[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
TAX INCENTIVES FOR
POST SECONDARY EDUCATION
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HEARING
before the
SUBCOMMITTEE ON SELECT REVENUE MEASURES
of the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
MAY 1, 2008
__________
Serial No. 110-80
__________
Printed for the use of the Committee on Ways and Means
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COMMITTEE ON WAYS AND MEANS
CHARLES B. RANGEL, New York, Chairman
FORTNEY PETE STARK, California JIM MCCRERY, Louisiana
SANDER M. LEVIN, Michigan WALLY HERGER, California
JIM MCDERMOTT, Washington DAVE CAMP, Michigan
JOHN LEWIS, Georgia JIM RAMSTAD, Minnesota
RICHARD E. NEAL, Massachusetts SAM JOHNSON, Texas
MICHAEL R. MCNULTY, New York PHIL ENGLISH, Pennsylvania
JOHN S. TANNER, Tennessee JERRY WELLER, Illinois
XAVIER BECERRA, California KENNY HULSHOF, Missouri
LLOYD DOGGETT, Texas RON LEWIS, Kentucky
EARL POMEROY, North Dakota KEVIN BRADY, Texas
STEPHANIE TUBBS JONES, Ohio THOMAS M. REYNOLDS, New York
MIKE THOMPSON, California PAUL RYAN, Wisconsin
JOHN B. LARSON, Connecticut ERIC CANTOR, Virginia
RAHM EMANUEL, Illinois JOHN LINDER, Georgia
EARL BLUMENAUER, Oregon DEVIN NUNES, California
RON KIND, Wisconsin PAT TIBERI, Ohio
BILL PASCRELL, JR., New Jersey JON PORTER, Nevada
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama
Janice Mays, Chief Counsel and Staff Director
Jon Traub, Minority Staff Director
______
SUBCOMMITTEE ON SELECT REVENUE MEASURES
RICHARD E. NEAL, Massachusetts, Chairman
LLOYD DOGGETT, Texas PHIL ENGLISH, Pennsylvania
MIKE THOMPSON, California THOMAS M. REYNOLDS, New York
JOHN B. LARSON, Connecticut ERIC CANTOR, Virginia
ALLYSON Y. SCHWARTZ, Pennsylvania JOHN LINDER, Georgia
JIM MCDERMOTT, Washington PAUL RYAN, Wisconsin
RAHM EMANUEL, Illinois
EARL BLUMENAUER, Oregon
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also, published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
printed and electronic versions of the hearing record, the process of
converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
__________
Page
Advisory of April 24, 2008 announcing the hearing................ 2
WITNESSES
Michael Brostek, Director, Tax Issues, Strategic Issues Team,
United States Government Accountability Office................. 7
Karen Gilbreath Sowell, Deputy Assistant Secretary for Tax
Policy, United States Treasury Department...................... 55
Debra M. Townsley, President, Nichols College, Dudley,
Massachusetts.................................................. 84
Wayne Watson Ph.D., Chancellor, City Colleges of Chicago,
Chicago, Illinois.............................................. 89
Susan Dynarski, Associate Professor, Harvard Kennedy School,
Cambridge, Massachusetts....................................... 100
Dan Ebersole, Director, Georgia Office of Treasury and Fiscal
Services, Atlanta, Georgia..................................... 113
SUBMISSIONS FOR THE RECORD
Paul J. LeBlanc, Statement....................................... 133
B. Russell Lockridge, Statement.................................. 134
Dr. Shirley Robinson Pippins, Statement.......................... 134
Experience Wave and the Council for Adult and Experiential
Learning, Statement............................................ 135
Joseph B. Moore, Statement....................................... 139
Reid Cramer, Statement........................................... 139
Robert Shireman, Statement....................................... 143
TAX INCENTIVES FOR
POST SECONDARY EDUCATION
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THURSDAY, MAY 1, 2008
U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Select Revenue Measures,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:00 a.m., in
Room 1100, Longworth House Office Building, the Honorable
Richard E. Neal [Chairman of the Subcommittee] presiding.
HEARING ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS
Neal Announces Hearing on
Education Tax Incentives
April 24, 2008
By (202) 225-5522
House Ways and Means Select Revenue Measures Subcommittee Chairman
Richard E. Neal (D-MA) announced today that the Subcommittee on Select
Revenue Measures will hold a hearing on tax incentives for
postsecondary education. The hearing will take place on Thursday, May
1, 2008, in the main Committee hearing room, 1100 Longworth House
Office Building, beginning at 10:00 a.m.
