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This article is part of an ongoing series of pieces that focus on individual tax expenditures [ [link removed] ] that policymakers might consider eliminating or reforming to address America’s dire fiscal trajectory. Previous articles in this series have addressed the low-income housing tax credit [ [link removed] ], tax-exempt interest on municipal bonds [ [link removed] ], the state and local tax deduction [ [link removed] ], the earned income tax credit [ [link removed] ] and energy subsidies [ [link removed] ].
In the late 1990s, the Clinton administration created two new tax credits to subsidize the cost of higher education expenses, the Hope Scholarship and the Lifetime Learning Credit (LLC). The former was replaced by the American Opportunity Tax Credit (AOTC) as a temporary measure in the 2009 American Recovery and Reinvestment Act and was subsequently made permanent in 2015.
Both these credits are intended to help students defray the costs of their education. The AOTC allows college students to claim $2,500 a year on qualifying expenses [ [link removed] ] including tuition fees, books, supplies or equipment needed for a course of study. Similarly, the LLC allows students to claim a credit of $2,000 a year on qualifying expenses. Students must be enrolled at least half time to qualify for the AOTC, but the LLC is also available to those studying less than half time. Another key difference is that the AOTC is partially refundable (up to $1,000), while the LLC is nonrefundable, meaning it can reduce the amount of tax owed but cannot create or increase a tax refund.
To qualify for these credits, a student must be enrolled in college, not have a felony conviction and not have claimed these credits for more than four years. Students claiming either the AOTC or the LLC cannot claim both credits in the same year. To claim the full amount of either credit, students’ gross income—or that of their parents, if the students are claimed as dependents—must be below $80,000 ($160,000 if married filing jointly), while reduced credits are available for students with gross incomes up to $90,000 ($180,000 if married filing jointly).
In terms of fiscal costs, these higher education tax credits are estimated [ [link removed] ] to cost the government more than $14 billion a year. The Treasury estimates [ [link removed] ] that over the coming decade (2024-2033), the total cost of this tax subsidy will be $151 billion. Not only are the AOTC and LLC tax credits costly, they are also riddled with fraud and abuse. What’s more, these credits are ineffective at achieving their intended goals of increasing college enrollment and making higher education more affordable.
Admin Errors
The problems with administering college tax credit programs are severe and well documented: Several reports have revealed significant errors and instances of fraud. One report [ [link removed] ] published by the U.S. Treasury Inspector General for Tax Administration found that over 3.8 million students had been awarded tax credits erroneously.
Specifically, almost 900,000 students who received AOTC didn’t attend eligible institutions, about 700,000 received AOTC for more than four years or while attending college less than half time and millions of dollars in credits were even awarded to full-time prisoners who were not students at all.
This level of error and fraud within college tax credit programs is not insignificant. A 2023 report [ [link removed] ] conducted by the IRS found that erroneous payments for the AOTC amounted to 36% of total program outlays in fiscal year 2022, or more than $2 billion.
Ineffective and Insufficiently Targeted
One of the main goals of the AOTC and LCC is to encourage more students to pursue higher education. But before even exploring whether college tax credits actually do increase college enrollment, policymakers should consider whether inflating college enrollment is a worthy goal to pursue in the first place. Existing literature suggests [ [link removed] ] that government efforts at inflating college enrollment have worsened the mismatch [ [link removed] ] between employees’ capabilities and employers’ desired skills. It has also led to underemployment among college graduates—all while increasing the cost of college tuition.
But even assuming that increasing college enrollment is a desirable goal, college tax credits may not be effective at aiding students in their aspirations to pursue higher education. Prior research [ [link removed] ] by the Congressional Budget Office has noted, from a detailed examination of Hope and Lifetime Learning Credits, that “tax credits are unlikely to cause substantial increases in college enrollment.”
Also, low-income students are most sensitive to changes in the price of education, but the AOTC primarily benefits middle-income taxpayers, with more than one in five AOTC dollars going to taxpayers with an income above $100,000.
With a phaseout income range of $80,000-90,000 for single individuals (or $160,000 for married people filing jointly), the credit isn’t very well targeted. For example, students from wealthy families who aren’t claimed as a dependent on their parents’ tax return could qualify for the full subsidy, while a student from a modest background whose single parent takes home $90,000 would not qualify if claimed as a dependent.
What’s more, the income phaseouts aren’t very effective at limiting the subsidies to those who need them, given that 90% of full-time students [ [link removed] ] have far less than $80,000 in yearly income: They work fewer than 35 hours a week, and almost 60% don’t work at all.
Some older studies [ [link removed] ] have estimated that tax credits could potentially increase college enrollment by a modest 3-4%. However, these studies have one fundamental flaw in their analysis: They are based on how current students respond to cost, rather than how nonstudents (that is, aspiring students) respond to changes in cost.
Students who receive the tax credit are already enrolled in college, so the credit is unlikely to impact nonstudents considering attending college. Rather, it will benefit middle-income students who are already enrolled and would have gone to college regardless of the availability of credits.
In fact, students generally file for the credit during the year following their enrollment in higher education, so the decision to enroll has already been made. A student filing for AOTC in April 2024, for example, would likely have enrolled in college in September 2023 or earlier, so it is difficult to make the case that this credit incentivizes the decision to enroll in the first place.
It is no surprise, then, that a National Bureau of Economic Research study [ [link removed] ] published in 2004 found that “although the tax credits were promoted as a means of increasing college access, this analysis found no enrollment response.” A 2015 study [ [link removed] ] on the effects of tax deductions on college attendance came to the same conclusion. The authors found that it had no impact on college attendance, attending full time vs. part time, attending four-year vs. two-year college, the resources available in college or the amount paid for college.
What’s more, the empirical literature [ [link removed] ] also finds that colleges react to increased government aid by decreasing their provision of institutional aid or by raising costs (such as tuition). So, the tax credits don’t actually result in students paying any less for their college education.
No More Extra Credit(s)
Higher education tax credits, including the LLC and AOTC, were introduced to ease college expenses and boost enrollment. However, these programs have significant drawbacks. In addition to annual costs exceeding $14 billion, they are marred by administrative errors, fraud and ineffective targeting: They primarily benefit middle-income students rather than those in greatest need.
Empirical evidence shows these credits do little to increase college enrollment or address problems like job-skills mismatch and rising tuition costs. Studies reveal that the credits often fail to affect prospective students’ decisions and merely subsidize current students, who would have enrolled in college regardless. The most prudent course of action that policymakers could take would be to fully eliminate these tax credits, which serve no useful purpose.

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