits 4.9 68% 2.3 32%Source: IRS SOI sample, 2001Note: numbers are in millions; due to rounding, totals may not equal those found in tables above.

Filers who received the credit(s) for their own/spouse's educational expenses received a lower credit thanthose who received the credit(s) for dependents under the Hope or LLTC. However, when filers receivedboth credits, the self-filers received higher credit than parents claiming dependent college students.Overall, the LLTC filers received significantly lower tax credit benefits than Hope filers or those whoreceived both credits.

Under both the Hope and LLTC, if the credit was taken for a dependent(s), primarily moderate to highincome tax filers received it. As Graphs 1 and 2 in Appendix B show, only 25 percent of the Hope creditsand 20 percent of the LLTC went to filers who earned less than $40,000 annually. Of tax filers who



claimed the education tax credits for their own or their spouse’s educational expenses, most had adjustedgross incomes (AGIs) under $40,000. A full 76 percent of Hope filers and 59 percent of LLTC filers inthis category had incomes below this amount (see graphs 3 and 4).

Analyzing whether filers’ SSNs matched between the Individual Income Tax Return and the EducationTax Credits forms indicated if a tax filer was using the credit for his/her own or spouse's educationalexpenses; however, it did not tell us if the filer who benefited was a full-time, half-time, or less than halftime student or if this filer was a part-time or full-time working adult. The filer may have been a full-timestudent, for example an independent undergraduate studying beyond the first two years of a program or agraduate student, or could have been a full-time working adult taking classes part-time (i.e., from thegroup that is the focus of our research).

From the tax forms alone, it is impossible to determine the enrollment intensity of the student filers whoclaimed the tax credit for his/her own educational expenses or those of a spouse. This is because neitherIndividual Income Tax Return form (1040, etc.) nor the Education Tax Credits form (8863) asks for thestudent's enrollment intensity. To understand the extent to which students using the education tax creditswere working adult students, this study did further analysis of the IRS SOI data and looked at twoadditional sets of data.

First, the IRS SOI dataset provided us with exact numbers of filers and amounts of credits received.However, it is limited because it does not clearly differentiate between students who are attending full-time and might consider themselves primarily students and those who are attending on a limited part-timebasis and consider themselves primarily workers. We used a proxy to sort this information, as describedbelow.

Second, we analyzed the findings from the National Household Education Survey(NHES) Adult Interview questions that asked about the usage of education tax credits. From this data, wecan get clues about the characteristics of adult students who indicate that they have claimed or plan toclaim the credits. This dataset is limited because it relies on self-reporting by students and it does notdisaggregate information by type of credit.

Finally, we analyzed data from the National Postsecondary Student Aid Survey (NPSAS) on students inthe 1999-2000 school year. Like the NHES, this dataset provides clues about the characteristics ofstudents who indicate that they have claimed or plan to claim the credits, but it is also limited due to self-reporting and lack of disaggregation. In addition to the typical limitations of self-reporting (i.e.,inaccurate representation), many dependent students (in this survey and in general) are unaware of whattheir parents' tax forms indicate and cannot accurately answer questions about tax credit usage. As wediscuss above, few students even know about the credits and may not have a good understanding of them.Finally, the student answers are based on whether they claimed or planned to claim the credit, not if theyactually received one.

It is our hope that the combined information from these three datasets will shed some light on thecharacteristics of students who benefit from the educational tax credits. However, we strongly encourageadditional research into this question.

IRS Statistics of Income Education Tax Credit Usage Data –Tax Filers Who Claimed the Credit for Their Own/Spouse’s Educational Expenses

In order to understand which students actually benefited from these credits, we analyzed IRS data fromthe Statistics of Income (SOI) sample. As we note above, IRS tax data does not indicate the enrollmentintensity of a student receiving a tax credit beyond the half-time or more requirement of the HopeScholarship Tax Credit. However, there may be a proxy for this information.

We asked the IRS to run a sort of the SOI data into two categories of education tax credit recipients: (1)those who received the credit for their own or their spouse’s educational expenses and indicated “student”as their occupation on their tax return; and (2) those who received a credit, but did not list “student” astheir occupation. The Individual Income Tax Forms include a box near the signature line at the bottom ofeach form that asks filers to indicate their occupation. We assumed that taxpayers who are full-timestudents would indicate "student," and those who work more than they attend school and/or consider



themselves primarily “workers” and secondarily “students” would indicate an occupational title. Weviewed this proxy as somewhat similar to the self-reported question in the NPSAS survey that asksstudents if they consider themselves primarily “workers who study” or “students who work.” This is thefirst time that we know of researchers using this particular variable to study usage of the education taxcredits, and it is difficult to know its validity. Findings from this analysis should be used with caution,and we strongly recommend additional research on this variable.

Using this proxy, we found that, of the 4.9 million tax filers who received an education tax credit in 2001for their own educational expenses, 18 percent - 885,000 - indicated "student" as their occupation. A full82 percent - 4 million - indicated something other than student as their occupation. This implies that themajority of those receiving an education tax credit for their own educational expenses were workingadults who identified primarily as workers and not students.

Tax filers who indicated "student" as their occupation: In 2001, these tax filers received $285 millionin Lifetime Learning Tax credits and $321 million in Hope credits. As graphs 5 and 6 in appendix Bshow, 64 percent of the LLTC recipients and 76 percent of the Hope credit recipients had adjusted grossincomes below $30,000. A striking 43 percent had AGIs between $10,000 and $20,000. Overall a fairlysmall share of these taxpayers also claimed dependents: 17 percent of those who received a LLTC and 13percent of those who received a Hope credit claimed dependents.

A relatively small number of these taxpayers also claimed the Earned Income Tax Credit (EITC), despitethe fact that many of them had low enough incomes to qualify. Only 4 percent of tax filers who took theLLTC for their own/spouse’s educational expenses, claimed “student” as their occupation, and claimeddependents also claimed the EITC; 3.4 percent of filers who took the Hope credit and had thesecharacteristics also claimed the EITC. These small percentages could reflect that the income eligibilitylimits under EITC are more restrictive than under the education tax credits, that these filers did not meetother requirements of the EITC and/or underscore that the EITC also is a relatively unknown tax credit.

In summary, most of the 885,000 filers who claimed a credit for their own/spouse's expenses andindicated "student" as their occupation were poor and without children. This may indicate that theylooked more like traditional students.

Tax filers who did not indicate “student” as their occupation: Overall, 82 percent of tax filers whoreceived an education credit for their own/spouses educational expenses did not indicate “student” as theiroccupation. Table 8 presents more detail on this data. The overall percentage for this group seems high,and we encourage readers to view this data with caution.