Oral testimony at this hearing will be limited to invited witnesses
only. However, any individual or organization not scheduled for an oral
appearance may submit a written statement for consideration by the
Committee and for inclusion in the printed record of the hearing.
FOCUS OF THE HEARING:
The hearing will focus on various tax benefits currently provided
for postsecondary education. The Internal Revenue Code currently
provides several tax benefits designed to encourage the pursuit of, and
assist in the payment for, educational studies beyond the secondary
level. The hearing will examine the interaction of many of these
benefits, the complexity associated with them, and whether these
benefits can be simplified to make them more efficient and effective.
BACKGROUND:
The complexity surrounding the Code has grown in recent years. The
laws that apply to tax incentives for postsecondary education do not
escape these growing concerns. The many education tax benefits come
with complex rules that restrict how these products can be used
separately and in combination with other similar benefits. Some of
these benefits may be more beneficial to taxpayers if saving begins
when the child is young. Such benefits include (1) the Coverdell
education savings account; (2) a Section 529 college savings or prepaid
tuition-and-fee plan; (3) U.S. education savings bonds; and (4)
penalty-free withdrawals from an Individual Retirement Account (IRA).
Other tax incentives relate to the tax treatment of current
educational expenses. With respect to these benefits, the taxpayer must
decide which benefit provides the greatest tax savings and without
violating rules preventing ``double dipping'' between certain tax
benefits. The available benefits are (1) the Hope Credit; (2) the
Lifetime Learning Credit; (3) the deduction for tuition and fees; and
(4) the deduction for interest on student loans. One limitation of each
of these provisions is that they do not benefit families who have no
income liability. In addition, many of the benefits are phased out for
taxpayers with income above certain thresholds. The complexity and
interaction of these provisions can result in confusion and less than
optimal choices by the taxpayer. Thus, simplification of our current
structure may be necessary to produce greater efficiency and increased
access for taxpayers who need as much help as possible with rising
college costs.
In announcing the hearing, Chairman Neal stated, ``With more than
ten million families claiming tax benefits to help finance higher
education each year, Congress must ensure that these benefits work as
intended. This hearing will explore whether complexity in the current
system means that families do not fully utilize these benefits, and
provide recommendations for improvement.''
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noted above.
Chairman NEAL. Let me call this meeting of the Select
Revenue Measures Subcommittee to order.
Part of the American Dream has always been the hope that
our kids will do better than us, and a college education is one
way to ensure that. As the parent of four kids, I can tell you
that matters. And how you prepare for college often times
requires the need for some help.
I thought I had it tough when I went to college. First
generation college student from my family, I worked in a bakery
for all four years to pay tuition and fees, drove a 1963 Impala
back and forth to a commuter college.
And, in the next generation, as a parent, I found myself
with three of my four kids in college at the same time. While I
felt blessed that they had been admitted to excellent schools--
Springfield College, Trinity College, and Boston College--the
combined private school tuition was simply overwhelming, even
for a Member of Congress.
During the peak tuition year of $90,000, I actually
qualified for financial aid, with 3 kids attending private
universities. So I did what most American families do: I took
out a second mortgage on my home, I got a second job, teaching
at the University of Massachusetts, and I borrowed from my
retirement account.
Part of the bargain was that each of my kids would commit
to pay for one year on their own. All of us will be paying off
this debt for years to come. And, in my instance, one example,
I will finish the last tuition payment when I am 68 years old.
But I cannot imagine any other decision for my children. It
was an investment in our future, and, most importantly, their
future. And imagine my relief when my last child, with a
spectacular jump shot, received a four-year scholarship to play
basketball at the division one level at La Salle University. I
thought, at that juncture, there really is justice.
Franklin Roosevelt noted that school is the last
expenditure upon which America should be willing to economize.
I certainly understand that sentiment. Congress has responded
over the years by creating a variety of tax benefits for
families with higher education costs. We may have over-
responded, though, with conflicting and overlapping incentives.
GAO will tell us today that a quarter of taxpayers with
education expenses either don't claim the right tax benefits,
or miss those incentives all together. And half of those tax
returns were done by professional preparers. We will also hear
that these incentives may help keep down the cost of those
already attending college, but may not help those for whom
college is out of reach.
We have assembled a diverse set of witnesses who will
explain these issues and offer suggestions about how to improve
these incentives.
