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Missing Graduation

This spring, millions of parents across the country will celebrate their children's graduation from college. But a growing number of parents and their children will be on the sidelines. Not because the children weren't accepted to college, but because the family can't afford the expense. More and more middle-income families are in the same boat, but a confluence of two trends in federal aid for higher education has been particularly crippling for the families that need assistance most.

First, the government aid offered through income tax breaks bypasses many lower- and moderate-income households altogether. Second, Congress has allowed the real value of Pell Grants the primary source of higher-education assistance for low- and moderate income students in the past?to decline in value from what they were worth in real terms (after adjustment for inflation) 20 to 30 years ago. It's imperative that something be done before this trend becomes a landslide.

The Value Of A College Degree

No one doubts the odds: an investment in college is likely to pay off handsomely. Consider these figures from the College Board:

Within each demographic group, median annual earnings for year-round, full-time workers with bachelor's degrees are about 60 percent higher than earnings for those with only a high school diploma... Over a lifetime, the gap in earnings between those with a high school diploma and those with a B.A. or higher exceeds $1,000,000.

This gap is likely to leave more and more Americans coming up short. At two-year and four-year public institutions, which educate 80 percent of our college students, the average tuition and fees for the 2003-04 academic year rose by about 12 percent from the previous year, after adjusting for inflation. More hikes can be expected. Declines in state funding fueled this recent spike in tuition and fees?a problem that will not be solved anytime soon. As could be predicted, the combination of state fiscal problems and limited Pell Grants has led many state colleges and universities to accept fewer Pell students and more out-of-state applicants who pay higher tuitions.

In response to widespread concerns about escalating costs of higher education, Congress, beginning in 1997, turned to the tax laws to help out. It gave us Hope Scholarship and Lifetime Learning tax credits, and it greatly expanded the ability of households to set aside money for the future costs of college through tax-exempt education IRAs (called Coverdell accounts) and tax-exempt qualified tuition programs. The problem for low- and moderate-income households: they lack the resources to save for college, and most can't benefit from the tax credits.

You Gotta Make Money To Save Money

Last year, parents with incomes of less than $51,000, or, in the case of joint filers, $103,000, could have claimed either the Hope or Lifetime Learning credit. The Hope credit allows a family to reduce its taxes by up to $1,500 for each member who is attending his or her first two years of college. The Lifetime Learning credit allows a family to reduce their taxes by up to $2,000 for one family member who attends college during the year. As with the Hope credit, a student who is not a dependent can claim the credit for themself. While only one Lifetime Learning credit is available per family each year, the credit is available for all years of college, not just for the first two years.

These credits have helped millions of students. But because the credits only cut one's income taxes, they have no value to all those households that don't owe taxes yet desperately need to attend college to break out of the income cycles in which their families are trapped. During the 2003-2004 academic year alone, according to the College Board, 250,000 students who were eligible to attend college declined to do so because they could not afford it. Most of these students set their hopes on two-year community colleges, where the average cost for tuition and fees is about $2,000 per year, or four-year public colleges, where these costs run about $4,000 per year. There are, of course, significant additional costs for housing, transportation, books and supplies. But access to higher education would be tantalizingly within reach if these students could get financial assistance equal to the Hope or Lifetime credits.

The problem is even worse than it looks. Basic economic theory teaches us that the credits are likely to have produced higher tuitions and fees because institutions realize that the government will cover part of the costs. This means that students who don't benefit from the credits are double losers; they're actually worse off than they would be if the credits didn't exist in the first place.

A Possible Solution

The simplest and most efficient way to help needy students afford higher education is to substantially increase Pell Grants and favorable loans for them. Until that happens, the tax credits ought to be made "refundable." The IRS then would treat all families as if they had paid taxes equal to the credit they would be eligible to receive. If they didn't owe any tax, the IRS would send them a check "refunding" their theoretical tax payment.

The additional money would make it possible for many more qualified students to attend a community college or a four-year college. Moreover, making college more accessible for lower-income Americans is an investment that will pay off not just for the students. How often have we heard politicians say that a better-educated workforce would make our businesses more profitable and more competitive in this global economy? It's time for politicians to act as if they mean it.