Table 8: Tax Filers who Received an Education Credit for Their Own/Their Spouses EducationalExpenses and Did Not List “Student” as Their Occupation

Credit# did not list"student" asoccupation

# received creditfor self/spouse

% (of all filersreceiving a credit) Average Credit

Hope only 1.5 1.8 81% $881LLTC only 2.4 3.0 82% $361Both 0.06 0.07 86% $1,497

All credits 4.0 4.9 82%Source: IRS SOI sample, 2001Note: numbers are in millions; due to rounding, totals may not equal those found elsewhere

These filers received the largest share of education tax credit dollars in 2001: $1.3 billion in Hope creditsand $880 million in Lifetime Learning Tax credits (out of a total of $5.2 billion in education tax credits).As Graph 7 in Appendix B shows, 56 percent of the filers who received a Hope credit had adjusted grossincomes (AGIs) below $30,000 and 72 percent had incomes below $40,000. As Hope credit recipientsare required to attend school at least half-time, these student-workers are balancing a school course loadof at least 2 classes per semester (6 credit hours) and earning a low to middle income.



Only 36 percent filers who received a Lifetime Learning Tax Credit had AGIs below $30,000 and 54percent had AGIs below $40,000 (46 percent had AGI’s above $40,000; see Graph 8 in Appendix B).The LLTC benefits are nearly evenly split between lower/middle income filers and upper income filers;however, the real benefits are concentrated around filers with AGIs of at least $30,000. This dataunderscores our earlier finding that low-income working adult students attending school less than half-time will see little benefit from the LLTC.

About a third of these tax filers who took either the LLTC or the Hope credit also claimed dependents,although very few filers with low AGIs claimed dependents. The percentage of filers receiving aneducation tax credit and claiming dependents increased by AGI: more than half of those with AGIsbetween $50 and $60,000 who claimed LLTCs or Hope credits also claimed dependents. This findingmay be indicative of how difficult working parents find it to balance work, family, and school, and onlythose with higher incomes and more financial cushion can manage to engage in all three.

Similar to filers who listed their occupation as “student,” these filers claimed the Earned Income TaxCredit infrequently: between 4 and 8 percent of filers who claimed an education tax credit also claimedthe EITC.

In summary, in 2001 an estimated 4 million filers received a credit for their own/spouse's expenses anddid not list "student" as their occupation, but those who received the Hope Credit had a different incomedistribution than those who received the LLTC. Hope Credit tax filers had low to lower-middle incomeswhile more LLTC tax filers had an adjusted gross income of $40,000 or more. However, the dollarbenefits of both credits went primarily to filers with adjusted gross incomes of at least $30,000. Thesefilers typically did not have dependents and, if they did, they also had higher incomes. We can concludethat low-income parents taking courses themselves are not part of the population of filers who benefitfrom these tax credits.

Overall, of all tax filers who took an education tax credit for their own/spouse’s educational expenses,those who indicated that they were students and who took the Hope credit had the lowest incomes – 76percent were below $30,000. Those who did not indicate student as their occupation and took the LLTChad relatively high incomes – nearly half had incomes over $40,000 – although many were still low-income. These findings make sense in light of the structure of the credits. Students who claim the HopeCredit must be enrolled at least half-time, so it is likely that they have lower earnings from fewer hoursworked.

Mean Tax Credits for Working Adults

Although filers who received an education tax credit for their own educational expenses were a healthyshare of the total number of returns with the credits, the mean tax credit amount for this group wasconsistently lower than that for filers who claimed the credit on behalf of their dependent student(s).

Tax filers who claimed the Hope credit for their own/spouses educational expenses and did not indicate“student” as their occupation – presumably working adults – received, on average, $881 in credit (seeTable A2 in Appendix A). Tax filers who claimed this credit for their own/spouses educational expensesand indicated “student” as their occupation – presumably full-time undergraduate or graduate students –received, on average, $936 in credit.38 Tax filers who claimed the credit for a dependent student received,on average, a credit of $1,104; this average amount is skewed, however, by a fairly small number ofvery low income filers (less than $10,000 AGI) who received large tax credits for their dependent collegestudent(s).

Our analysis of the mean tax credit amounts at each AGI level shows that, for the most part, the greatestbeneficiaries are tax filers who take the credit for their own/spouse’s educational expenses and identifythemselves as students. Taxpayers who take the credit for their own/spouse’s educational expenses, butdo not identify themselves as students receive the least benefit. These differences could reflect lowertuition and fees used to calculate the credit for filers who do not identify as students and/or lower creditamounts allowed. A more detailed study of tax filers could help to clarify these findings.

Tax filers who claimed the Lifetime Learning Tax Credit for their own/spouse’s educational expenses anddid not indicate “student” as their occupation – presumably working adults – received, on average $361 in



credit (see Table A3 in Appendix A). Tax filers who claimed this credit for their own/spouse’seducational expenses and indicated “student” as their occupation – presumably full-time undergraduate orgraduate students – received, on average $536 in credit. Tax filers who claimed the credit for a dependentstudent received, on average, a credit of $578.

A careful look at the mean LLTC by AGI reveals varying benefit amounts for different groups of taxfilers. The SOI sample size is small for tax filers who took the credit for dependents and earned $20,000or less, and for those who took the credit for themselves/spouses, indicated “student’ as their occupationand had AGIs over $60,000. Nevertheless, it is safe to say that tax filers who take the credit for theirown or their spouse’s educational expenses and indicate something other than “student” as theiroccupation get smaller LLTC credits than other filers. The overall lower LLTC amounts compared to theHope credit amounts likely reflect the less generous design of this credit.

This analysis of usage of the Hope and LLTC using IRS data is one of the first research attempts tounderstand which students benefit from the education tax credits. We have uncovered interesting findingsand shed some light on this question. However, more research and analysis using the IRS SOI sampleand other information is required. In addition to knowing if filers who received the credit for themselveslisted "student" as their occupation, claimed dependents, or claimed the EITC, it would be useful to knowif they were single or married. This information could help researchers to understand whether adjustedgross income amounts are for an individual or a family, and the extent to which income resources arebeing stretched in families.

Additionally, because the IRS is not in the business of tracking students, we know very little about thestudents who receive these credits. Ideally, we would gather data on age and other demographicinformation, and look at education characteristics such as enrollment intensity, degree or program ofstudy, whether students were pursing a credential, what type of institution they attended, their persistencerate in school, etc. Some states collect this type of information from their state level education systems.To get a more accurate picture of the students who claim and receive the education tax credits, it will benecessary to use the tax records from the IRS in conjunction with student records from a state system.

NHES and NPSAS Data on Education Tax Credit Usage

Two U.S. Department of Education surveys provide information on the proclaimed usage of the Hope andLifetime Learning Tax credits by adult students. The computer-assisted telephone Adult Interview of the2001 NHES included two questions on usage of the education tax credits: (1) “Did you or will you use theLifetime Learning tax credit for any courses you have taken in the past 12 months?” and (2) “Did you orwill you use the HOPE tax credit for any courses you have taken in the past 12 months?”

About one-third of adults enrolled in college have used or planned to use the credits and the percentagesof adults in college who have or planned to use the credits increased with education and income (seeTable A4 in Appendix A). As with the findings on awareness discussed above, there is a lowerpercentage of Hispanics and adults whose first language is not English who have or plan to use thecredits.