And I must say, as I conclude this opening statement, to
those who are seeking the Presidency, or those who are seeking
Federal office, this is the sort of issue that the American
people are talking about every day. This is precisely where
Congressional focus ought to be. And you talk about timing.
I now would like to recognize my friend, and the Ranking
Member, and the gentleman from Pennsylvania, Mr. English, for
his opening statement.
Mr. ENGLISH. Thank you, Mr. Chairman, and I am going to
keep this brief. This is an area of great interest to me, and
has been since I came to the Committee, as the Chairman well
knows.
Access to higher education for every American who strives
to achieve a college education has long been a priority, not
only for me, but for a whole range of leaders in this
institution.
I look forward to an examination of the benefits and
shortcomings of the current maze of tax incentives for higher
education. As a long-time advocate of breaking down the
barriers to college savings, I have engaged with my colleagues
on the Committee to advance many of the programs that we're
going to hear about from the witnesses today, including the
tuition deduction, the Section 529 plans, like the Pennsylvania
tuition account program, and expanding the deductibility of the
student loan interest.
In my view, education is an investment in the future.
Congress has a fundamental responsibility to encourage the
pursuit of higher education, and to allow individuals in a free
society to maximize their opportunities. In a good faith effort
to achieve these goals, Congress has created a myriad of tax
provisions to help save for college, and to make college more
affordable. Some of these are coordinated with educational aid
programs; some of them, frankly, are not.
With respect to the tax credits, the testimony that we will
receive today will reveal something that comes as little
surprise to any of us, that the credits are complex, and as a
result, many working families who should benefit from them fail
to do so. Today's hearing will give us a chance to consider
whether simplification of those policies, those credits, making
them partially refundable, as proposed by my colleagues, Mr.
Emanuel and Mr. Camp, would increase access to affordable
higher education. It is my sense that it would.
Simplification, which I know is dear to your heart, Mr.
Chairman, as in other areas of the Tax Code, would likely be a
good start in the area of education tax policy. In my view,
however, we should also ensure that we maintain the broader
goal of simplification and realignment, and that these do not
disadvantage students and working families in the short run.
To that end, Congress should ensure that the expired
tuition deduction and other education incentives that are
anticipated to expire in 2010 should be extended or made
permanent until any consolidated program is put in place. I
have introduced legislation in congress to do that.
If I might, Mr. Chairman, if it is appropriate, I would
like to yield to my colleague, Mr. Camp, who is an original
sponsor--the number two sponsor--of this legislation, that he
might complete my statement.
Mr. CAMP. Well, thank you. I want thank the gentleman for
yielding to me, and thank you, Chairman Neal, for holding this
hearing on education tax incentives.
Frankly, this is an area of the Tax Code that is long
overdue for reform and simplification. I am glad the
Subcommittee is taking a closer look at this issue. And
hopefully the Committee will use this hearing as a platform in
which we can make some real improvements to the current
confusing maze of credits and deductions.
I would also like to recognize my colleague on the
Committee, Congressman Rahm Emanuel. Together, we introduced
the Universal Higher Education and Lifetime Learning Act. Our
bill really goes to the heart of reform and simplification.
I know that several of the witnesses here today will
discuss our bill in greater detail, but the key point of our
legislation is to strengthen and simplify the three existing
tax breaks students currently used to help pay for higher
education: the Hope Scholarship, the Lifetime Learning Credit,
and the deduction for tuition and fees. These three existing
tax breaks I mentioned all have different rules for eligibility
and differing maximum credit amounts.
Americans shouldn't have to be experts to take advantage of
these incentives, and it's no wonder that the Government
Accountability Office found that many Americans don't use these
incentives. In its 2006 report, GAO found that 77 percent of
the 2002 tax returns were eligible to claim 1 or more of these
3 tax preferences. However, GAO found that 27 percent of those
returns--about 374,000 Americans and their families--failed to
use any of them.
Our bill combines and simplifies these credits into one
larger $3,000 tax credit. By eliminating the complexity and
duplication, more students will get the financial help Congress
intended. It's a common sense proposal that will help more
young adults get the college degree and technical skills they
will need to excel in life.
Again, thank you for giving me the opportunity to be here
today in support of this bill, and I look forward to working
with you, Mr. Chairman, and Ranking Member English, and Mr.
Emanuel in advancing this bill in the Committee. Thank you, and
I yield back.
Chairman NEAL. Thank you, Mr. Camp. Let me welcome our
witnesses this morning. On the first panel we will hear from
Mike Brostek, the Director of Tax Issues at the GAO, who will
be accompanied by George Scott, Director of Education Issues at
the GAO. They have studied not only tax incentives, but also
how these interact with Federal aid programs.
