Along with grants and loans, tax benefits can be thought of as the third major component of federal financial aid provided to students. However, the current design of higher education tax benefits should be significantly improved to better support financially needy community college students.
AACC and ACCT strongly support enactment of the bipartisan “Tax-Free Pell Grant Act,” introduced in the Senate by Senators Whitehouse (D-RI), Grassley (R-IA), Tillis (R-NC), and Wyden (D-OR), and in the House by Reps. Doggett (D-TX), Kelly (R-PA), Davis (D-IL), and Feenstra (R-IA). Tax legislation falls under the jurisdiction of the Senate Finance Committee and the House Ways and Means Committee.
Community colleges have long supported ending the taxation of Pell Grants. Taxing grant funds used for the non-tuition portions of student expenses is counterproductive and limits the impact of this needs-based program. The Tax-Free Pell Grant Act would make all Pell Grant funds non-taxable, a policy whose benefits are concentrated on community college students, because their low tuitions often leave them with a tax liability; only the portion of the Pell Grant that exceeds tuition and required fees is subject taxation, and so it’s mostly only community college students who are in this situation.
The legislation would also alter the $2,500 American Opportunity Tax Credit (AOTC) to enable Pell Grant recipients who attend community colleges to receive the credit. The current eligibility formula largely precludes that— for example, families with incomes of up to $160,000 qualify for the full $2,500 credit, while low-income community college Pell Grant recipients often receive no benefit whatsoever. Both the taxation of community college students’ Pell Grants and their frequent inability to qualify for the AOTC stems from community colleges’ low tuition.
As noted, the Tax-Free Pell Grant Act has bipartisan support in both chambers of Congress. The current Congress provides a golden opportunity to make this commonsense change.
The $2,000 Lifetime Learning Credit (LLC) can be used by part-time, non-credit, and postbaccalaureate students who do not qualify for the broader AOTC. However, LLC only covers 20 percent of tuition and fees, so students have no incentive to use low-cost community colleges. Congress should modify LLC to cover 100 percent of a student’s first $2,000 in tuition and fees in occupational programs.
Talking Points:
- Financially needy students should not have to pay taxes on Pell grant funds that, by law, must be used for education and related expenses. Current policy undermines the program’s impact and financially penalizes students who attend low-cost institutions, particularly community colleges.
- The Tax-Free Pell Grant Act will simplify the tax code and make it easier for low-income students to efficiently file their taxes.
- The bill costs relatively little but will have a large positive impact on those community college students who tend to have the hardest time financing their education. In particular, it will ensure that Pell Grant recipients are able to receive the $2,500 American Opportunity Tax Credit.
- The bill is bipartisan and is a commonsense solution to a largely unanticipated outcome.
- Congress should also increase the LLC to covering 100 percent in workforce programs, up to the same $2,000 limit in current law.