The NHES survey data provides a general understanding of adult students who indicate that they haveused or plan to use an educational tax credit. However, it is important to distinguish between studentswho simply plan to claim the credits and those who are eligible to receive them. To determine who waseligible to receive an educational tax credit, we analyzed data from the NPSAS. Unfortunately, thisdataset does not allow one to perfectly determine tax credit eligibility because income and net tuitioninformation are provided for a school year (1999-2000), while eligibility for a credit is determined by atax year. Given the way the variables are defined, we do not know how much of a student’s tuitionexpenses were actually incurred during 1999 as opposed to the year 2000. Furthermore, we have noinformation about expenses incurred during the spring of 1999.

To estimate as accurately as possible the adult students who would be eligible for the credit, we establishtwo definitions of eligibility using the same method used by Long (2004) but restrict the analysis toindependent students.39 To further refine the population to understand the take-up rate by working adultstudents, we analyze the data by students’ enrollment intensity – that is, full-time, part-time and less than



half-time. With this analysis we assume that many of the students who are independent and attend schoolpart-time and less than part-time are working adults.

Approximately one-third of eligible independent students claimed an education tax credit in the 1999-2000 school year. Using the two eligibility definitions, we found that between 33 and 36 percent of alleligible independent students claimed a credit. This compares to between 27 and 29 percent of all eligiblestudents – both dependent and independent – who claimed a credit that school year, according to Long’sprevious analysis (Long, 2004). See Table A5 in Appendix A for more detailed data.

The percentage of independent students who attended less than half-time – generally working adultstudents – was slightly lower than for all independent students, between 27 and 30 percent. Regressionanalysis on the likelihood of independent students claiming a credit substantiates these findings. TableA6 in Appendix A displays odds ratios on the likelihood that eligible independent students claimed acredit. This analysis shows that women and married students were, all else equal, more likely to claimcredits, but Black, Hispanic, and immigrant students were less likely to claim them. Students with nettuition costs were more likely to claim credits. Part time and less than part-time (less than half-time)students were both less likely to claim credits. College attendance status as a freshman or sophomore didnot mean, all else equal, that eligible students were more likely to claim credits.



VI. Potential Impact On Working Adult Students and Their Enrollment In Post-Secondary Education

The previous two sections reveal that availability and use of education tax credits by all students, butespecially working adult students, is not high. This finding is important and has public policyimplications. It also leads us to assess the impact of the education tax credits on the post-secondaryeducational enrollment of working adult students. One of the main goals of the education tax creditlegislation when it was passed in 1997 was to increase access to post-secondary and career enhancingeducation. Simply: have or can these tax credits as they are currently structured encourage more workingadult students to enroll in post-secondary education and career-enhancing programs?

Researchers have estimated the impact of changes in student financial aid and subsequent effects oncollege costs on student enrollment. Generally, this research shows that, for every $1,000 (2001 dollars)increase in the cost of college, college enrollment decreases by three to six percentage points.Unfortunately, several unique aspects of delivering student aid through the tax code prohibit a strongcomparison between the impacts of student aid and college costs and the impacts of education tax creditson college enrollment. Long has summarized these unique aspects as follows: "the manner ofdisbursement (through the tax code), the timing of the benefits (up to 15 months later), and the eligibilityconstraints of the Hope and LLTC." 40 Quite simply, because the student aid of the education tax creditsdoes not come bundled with traditional student aid and can be delivered long after educational expensesare incurred, there is likely little connection in students' minds between the education credits and collegecosts and enrollment.

In fact, Long's analysis of the enrollment effects of the tax credits found that they had little to no impacton enrollment for traditional students and only a slight positive impact on college enrollment by non-traditional students (ages 25 to 40). She concludes that the "principle benefactors of the tax credits arenot likely to be marginal students, and the disconnect between the aid and college attendance is likely tolimit the effect of the credits on enrollment."

In conclusion, as they are currently marketed, structured, and delivered, it appears that neither the Hopenor the Lifetime Learning Tax credits have had an effect on increasing the number of students who enrollin college who otherwise might not. These tax credits reward students - both traditional and non-traditional - who are already enrolled in school. However, it may be that marketing, structuring and/ordelivering the credits differently could have an impact on college access and success. Demonstrationprograms and experiments with these variables could shed light on this question. The policyrecommendations that follow address this issue.



VII. Policy Recommendations

Although 7.2 million students benefited from the Hope and Lifetime Learning Tax credits in 2001, thesecredits are falling far short of meeting the needs of workers and employers for post-secondary educationand skill upgrades. Even if 4 million working adults had used one of the credits to help cover the costs oftheir post-secondary education, that leaves 56 million working adults in this country with no post-secondary education at all. In an economy that increasingly relies on knowledge and skills, workers andemployers can no longer afford this skills gap. These tax credits are not coming close to addressing theproblem of the under-educated worker in this country.

What would it take to "scale up" these tax credits to a point where they would have significant impact onthe education and skill deficits in our workforce? We offer the following recommendations forimproving the education tax credits’ effectiveness and helping to make “lifelong learning” a realisticpossibility for workers. These changes are aimed at making both education tax credits more accessibleand beneficial for working adults who pursue the post-secondary educational credentials needed intoday’s economy. The recommendations preserve the education tax credits as two separate credits.However, as we considered the myriad of alternative structures, we toyed with the notion that it may bebest to merge the two credits into one. Although we are not prepared to make this a formalrecommendation, we do want to introduce it as an option for expanding the credits and simplifying the taxcode. Our formal recommendations are presented in priority order below.

A. Raise Awareness of Both the Hope Scholarship and Lifetime Learning Tax Credits

As discussed in section two above, few adults have even heard about the Hope or Lifetime Learning Taxcredits. Less than one-quarter of all adults know about them and less than one-fifth of working adultswithout bachelor’s degrees - our prime population in need of skill development - know about them.Perhaps the most useful policy to promote these tax credits as part of the solution to the skills gap in thiscountry is to market the credits strategically to a targeted audience of working adults. This will require acommunication and public relations strategy that involves reaching out to adults in the workplace, athome, and through schools, colleges, training centers, and community-based organizations.

Work with employers to market and improve the take-up rate of the education tax credits. Workingadults are a "captive" audience in the workforce. The federal government could leverage this connectionto the workplace to better reach workers. For example, employers who know that their employees canreceive a $1,500 to $2,000 tax credit for education might encourage their employees to continue theireducation and upgrade their skills. Business groups also could spotlight innovative practices amongbusinesses that encourage and support their employees in using the credits to further their education.