We also welcome, for the first time before the committee,
Ms. Karen Gilbreath Sowell, Deputy Assistant Secretary for Tax
Policy, United States Treasury Department.
On our second panel we will hear from Dr. Debra Townsley,
the President of Nichols College, in Dudley, Massachusetts.
Nichols is a private, four-year college, and a member of the
National Association of Independent Colleges and Universities.
We will also welcome Dr. Wayne Watson, the Chancellor of
City Colleges of Chicago, in Chicago, Illinois. Dr. Watson will
share his perspective as Chancellor, and the views of the
American Association of Community Colleges.
Next we will hear from Dr. Susan Dynarski, a professor at
Harvard University's Kennedy School of Government, in
Cambridge, Massachusetts. Dr. Dynarski has written extensively
on the efficiency of tax incentives.
And, finally, we welcome Dr. Dan Ebersole, of the Georgia
Office of Treasury and Fiscal Affairs in Atlanta, Georgia. Mr.
Ebersole will share his thoughts as the Director of the office
administering the Georgia 529 college savings plan. He also
serves as the Chair of the College Savings Plan Network, an
affiliate of the National Associate of State Treasurers, which
represents the interests of state-run 529 plans.
Without objection, any other Members wishing to return
statements as part of the record may do so. All written
statements written by the witnesses will be inserted into the
record, as well.
And with that, let me recognize Mr. Brostek.
STATEMENT OF MICHAEL BROSTEK, DIRECTOR, TAX ISSUES, STRATEGIC
ISSUES TEAM, UNITED STATES GOVERNMENT ACCOUNTABILITY OFFICE,
ACCOMPANIED BY GEORGE A. SCOTT, DIRECTOR, EDUCATION ISSUES,
EDUCATION, WORKFORCE, AND INCOME SECURITY, UNITED STATES
GOVERNMENT ACCOUNTABILITY OFFICE
Mr. BROSTEK. Chairman Neal, Mr. English, and Members of the
Subcommittee, thank you for the opportunity to testify today on
the Federal Government's efforts to financially support
attendance at post-secondary education institutions.
American higher education has long been crucial to the
development of our nation's cultural, social, and economic
capital. This hearing is an opportunity to consider whether any
changes should be made in the government's overall strategy for
providing such assistance, or to individual assistance programs
and tax provisions.
This is important, because we face large and growing future
deficits, and we need to consider how the government allocates
its resources. In addition, GAO has noted that a fundamental
re-examination of government programs, policies, and priorities
is necessary to ensure they match 21st century needs.
My statement focuses on four topics: differences between
tax preferences and Title IV assistance; apparent ineffective
use of tax preferences, possibly due to their complexity; some
issues that may arise if simplification is pursued; and the
lack of research about post-secondary education assistance
outcomes.
Post-secondary student financial assistance provided
through programs authorized by Title IV in the Tax Code differ
in three key ways.
First, Title IV grant and loan programs traditional provide
aid to students while they are in college. Tax preferences help
while in college, but also help families save before and pay
after college.
Next, while student aid programs and tax preferences serve
students and families across a wide range of income groups,
some Title IV programs, particularly the Pell Grant program,
provide much of their assistance to students in families with
lower average incomes.
For Pell Grants to dependent students, 92 percent of the
dollars, went to families with incomes of less than $40,000 in
school year 2003-2004. In contrast, in 2005, 60 percent of the
benefit of the tuition deduction went to families with incomes
exceeding $80,000.
Students and families also have more responsibility for
appropriately using tax preferences, compared with Title IV
aid. For Title IV aid, students and families fill out the free
application for Federal student aid form, and submit it to the
Department of Education. The education department calculates
the student's and family's expected family contribution. The
student's educational institutions, then, determine aid
eligibility, the amounts, and packaging of awards.
In contrast, users of tax benefits must identify all the
applicable preferences, understand the rules, understand how
these preferences interact with one another, and with Federal
student aid, keep records sufficient to support their tax
filing, and correctly claim any credit or deduction on their
returns.
These tax preferences can be difficult for families to
understand. Perhaps due to their complexity, hundreds of
thousands of taxpayers failed to claim tax benefits that they
are entitled to, or did not claim tax benefits that would be
most advantageous to them.
For example, for tax year 2005, we estimate that about
410,000 taxpayers--for whom we could make an estimate--failed
to claim an education credit or the tuition deduction to which
they were entitled. About 190,000 additional taxpayers used one
provision, when another would have been better for them. About
half of those taxpayers making sub-optimal choices used paid
preparers.
The complexity of post-secondary education programs might
be simplified by consolidating them, perhaps as a single credit
or otherwise. Such simplification might well reduce confusion
among taxpayers. In considering simplification, some key issues
would need to be understood, such as whether the benefits would
be provided before costs are incurred, versus afterward, or the
budgetary consequences of differing simplification options.
Finally, we found that Congress has received little
evidence concerning the effectiveness of assistance provided
under either Title IV, or through the tax preferences, in
promoting, for example, post-secondary attendance or choice
amongst educational institutions.
We found no research on any aspect of effectiveness for
several major Title IV programs and tax preferences. For
example, no research had examined the effects of education tax
preferences on students' persistence in their studies, or the
type of institution they chose to attend. Gaps in research on
post-secondary education programs may be due in part to data,
methodological challenges that have proven difficult to
overcome.
The relative newness of most of the preferences also
presents challenges, because relevant data are just now
becoming available.
That concludes my statement. Mr. Scott and I will be happy
to answer questions.
[The prepared statement of Michael Brostek follows:]
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Chairman NEAL. Mr. Scott, you can proceed.
Mr. SCOTT. I don't have a statement at this time, Mr.
Chairman. I am here to answer questions.
Chairman NEAL. Okay. Ms. Sowell.
STATEMENT OF KAREN GILBREATH SOWELL, DEPUTY ASSISTANT SECRETARY
FOR TAX POLICY, UNITED STATES TREASURY DEPARTMENT
Ms. SOWELL. Mr. Chairman, Ranking Member English, and
distinguished Members of the Subcommittee, thank you for the
opportunity to appear before the Subcommittee today to discuss
tax incentives for higher education.
Education is important to the Administration, and we
recognize there may be room for improvement in the tax benefits
currently provided through the Internal Revenue Code to
encourage higher education. We believe, as you do, that it is
important, periodically, to assess the provisions within our
Tax Code to determine whether modifications are warranted, and
we appreciate your leadership in studying this important
subject.
From a broad perspective, it is also important that we keep
in mind that these tax incentives are just one aspect of an
array of governmental and other programs that help individuals
and families meet the challenge of financing higher education
and that figure into their decisions regarding higher
education.
While I am not an expert on the non-tax offerings, we
believe the non-tax programs must be taken into account when
assessing the efficacy of the higher education tax incentives.
My testimony today highlights the myriad tax incentives
enacted over several decades to help families save for college
and finance higher education. From available data, we know that
certain of these incentives are being utilized by a significant
number of America's students and families.
However, our available data does not tell us whether the
incentives are being used optimally by taxpayers to maximize
their benefits. Further, it does not tell us whether the
incentives are effective in influencing higher learning
choices, or if, instead, they are simply furthering the goal of
making higher education more affordable.
For individuals and families who have the ability and who
have the sufficient time to save in advance for higher
education, there are significant tax benefits to assist them.
The Administration and Congress have made considerable
progress during the past seven years to improve savings-related
incentives, notably the 2001 tax legislation expanded Coverdell
education savings accounts and Section 529 plans to make
distribution from plan accounts for post-secondary education
expenses tax-free, and to allow private educational
institutions to create Section 529 plans. The Pension
Protection Act of 2006 made the changes to Section 529
permanent, which helped eliminate uncertainty with respect to
this education savings vehicle.
Further, the Administration's budget for Fiscal Year 2009
includes a proposal to extend the Saver's Credit for
contributions to Section 529 plans, in order to encourage and
assist low-income families in saving for higher education.
Those students and families who are facing immediate
education-related costs without the benefit of savings,
however, confront a patchwork of education-related tax
incentives, that are complex, often overlapping, and can have
varying applications to individuals in different circumstances.
For example, tax credits and deductions to help families
pay for higher education include the Hope Credit and the
Lifetime Learning Credit. Parents supporting college students
may claim a personal exemption, or Earned Income Tax Credit, if
applicable, for full-time students aged 19 through 23, where
children over the age of 18 otherwise do not qualify as
dependents.
To name a few others, a student may exclude from gross
income the amount of a qualified scholarship, or a loan that is
forgiven if a student works for a required period of time in
certain professions or locations. There is also an unlimited
gift tax exclusion for tuition paid directly to a school on
behalf of a student.