Media Campaigns and Targeted Mailings. One of the most significant challenges to making “lifelonglearning” a reality and not empty rhetoric may be to overcome the perception held by many low-skilledadults that they are not “student material.” Often, these adults struggled through or dropped out of highschool and were eager to leave formal learning behind. Yet today’s “knowledge economy” requires thatworkers upgrade their education and skills if they are to keep pace and get ahead. A targeted mediacampaign that markets the benefits of education past high school could be the boost that low-skilledadults need to begin or continue post-secondary education in greater numbers. Of course, such a mediacampaign alone will not ensure their retention and completion of credentials or their advancement in theworkforce; this campaign must be accompanied by increased supports – academic and personal – to helpthem succeed in post-secondary education.

Additionally, mailings from federal and state governments, post-secondary educational institutions, andcommunity-based organizations to reach out to working adults not currently enrolled in higher educationwith information on programs of study and alternative forms of student aid, especially the more flexibleeducation tax credits, could help raise the societal expectation that adults must engage in learningthroughout their careers. Such mailings could resemble those sent by the Social Security Administrationperiodically that informs adults how much social security benefits we can expect to receive based oncurrent earnings. The federal government could create similar mailings that inform adults how much theycan expect to earn based on their current education levels compared to higher levels of education. This



information is readily available in schools, on the Department of Education’s publications and website,and even in this paper. If low-skilled adults are directly informed of the economic consequences of theireducational choices, they may be more motivated to pursue further education and training as part of theirregular course of career building.

Estimated Projected Cost: If we assume that marketing increases the take-up rate by 30%, this wouldincrease the number of filers who received a credit from 7.2 million in 2001 to 9.36 million and increasethe tax expenditure from $5.2 billion to $6.76 billion – an increase of just over $1.5 billion.41

B. Increase the Percentage of Qualified Educational Expenses Allowed Under the LifetimeLearning Tax Credit

Currently, students who are eligible for the Lifetime Learning Tax Credit may receive a credit worth only20 percent of the first $10,000 they spend on qualified educational expenses (tuition and fees), for a totalcredit of $2,000. This rate structure benefits students who attend high cost institutions full-time.However, most students – traditional or non-traditional - come nowhere close to spending $10,000 ontuition and fees. For example, the average in-state tuition at a public college in 2001 was $3,750.42

Working adult students spend even less, between $500 and $700 per year on tuition and fees, becausethey often enroll less than half-time.

The Lifetime Learning Tax Credit could better serve both the average traditional student and the workingadult non-traditional student by increasing the percentage of qualified expenses from 20 percent to 50percent and capping the amount of the credit at $2,000. This would more than double the potentialbenefit for students who get very little benefit under the current structure without harming those studentswho are currently eligible for the maximum credit of $2,000. Using this method, the average studentattending a public college in-state could receive $1,875 instead of only $750 and the typical working adultstudent could receive $250-350 instead of just $100-140.

In addition to increasing the benefit to students – and, perhaps, encouraging more to enroll - this changewould have the added effect of creating greater parity between the two education credits. With the Hopecredit providing a credit amount of 100 percent of the first $1,000 in expenses plus 50 percent of the next$1,000, the current 20 percent amount provided by the LLTC is significantly lower. Bringing the two taxcredits to closer parity not only helps students, it helps to simplify the tax code.

Estimated Projected Cost: An increase in the Lifetime Learning Tax Credit percentage from 20% to 50%(capping the total credit to $2,000) is a 250% increase for individual credits. The mean Lifetime LearningTax Credit in 2001 was $431, and a 250% increase would result in a mean credit of $1,078. This iswithin the $2,000 credit cap; therefore, we can apply the percentage increase to the aggregate with someconfidence. A 250% increase on the $1.6 billion total Lifetime Learning Tax credits in 2001 results in atotal increase of $2.4 billion for this recommendation.

Caveat: Current law allows for a credit of up to $2,000 under the Lifetime Learning Tax Credit (20% ofthe first $10,000 spent on qualified expenses of tuition and fees). This structure presents a possible pointof contention regarding the Hope Scholarship Tax Credit, which allows for only a $1,500 credit. Ifeligible for either credit, the astute tax filer will claim the higher of the two credits – the LifetimeLearning Tax Credit – if he or she has more than $7,500 in qualified expenses. At this level, this filercould receive either a $1,500 Hope Credit or at least a $1,500 Lifetime Learning Credit (up to $2,000),depending on the amount of qualified expenses above $7,500 (up to the maximum of $10,000).

This recommendation – to increase the Lifetime Learning Tax Credit from 20% to 50% - exacerbates thistension. Under this recommendation, filers who could qualify for either credit are likely to chose theLifetime Learning Tax Credit if they have more than $3,000 in qualified expenses because it would yielda higher benefit. At this level, they could receive only a $1,500 Hope Credit, but they could receive atleast a $1,500 Lifetime Learning Tax Credit or even more, up to $2,000. This tension could make theHope Scholarship Credit obsolete. The best option to preserve the Hope Scholarship Credit is to structureit so it is slightly more beneficial for tax filers. Perhaps the maximum Hope Credit could be increased to$2,500 (say, 100% of the first $1,000 spent on qualified expenses and 50% of the next $3,000) and the



Lifetime Learning Tax Credit maximum could be preserved at $2,000. In any case, this tension exists tosome degree in the current tax law and may already affect the viability of the Hope Credit.

C. Expand the Definition of "Qualified Expenses” for Both Education Credits

In the current structure, both credits are limited to covering only net tuition and fees. However, asdiscussed above, the real costs to attending college for working adults are often not the tuition and fees;they attend low-cost institutions on a very part-time basis. The real costs are those directly associatedwith attending school above and beyond tuition. We have estimated that these costs can easily amount to$1,000 to $2,000 or more, depending on the student's individual needs.

We recommend that the definition of qualified expenses be expanded to include more direct costs ofattendance, i.e., tuition and fees, plus room and board, and indirect costs, i.e., books, supplies, equipment,transportation, childcare, and others as defined by the U.S. Department of Education in Title IV studentaid formulas. These costs of attendance are regularly included in other federal and state financial aidcalculations; therefore, this is an accepted practice. Because all post-secondary educational institutionsthat already participate in federal student financial aid programs already have a standard definition forthese costs of attendance that are tailored to individual campuses (and they typically are adjusted forinflation), from an administrative perspective, making this transition should be simple. Helping to coverthese costs also might encourage marginal students to enroll.

Estimated Projected Cost: Increasing the amount of eligible expenses must be considered for the Hopeand Lifetime Learning Tax credits separately. In 2001, the mean Hope credit was $980, compared to themaximum credit of $1,500. If we assume that allowing more qualified expenses doubles the expensesthat students claim, then this mean credit doubles to $1,960; however, the maximum credit is still $1,500.If all 3.2 million filers (2001 Hope numbers) received the maximum Hope credit of $1,500, total Hopecosts would be $4.8 billion. As many Hope filers are already close to the maximum credit, this is only a55% increase from the 2001 total Hope credits of $3.1 billion, or an additional $1.7 billion.