Given the range of available education tax benefits, it is
understandable that many find them difficult to parse. The
incentives vary, in terms of who may receive benefits, which
expenses may be covered, and how large an allowed exclusion,
deduction, or credit may be.
For example, part-time students may be eligible for the
education credits and savings interest exclusion. Only full-
time students may qualify for the dependent deduction. Some
provisions, like the Hope Credit, are calculated per student,
while others, like the Lifetime Learning Credit and the student
loan interest deduction, are calculated per taxpayer. Different
expenses qualify under different provisions, and phase-outs
with different income thresholds apply to different incentives.
Because of this complexity, it may be difficult for a
student or parent to determine the value of the tax incentives.
In addition, the value of incentives based on adjusted gross
income is necessarily retrospective, unless the student or
parents can predict their income with precision. The more
difficult it is to predict the value of the tax benefit
accurately, the less effective these benefits are as incentives
for the pursuit of higher education.
My written testimony includes a number of examples that
illustrate the complex nature of the existing tax provisions
and the differing outcomes that can occur for students and
families in different situations.
In conclusion, while there is clearly a need to address the
complexity concerns arising from the current welter of tax
incentives, it is important to remain cognizant that revisions
to the tax regime may lead to unintended consequences.
Recognizing budgetary constraints, legislative reform of
existing tax incentives will almost invariably result in
winners and losers.
Further, considering that the population of students spans
so many circumstances and situations, there may be no one-size-
fits-all solution. Legislative reform of tax incentives would
also need to address transition issues for those students and
families who currently rely on existing provisions, or plan on
them in the near term, to minimize the adverse effects of any
reform on educational pursuits.
Thank you again, Mr. Chairman, Ranking Member English, and
distinguished Members of the Subcommittee, for this opportunity
to participate today. I would be pleased to respond to your
questions.
[The prepared statement of Karen Sowell follows:]
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Chairman NEAL. Thank you very much, Ms. Gilbreath Sowell.
In discussing your testimony with my staff, I concluded that we
were pretty impressed with the details that you offered. And
considering that this is your inaugural visit to the Committee,
you certainly took the task seriously.
In the examples you have included of the confusing choices
the typical family might face are extremely instructive for the
Committee. On the much tougher question of how we simplify,
however, your testimony is more silent. And I don't blame you.
Obviously, the choices are not easy. But I know the
Administration has proposed some changes to the tax benefits in
the past.
Can you tell us whether Treasury is currently looking at an
effort to craft a simplified education tax benefit, or are
there any proposals that are ruminating through the Department?
Ms. SOWELL. Thank you for your question, Mr. Chairman, and
I might add that I am very impressed with the funding that you
have provided for your family in these education endeavors.
Chairman NEAL. I will be working until I'm 90.
[Laughter.]
Ms. SOWELL. As I mentioned, over this Administration, this
Administration and this Congress have provided significant
adjustments to the savings-related incentives for education.
And those are permanent adjustments that should serve families
well going forward.
There have been significant advancements in the Section 529
accounts and Coverdell savings accounts to allow for tax-free
dollars for post-secondary education. And in addition, our
current budget proposes to extend the Saver's Credit to the
Section 529 savings plans.
As you also are aware, in our Fiscal Year 2005 budget, we
recommended simplifying and bringing together some of these tax
incentives for simplification purposes.
Chairman NEAL. And, Mr. Brostek, your research is
astounding: 28 percent of the filers either missed education
tax benefits, or did not claim the right benefit for the
maximum credit.
GAO recommended some time ago that the Department of
Education, consulting with Treasury, study the effectiveness of
the combined aid and tax programs, but little has really been
done. Do you think that a very detailed Federal financial aid
form--which, by the way, is pretty challenging--might be one
place where families could be tipped off to the potential tax
benefits, or is it already so complex that this would simply
confuse the matter?
Mr. BROSTEK. Well, that's certainly an option. As you
rightfully note, though, that is a long and quite complex form.
And it is filled out before assistance is provided, whereas the
tax benefits, other than the savings provisions, are generally
after the expenses have occurred.
I think it might be better to have a flag like that when it
would be contemporaneous with the taxpayer making a decision
about which provision to use.
So, for instance, the educational institutions send the
taxpayer a Form 1098-T that indicates their child did attend
the institution, and also, in some cases, includes the
expenses. That form might be a better place to flag to the
taxpayer that they can use various tax benefits, and that they
need to carefully select among them to choose the one that's
best for them.
Chairman NEAL. And, Ms. Gilbreath Sowell, you mentioned the
burdens on taxpayers of claiming these benefits, including
additional and more complicated tax forms.
After reading your taxpayer examples, where the wrong
choice penalizes the taxpayer by hundreds of dollars, it seems
we are already forcing these families to seek professional tax
assistance, and that certainly lends itself to additional
costs. Is that counter-intuitive?
Ms. SOWELL. Mr. Chairman, you are correct, that whenever
there are multiple tax provisions that could apply to a single
expenditure, that creates complexity.
I will note that the Treasury Department and the IRS have
worked very closely with the Department of Education to provide
information to the Education Department that could be
disseminated to students and families.
In addition, the IRS has a very thoughtful 80-page
publication that tries to identify all the tax provisions that
are available in a plain-English style, with computational aids
that can help families figure this out. I am actually quite
impressed with the publication. If you have had an opportunity
to look through it--which I would guess you have, based on your
experience--it is a very useful tool.
That said, I have no doubt that, because of the complexity,
there are things that are missed, and possibly options that are
not taken by students and families that should be taken.
Chairman NEAL. Before I yield to Mr. English, in every
January I host two forums on financial aid, where we assemble
experts from across the field, and invite constituents to
attend.
I must tell you, the crowds are overwhelming. And much of
it relates to the whole issue of complexity. And the people
that walk through that door of good will and good purpose are
genuinely confused by the options that are available to them.
Seminars typically last for two hours.
And I must tell you again, nobody gets up to leave. They
stay through the whole demonstration process, and they leave
maybe with a little bit of relief that they're going to get
through it.
But again, the issue of complexity threatens to overwhelm
the process. And with that, I would like to yield to Mr.
English.
Mr. ENGLISH. Thank you, Mr. Chairman. And I guess my
questions will follow very much in the same vein.
Mr. Brostek, in examining this field, I understand many
experts believe that taxpayers are often simply not aware of
the existence of the Hope or Lifetime Learning tax credits when
making a decision about whether to send a child to college, or
how much college they can afford.
Instead, for those taxpayers, the credits come as a
surprise the following April, when they file their taxes. Did
any of your research confirm this?
Mr. BROSTEK. We didn't gather any specific information on
that. But, given the number of individuals we found who didn't
claim any of the provisions, I can certainly suppose that many
people were unaware of them.
Mr. ENGLISH. What are Congress's options, apart from
simplification, which I strongly supportive of, to make sure
that the credits have their desired effect of helping people
who are making a decision about whether they can afford
college?
Mr. BROSTEK. There I think it would have to be educational
assistance before the expenses are incurred, before a decision
is made to go to college. And it is possible that additional
assistance with the form--perhaps not on the form, but
accompanying it--would be made available to taxpayers, to help
them understand that there are tax benefits available, and how
much those benefits might be worth.
Perhaps there could be some tools made available, either at
the IRS or perhaps in the Department of Education, for people
who have computer access, to go in and get some sense, if they
had their current financial circumstances, how much aid might
they get if they use one of the benefits.
Mr. ENGLISH. In your testimony you note that 19 percent of
tax returns that showed eligibility for 1 of the Federal tax
benefits for higher education had failed to claim it. You also
said that many of these returns were prepared by professional
preparers.
The latter fact is especially disturbing. Did you attempt
to determine why even professional preparers failed to claim
available education tax benefits for their clients?
Mr. BROSTEK. We haven't determined that, but we have at
least a little bit of indirect evidence. A couple of years ago
we did some mystery shopping during the tax season. We went
into some paid preparers, pretending to be taxpayers under a
couple of scenarios, one of which was an individual who had a
child who was eligible for one of these tax benefits.
And the impression we had was that the paid preparers were
not all that knowledgeable themselves, and the software
programs--almost all paid preparers use software programs--
didn't seem to be giving them the kind of prompts that may have
helped the paid preparers determine what would be the best
option to make available to their client.
Mr. ENGLISH. Now, on a rather different angle, Mr. Brostek,
according to the National Association of College and University
Business Officers, in 2006 the 7 universities with the largest
endowments were sitting on more than $100 billion of endowment
assets. Average endowment asset growth at these schools was 17
percent from the year before.
Some of these endowment dollars are from years of tax-
exempt investment income earned by the universities. Some of
these endowment dollars are from charitable contributions, for
which a deduction was taken decades ago, yet the university has
not yet used the money for an educational purpose
Has the GAO examined whether we are getting a good rate of
return on our investment, such as through lower tuitions or
greater financial aid for students in need? And shouldn't we be
asking questions about universities that sharply raise tuition,
at the same time balances in their endowment increase even
faster?