For the Lifetime Learning Tax credit, the average individual credit was $431. If the expansion of thequalified expenses doubles the net costs on which a student can claim credit, this increases the averageLLTC to $864 (based on the current 20% claim rate). This amount is within the $1,000 credit cap in 2001and the $2,000 current cap. If 3.7 million LLTC filers (2001 numbers) each claim a mean credit of $864,the total cost of the credits is $3.2 billion, a $1.6 billion increase over the 2001 cost of $1.6 billion incredits.

In total, this recommendation could cost roughly $8 billion, compared to the $4.7 billion spent on thesecredits in 2001 ($5.2 billion minus the $500 million for filers who received both credits; this populationwould have to be more closely analyzed to understand how the recommendation would affect them and,therefore, total costs). This is a $3.3 billion increase over 2001 cost figures.

D. Make Both the Hope Scholarship and Lifetime Learning Tax Credits Refundable

We recommend using the guidelines for the Earned Income Tax Credit, change the Hope and LifetimeLearning Tax Credits to allow low-income working adult students to keep their full credit, including theportion above any tax liability they have. Because the education tax credits simply reduce filers’ taxliability, those working adult students who do not owe taxes will not benefit from the credits, even thoughthey have paid for tuition and fees just as tax-owing working adult students have. At a minimum, in2001, a married tax payer with a family of four must have had at least $19,200 in adjusted gross incometo owe taxes, and often, this amount is closer to $22,000 after families qualify for child tax credits anddependent care tax credits. At this income level, families also would qualify for the Earned Income TaxCredit, wiping out even more of their tax liability.

Analysis of IRS data indicates that very lowest income recipients of the credits benefit very little from thecredits. The mean Hope credit for filers who had an adjusted gross income of less than $10,000 and whoreceived the credit for their own or their spouse’s educational expenses was $195, compared to the overall



average for all income ranges of $892. The mean LLTC for these filers was $173, compared to theoverall mean of $393. Filers with adjusted gross incomes of $10,000 to under $20,000 received a meanHope credit of $758 and a mean LLTC of $446.

Of course, there are several reasons for this disparity, including the likelihood that low-income studentsattend lower cost institutions. However, many of these students have such low tax liabilities that theycannot receive full benefit from the education tax credits (the fact that they even owed any taxes at thisincome level indicates that they probably are single adults with no dependents).

Most low-income working adult students receive aid for college only from the Lifetime Learning credit,due to their limited enrollments, so it is most important to focus refundability on this credit. However,making the Hope Credit refundable would also be beneficial. Some low-income working adults,especially those who are closer to traditional college age and do not have dependents, may be enrolled atleast half-time and could use the financial support from a refundable Hope Credit. In fact, analysis of IRSdata found that 58% of Hope recipients in 2001 filed their own taxes and received the credit for their owneducational expenses. Many were low-income, and could potentially gain significant benefit from arefundable credit.

Estimated Projected Cost: In 2001, 1.4 million of the 7.2 million (19%) of tax filers who received aneducation tax credit had incomes below $20,000. Due to their low incomes, almost all will qualify forsome student financial aid. If all of the Hope and LLTC filers in 2001 with incomes below $20,000received a maximum refundable credit ($1,500 for Hope and $2,000 for LLTC), the total cost would be$2.3 billion. This amount is just $1.5 million over the current cost for this group of $760 million in 2001.



VIII. Conclusion

The Hope and Lifetime Learning Tax credits conceived under the Taxpayer Relief Act of 1997 weredesigned to complement each other and to make higher education more affordable. The findings in thisreport indicate that they are not yet meeting this goal.

Based on our findings, we propose several changes to the marketing and structure of the education taxcredits. The current reauthorization of the Higher Education Act has spurred Congressional interest inrevisiting the Hope and LLTC. Several members of Congress have introduced legislation that includesmany of our above recommendations.43 We hope that policy makers and others will use the findings andrecommendations in this report to inform their ideas and work in improving the education tax credits forall students.



Appendix A: Additional Tables

Table A1: Awareness of the Credits, 2001 (weighted results)Heard of the Credits (All Adults)

Full Adult SampleWorking Adults

without a BA/BS DegreeMean 20.78 17.30Demographics

Male 20.07 15.78Female 21.47 19.04White 21.76 17.61Black 20.59 19.16Hispanic 15.91 14.28All other races 21.10 15.72English is not 1st Language 17.21 13.82Married 22.25 17.54Has Kids 19.77 16.16

Level of EducationLess than High School 12.24 10.44High School Degree 15.95 16.79Some College 29.29 30.02Bachelor’s Degree or above 32.35 ---

Household Income$5,000 or less 9.38 6.41$5,001-$10,000 19.73 23.20$10,001-$15,000 13.15 14.71$15,001-$20,000 15.85 11.76$20,001-$25,000 16.69 15.72$25,001-$30,000 14.47 12.27$30,001-$35,000 18.25 18.56$35,001-$40,000 19.25 15.28$40,001-$45,000 17.75 17.17$45,001-$50,000 20.70 20.48$50,001 - $60k 22.36 19.64$60,001 - $75k 22.58 18.72$75,001 - $100k 26.97 18.02More than $100k 28.66 22.31

Other Income and EmploymentMeasures

Own Home 23.28 18.33Worked within the last 12 months 21.79 17.30Currently Employed 22.17 17.30Unionized 22.79 18.95Receive WIC 16.20 16.07Receive Food Stamps 16.93 17.25Receive Medicaid 13.63 14.06

Sample 6,538 3,046Source: National Household Education Survey (NHES), Adult Interview, 2001.



Table A2: Mean Hope Tax Credits Received, 2001

Taxfiler TakesCredit forDependent

Taxfiler(s) TakeCredit for

Self/Spouse


Self/Spouse


Self/Spouse

SIZE OF AGI Overall OverallOccupation is

Student44Occupation is Not

Student Less than 10,000 $195 $1,21445 $195 $207 $18510,000 to under 20,000 $758 $597 $773 $852 $74420,000 to under 30,000 $1,031 $1,006 $1,039 $1,283 $99830,000 to under 40,000 $1,111 $1,172 $1,080 $1,320 $1,04640,000 to under 50,000 $973 $1,091 $843 $1,194 $80050,000 to under 60,000 $1,230 $1,304 $1,127 $1,455 $1,08960,000 to under 70,000 $1,295 $1,357 $1,101 $1,153 $1,09770,000 to under 80,000 $1,320 $1,369 $1,115 $1,500 $1,05080,000 to under 90,000 $934 $994 $657 n/a $65790,000 to under 100,000 $320 $304 $404 $415 $402 Total $980 $1,104 $892 $936 $881

Source: IRS SOI, 2001

Table A3: Mean Lifetime Learning Tax Credits Received, 2001


Taxfiler(s) TakesCredit for

Dependent46


Self/SpouseTaxfiler(s) Take

CreditTaxpayer Takes

Credit

SIZE OF AGI Overall OverallOccupation is

Student47Occupation isNot Student

Less than 10,000 $173 $1,000 $173 $180 $16510,000 to under 20,000 $446 $371 $448 $522 $41220,000 to under 30,000 $478 $516 $475 $688 $42430,000 to under 40,000 $489 $693 $454 $637 $42740,000 to under 50,000 $383 $594 $325 $626 $27450,000 to under 60,000 $470 $684 $396 $522 $37960,000 to under 70,000 $468 $712 $341 $428 $33670,000 to under 80,000 $476 $671 $368 $627 $34880,000 to under 90,000 $380 $572 $242 $219 $24490,000 to under 100,000 $161 $206 $100 $164 $97 Total $431 $578 $393 $536 $361



Table A4: Usage of the Credits, 2001 (weighted results)

Have or Plan to Use the Credits(Adults in College)

Full AdultSample

Working Adultswithout a

BA/BS DegreeMean 33.58 31.98Demographics

Male 30.22 26.11Female 36.34 37.00White 35.21 33.40Black 36.99 35.66Hispanic 21.96 23.44All other races 28.27 21.67English is not 1st Language 27.91 20.76Married 42.36 37.08Has Kids 33.02 29.06

Level of EducationLess than High School 8.50 30.76High School Degree 23.97 28.60Some College 50.07 51.16Bachelor’s Degree or above 50.83 ---Presently in college 100.0 100.0

Household Income$5,000 or less 18.15 26.77$5,001-$10,000 42.71 37.33$10,001-$15,000 23.63 26.82$15,001-$20,000 31.32 39.66$20,001-$25,000 37.81 33.46$25,001-$30,000 32.56 29.75$30,001-$35,000 40.10 43.72$35,001-$40,000 31.41 24.66$40,001-$45,000 27.47 23.74$45,001-$50,000 31.56 45.03$50,001 - $60k 38.51 34.16$60,001 - $75k 28.30 27.51$75,001 - $100k 37.10 27.98More than $100k 35.32 29.46

Other Income and EmploymentMeasures

Own Home 39.86 39.00Worked within the last 12 mo’s 35.49 31.98Currently Employed 39.15 31.98Unionized 41.57 34.30Receive WIC 20.25 27.54Receive Food Stamps 22.22 33.30Receive Medicaid 27.72 30.19

Sample 1,084 424Source: National Household Education Survey (NHES), Adult Interview, 2001.



Table A5: Percentage of Independent (Nontraditional) Undergraduates that Claimed a CreditAll Full-Time Part-Time Less Than Part-

Time

Definition #1: Eligible by Income and Attendance (upper bound)

Whole Sample 33.18 35.22 33.08 27.47

Male Students 31.92 35.14 30.24 24.71Female Students 34.04 35.28 34.88 29.25White Students 34.98 37.76 34.65 28.26Black Students 25.97 25.27 26.42 27.86Hispanic Students 28.43 30.42 29.85 16.66Asian Students 30.50 32.91 28.98 20.68Not born in the U.S. 26.14 27.84 25.14 22.44Student is Married 34.15 37.05 34.35 27.69

Student has a GED 25.36 22.38 30.39 29.03Parents - HS Degree 31.88 34.04 33.29 24.02Parents - Some College 34.59 34.12 36.94 31.75Parents - College Degree 34.65 37.60 32.17 28.81

Public Two-year 26.40 28.85 24.19 25.80Public Four-year 34.60 37.25 34.78 28.14Private Four-year 35.05 37.80 36.01 26.16Proprietary College 27.17 26.09 29.45 30.55

Observations 8687 4570 2530 1587

Definition #2:Eligible by Income, Attendance, and Positive Net Tuition (lower bound)

Whole Sample 35.93 38.83 34.91 29.61

Male Students 34.70 38.36 31.98 27.90Female Students 36.76 39.17 36.76 30.75White Students 37.66 41.32 36.26 30.67Black Students 28.83 28.86 28.99 28.30Hispanic Students 30.89 32.97 32.48 18.84Asian Students 32.72 36.02 29.31 23.07Not born in the U.S. 27.92 28.73 26.84 27.27Student is Married 36.84 40.60 36.12 30.35

Student has a GED 29.36 26.87 34.93 26.92Parents - HS Degree 34.30 37.37 35.21 25.17Parents - Some College 37.84 38.32 38.65 35.05Parents - College Degree 37.44 41.19 33.85 31.28

Public Two-year 29.83 33.93 26.69 29.41Public Four-year 37.30 41.46 00.36 30.12Private Four-year 38.02 41.62 38.11 28.24Proprietary College 28.43 27.07 30.08 40.00

Observations 7010 3582 2108 1320Source: 1999-2000 National Postsecondary Student Aid Survey, CATI respondents. Sample limited to students who are eligible for a tax creditbased on 1999 family income and attendance. Due to incomplete information on net tuition expenses for the 1999 tax year, the proportions werecalculated with and without the restriction of positive net tuition for the 1999-2000 school year. Responses are weighted.



Table A6: Likelihood Eligible Independent Undergraduate Students Claimed a CreditLogistic Regression ModelsDependent Variable: Claimed a Tax Credit in 1999 (odds ratios reported)48

Definition #1: Eligibleby

Income and Attendance(upper bound)

Definition #2: Eligible byIncome, Attendance, and

Tuition(lower bound)

Demographics

Female 1.1081(1.51)

1.1733**(2.12)

Black .7019**(3.39)

.7628**(2.29)

Hispanic .6698**(3.21)

.7168**(2.38)

Asian .9986(0.01)

1.0575(0.21)

Immigrant .7142**(2.08)

.6450**(2.51)

Age .9928**(1.81)

.9910**(2.04)

Family Characteristics

Student Married 1.2914**(3.62)

1.3709**(4.01)

EFC (000s) .9988(0.28)

.9938(1.35)

College AttendanceCharacteristics

Freshman or Sophomore .6585**(4.35)

.6566**(3.96)

Part-time .9751(0.33)

.8742(1.60)

Less than Part-time .6328**(3.42)

.6153**(3.31)

Net Tuition (000s) 1.0611**(4.57)

1.0227(1.56)

Observations 4,558 3,524R-squared .0343 .0335

Source: 1999-2000 National Postsecondary Student Aid Survey, CATI respondents. Sample limited to students who are eligiblefor a tax credit based on 1999 family income and attendance pattern. Due to incomplete information on expenses for the 1999tax year, eligibility was calculated with and without the restriction of positive net tuition (hence, definitions 1 and 2). Eachregression also includes controls for the type of college attended.



Appendix B: Graphs

Graph 1

Taxfiler Takes Hope Credit for Dependent - Percent of Returns by AGI

0%

4%

10%

11%

14%

13%14%

16%

9%

9%

Less than 10,000 - 0%

10,000 to under 20,000 - 4%

20,000 to under 30,000 - 10%

30,000 to under 40,000 - 11%

40,000 to under 50,000 - 14%

50,000 to under 60,000 - 13%

60,000 to under 70,000 - 14%

70,000 to under 80,000 - 16%

80,000 to under 90,000 - 9%

90,000 to under 100,000 - 9%


Graph 2

Taxfiler Takes LLTC for Dependent - Percent of Returns by AGI

0%

2%

7%

11%

13%

13%13%

14%

14%

13%Less than 10,000 - 0%

10,000 to under 20,000 - 2%

20,000 to under 30,000 - 7%

30,000 to under 40,000 - 11%

40,000 to under 50,000 - 13%

50,000 to under 60,000 - 13%

60,000 to under 70,000 - 13%

70,000 to under 80,000 - 14%

80,000 to under 90,000 - 14%

90,000 to under 100,000 - 13%




Graph 3

Taxfiler Takes Hope Credit for Self/Spouse - Percent of Returns by AGI

6%

31%

24%

15%

9%

7%

3%

3%

1%

1%

Less than 10,000 - 6%

10,000 to under 20,000 - 31%

20,000 to under 30,000 - 24%

30,000 to under 40,000 - 15%

40,000 to under 50,000 - 9%

50,000 to under 60,000 - 7%

60,000 to under 70,000 - 3%

70,000 to under 80,000 - 3%

80,000 to under 90,000 - 1%

90,000 to under 100,000 - 1%


Graph 4

Taxfiler Takes LLTC for Self/Spouse - Percent of Returns by AGI

3%

20%

19%

17%

12%

9%

6%

6%

5%

3%

Less than 10,000 - 3%

10,000 to under 20,000 - 20%

20,000 to under 30,000 - 19%

30,000 to under 40,000 - 17%

40,000 to under 50,000 - 12%

50,000 to under 60,000 - 9%

60,000 to under 70,000 - 6%

70,000 to under 80,000 - 6%

80,000 to under 90,000 - 5%

90,000 to under 100,000 - 3%




Graph 5

Taxfiler Takes LLTC for Self/Spouse and Indicates "Student"

10%

34%

20%

12%

10%

6%

2%

2%

3%

1%Less than 10,000 - 10%

10,000 to under 20,000 - 34%

20,000 to under 30,000 - 20%

30,000 to under 40,000 - 12%

40,000 to under 50,000 - 10%

50,000 to under 60,000 - 6%

60,000 to under 70,000 - 2%

70,000 to under 80,000 - 2%

80,000 to under 90,000 - 3%

90,000 to under 100,000 - 1%

Source: IRS, SOI, 2001

Graph 6

Taxfiler Takes Hope Credit for Self/Spouse and Indicates "Student"

15%

43%

18%

10%

6%

4%

1%

2%

0% 1% Less than 10,000 - 15%

10,000 to under 20,000 - 43%

20,000 to under 30,000 - 18%

30,000 to under 40,000 - 10%

40,000 to under 50,000 - 6%

50,000 to under 60,000 - 4%

60,000 to under 70,000 - 1%

70,000 to under 80,000 - 2%

80,000 to under 90,000 - 0%

90,000 to under 100,000 - 1%




Graph 7

Taxfiler Takes Hope Credit for Self/Spouse, But Does Not Indicate "Student"

4%

27%

25%

16%

10%

8%

4%

3%

2%

1%Less than 10,000 - 4%

10,000 to under 20,000 - 27%

20,000 to under 30,000 - 25%

30,000 to under 40,000 - 16%

40,000 to under 50,000 - 10%

50,000 to under 60,000 - 8%

60,000 to under 70,000 - 4%

70,000 to under 80,000 - 3%

80,000 to under 90,000 - 2%

90,000 to under 100,000 - 1%


Graph 8

Taxfiler Takes LLTC for Self/Spouse, But Does Not Indicate "Student"

2%15%

19%

18%13%

10%

7%

7%6%

3% Less than 10,000 - 2%

10,000 to under 20,000 - 15%

20,000 to under 30,000 - 19%

30,000 to under 40,000 - 18%

40,000 to under 50,000 - 13%

50,000 to under 60,000 - 10%

60,000 to under 70,000 - 7%

70,000 to under 80,000 - 7%

80,000 to under 90,000 - 6%

90,000 to under 100,000 - 3%




Appendix C: IRS Form 886349

1 The Hope credit can be claimed for only two tax years, even if it takes a student longer to complete his or her firsttwo academic years (freshman and sophomore years).2 Tuition and fees minus these tax-free and non-loan sources of student aid is considered “net tuition and fees.”3 AGI is total income minus deductions for items such as alimony, student loans, IRAs, and medical savingsaccounts. For most taxpayers, AGI is equal to total income.4 Kane, Thomas (1999) The Price of Admission. Washington, D.C.: Brookings Institution Press.5 All cost estimates in this paper are preliminary and should be interpreted only as a rough estimate of the potentialcost. They are all based on 2001 data on number of tax credit recipients and credit amounts allowed. Additionally,the cost estimate for each recommendation considers only that recommendation. Further analysis of the interactionbetween the recommendations and resulting costs should be made when considering specific recommendationstogether.6 Bosworth, B. and V. Choitz. 2002. "Held Back: How Student Aid Programs Fail Working Adults." FutureWorks: Arlington,MA. www.futureworks-web.com7 Over the past decade, more high school graduates (almost 75 percent) are going on to college but a third fail to return after theirfirst year and only one-half of the rest earn any degree.8 US Department of Labor. 1999. "Futurework: Trends and Challenges for Work in the 21st Century. (amounts are adjusted forinflation)9 Ibid.10 Cheeseman Day, Jennifer and Eric C. Newburger. 2002. “The Big Payoff: Educational Attainment and Synthetic Estimates ofWork-Life Earnings.” US Census Bureau Special Study # P23-210. US Department of Commerce: Washington, DC.11 Judy, R. and C. D'Amico, 1997. Workforce 2020: Work and Workers in the 21st Century. Indianapolis IN: Hudson Institute.12 Carnevale, Anthony and Richard Fry, 2001. The Economic and Demographic Roots of Education and Training. NationalAssociation of Manufacturers: Washington D C13 See MDRC’s research and publications for its “Opening Doors” project at http://www.mdrc.org/project_24_2.html14 FutureWorks determined that of 270,000 working adults with children and with family income of less than 200% of thepoverty level who were enrolled at Title IV eligible institutions in Title IV eligible programs, only 7.7% got any form of aid –federal, state, private, institutional, grant or loan. Only 3.5% of these, 34.000 families, got any Pell grant aid. See Bosworth andChoitz, 2002.15 See Bosworth and Choitz, 2002.16 U.S. Department of Education. National Center for Education Statistics. Employer Aid for Postsecondary Education, NCES1999-181 by John B. Lee and Suzanne B. Clery. Project Officer: C. Dennis Carroll. Washington. DC: 1999.17 The Hope credit can be claimed for only two tax years, even if it takes a student longer to complete his or her first twoacademic years (freshman and sophomore years).18 Tuition and fees minus these tax-free and non-loan sources of student aid is considered “net tuition and fees.”19 AGI is total income minus deductions for items such as alimony, student loans, IRAs, and medical savings accounts. For mosttaxpayers, AGI is equal to total income.20 Kane, Thomas (1999) The Price of Admission. Washington, D.C.: Brookings Institution Press.21 The National Household Education Survey (NHES) is conducted by the US Department of Education’s National Center forEducation Statistics. These surveys are nationally representative household telephone surveys using random digit dialing.Civilian, non-institutionalized adults over the age of 16 in the United States and the District of Columbia who were not enrolledin secondary or primary school were interviewed. The survey includes 10,873 observations. The National Center for EducationStatistics is careful to ensure that the NHES databases meet rigorous quality standards, including careful review and cleaning thedata sets, as well as statistically adjusting for sample bias, i.e. the samples were statistically adjusted to correct for the bias oftelephone under-coverage. Results from the most recent survey in 2001 should be available soon.22 U.S. Department of Education, National Center for Education Statistics. Work First, Study Second: Adult UndergraduatesWho Combine Employment and Postsecondary Enrollment, NCES 2003-167, by Ali Berker and Laura Horn. Project Officer: C.Dennis Carroll. Washington, DC: 2003.Note: The age of 24 is used to identify adult undergraduates because this is the age that students are recognized as financiallyindependent of their parents for financial aid purposes.23 United States General Accounting Office. 2003. Federal Student Aid: Expanding Eligibility for Less Than Halftime StudentsCould Increase Program Costs, But Benefits Uncertain, GAO-03-905. Washington, DC.Note: In the student survey, the NPSAS asks students if they consider themselves "students who work" or "employees whostudy" in order to determine the nature of their connection to school.24 United States General Accounting Office. 2003. Federal Student Aid: Expanding Eligibility for Less Than Halftime StudentsCould Increase Program Costs, But Benefits Uncertain, GAO-03-905. Washington, DC.25 The survey was conducted January through April 2001 by the National Center for Education Statistics. The awarenessquestions posed to the sample were “Have you ever heard of…the Lifetime Learning tax credit?” and “Have you ever heardof…the HOPE tax credit?”26 The National Center reported in 1998 that an estimated 13 million students would receive a federal tax credit in 1998; seeConklin, Kristen D. 1998. “Federal Tuition Tax Credits and State Higher Education Policy: A Guide for State Policy Makers.”The National Center for Public Policy and Higher Education. December. (Table 1).



27 See Bosworth and Choitz, 2002.28 United States General Accounting Office. 2003. Federal Student Aid: Expanding Eligibility for Less Than Halftime StudentsCould Increase Program Costs, But Benefits Uncertain, GAO-03-905. Washington, DC.29 Bosworth, B., and V. Choitz. 2002. “Held Back; How Student Aid Programs Fail Working Adults.” FutureWorks: Arlington,MA. www.futureworks-web.com . Note: Twenty-nine percent were enrolled half-time, 15 percent were enrolled full-time, and 9percent varied in their enrollment intensity throughout the year30 For more information, see the DOE’s “Work First, Study Second,” report, FutureWorks’ “Held Back,” study, and the GAO’sreport, Federal Student Aid: Expanding Eligibility for Less Than Halftime Students Could Increase Program Costs, But BenefitsUncertain.31 Berknet, et al in U.S. Department of Education, National Center for Education Statistics. Work First, Study Second: AdultUndergraduates Who Combine Employment and Postsecondary Enrollment, NCES 2003-167, by Ali Berker and Laura Horn.Project Officer: C. Dennis Carroll. Washington, DC: 2003.32 The average tuition and fees for working adult students (and those who are parents) is about $500 per school year (this figure isconfirmed in both the GAO report and the “Held Back” study by FutureWorks).33 This calculation is for the minimum income possible using the 2001 standard deduction for a “Married filing jointly” return($7,600) and the exemption amount ($2,900 multiplied by the number of exemptions for incomes below $103,000). Theminimum will be lower if the tax filer is single and/or has fewer children and will be higher if the filer itemizes deductions ortakes a credit for dependent care expenses (line 46), elderly or disabled (line 47), children under age 17 (line 50), adoption (line51), or foreign taxes (line 45). See Form 1040 for 2001 for more details.34 “Trends in Student Aid.” 2002. The College Board: Washington, D.C. www.collegeboard.com.35 See Conklin, Kristen D. “Federal Tuition Tax Credits and State Higher Education Policy: A Guide for State Policy Makers.”The National Center for Pubic Policy and Higher Education. December. See Table 1.36 The Statistics of Income sample is a stratified probability sample of unaudited Individual Income Tax Returns, Forms 1040,1040A, and 1040EZ (including electronic returns) filed by U.S. citizens and residents. The latest year for which a detailedsample is available at the writing of the report was for returns filed in Calendar Year 2002, which represents returns filed for TaxYear 2001. For more information, see http://www.irs.gov/pub/irs-soi/sampling.pdf.37 See form 8863 for tax year 2001 in appendix C.38 The SOI sample included a small number of sample returns in each of the AGI categories from $50,000 and above, i.e.,$80,000 to $90,000 included no sample returns. Due to these small sample sizes, reported estimates should be used with caution.39 For a description of this method, see Long, Bridget Terry (forthcoming). “The Impact of Federal Tax Credits for HigherEducation Expenses.” College Choices: The Economics of Which College, When College, and How to Pay For It. Chicago:University of Chicago Press and the National Bureau of Economic Research.40 See Long, Bridget Terry (forthcoming). “The Impact of Federal Tax Credits for Higher Education Expenses.” College Choices:The Economics of Which College, When College, and How to Pay For It. Chicago: University of Chicago Press and the NationalBureau of Economic Research.41 All cost estimates in this paper are preliminary and should be interpreted only as a rough estimate of the potential cost. Theyare all based on 2001 data on number of tax credit recipients and credit amounts allowed. Additionally, the cost estimate for eachrecommendation considers only that recommendation. Further analysis of the interaction between the recommendations andresulting costs should be made when considering specific recommendations together.42 American Council on Education43 See, for example, Senate Bills 174, 1793 and House Resolutions 442, 2150, and 3251.44 Estimates in AGIs $50,000 and above should be used with caution due to the small number of sample returns on which they arebased.45 Estimate should be used with caution due to the small number of sample returns on which it is based.46 Estimates in AGIs $20,000 and under should be used with caution due to the small number of sample returns on which they arebased.47 Estimates in AGIs $60,000 and above should be used with caution due to the small number of sample returns on which they arebased.48 Odds ratios should be interpreted as follows: 1.1018 indicates that this group was 10% more likely to have claimed a credit, allelse being equal; 0.7019 indicates that this group was 30% less likely to have claimed a credit, all else being equal (1.0 - 0.7019).Two asterisks indicate that the result is statistically significant at the 5% confidence level.49 See http://www.irs.gov/app/scripts/redirectPDF.jsp?dest=/pub/irs-01/f8863.pdf.

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