Mr. BROSTEK. While we haven't directly studied that issue,
it certainly is an important one. Some of those endowments are
indeed extremely large. There are a number of issues that would
need to be considered.
A significant portion of endowments, as I understand it,
have strings attached. The donation to the institution requires
that money to be used for various identified purposes which
may, to some extent, constrict the college's ability to use it
for student assistance directly, for instance.
I do think it's a very important topic. As you note, it's a
relatively small number of institutions that have the very
large endowments, and there are many, many more institutions
who don't have those endowments but have needy students.
Mr. ENGLISH. Thank you, Mr. Chairman.
Chairman NEAL. Thank you, Mr. English. Mr. McDermott will
inquire.
Mr. MCDERMOTT. Thank you, Mr. Chairman. Having represented
the University of Washington in the State Legislature and the
United States Congress for almost 40 years, I am somewhat
familiar with the complexity of what you're up to.
So, I would like to ask you a question. I would like you to
step out of your role here and be a counselor at the University
of Washington, or at the Seattle Central Community College,
which Newsweek said was the best community college in the
United States.
A young woman comes in, single, $30,000 salary as a
secretary. She has two kids. She has one year down at the
community college. She is trying to go from being a secretary
to a legal assistant in the office in which she is working.
Which program should she try to access?
Mr. BROSTEK. Well, that's a very good question, and I
would----
Mr. MCDERMOTT. Thank you. I appreciate that. That's a vote
of confidence.
Mr. BROSTEK. I would have to do some research on the
situation.
Mr. MCDERMOTT. Why would you have to do research?
Mr. BROSTEK. Well----
Mr. MCDERMOTT. You guys have been studying this stuff.
Mr. BROSTEK. Well, there is a bit of a difference between
doing the research that we have done on--from the tax records,
how many people may have made a poor choice, to actually
analyzing the specific situation of an individual that is
involved.
And I have to admit that a lot of the expertise that went
behind our calculations on who made the best choice was not my
own personal expertise, but the expertise of people who work
with me in my office.
Mr. MCDERMOTT. Do either of the others have any idea what
you would tell this young woman who is trying to get ahead?
Mr. SCOTT. I think some of the question you raised, and
more generally, the issues that are involved here, get at the
heart of why the complexities surrounding the tax preferences,
as well as the tile four Higher Education Act programs are
important, in terms of looking for ways to enhance the
financial literacy of students.
Mr. MCDERMOTT. She can't access Title IV, can she? She has
to go half-time, and she is working full-time and raising two
kids on $30,000. So the likelihood of her going to school full-
time is probably pretty small, isn't it?
Mr. SCOTT. Well, you know, it depends on her financial
circumstances, generally. There are a broad range of programs,
both under Title IV, as well as institutional-based programs
that she might be eligible for.
But, as I mentioned, that's the importance of having sound
financial advisors and student financial advisors on campus to
help assist her, in terms of making sure that she applies for
the broad range of programs that she might be eligible for.
Mr. MCDERMOTT. Did you look at the question of whether any
of the colleges had those kinds of advisors in sufficient
numbers to actually help them figure out this maze?
Mr. SCOTT. For this study, we did not look at the
availability of student financial aid advisors on campus.
Generally though, most colleges and universities and community
colleges do have a number of staff who are available in the
financial aid office to assist students.
The financial aid offices are the ones who, based on the
information they receive from the Department of Education, from
the FAFSA form, developed a financial aid package for students.
Mr. MCDERMOTT. Where do they get the money to finance the
financial aid office?
Mr. SCOTT. My assumption would be that is basically general
administrative costs borne by the university.
Mr. MCDERMOTT. So we don't put any money into these
programs that could be accessed by schools to finance their
financial aid office.
It has to be out of state money or tuition money, or some
other place that they might come up with the money to hire the
people who are smart enough to help this young woman figure out
how to work the way through the maze?
Mr. SCOTT. I am not aware of any direct Federal subsidy to
assist schools with the financial aid, administration of
financial aid.
Mr. MCDERMOTT. And is there--are the programs that she is
going to be offered--I mean can you generally tell me? Would it
be better for her to take tax credits or a grant up front? Or
can she get a grant? Does anybody know?
Mr. BROSTEK. Well, as I am sure that you do know, there are
lots of grants that are available from sources other than the
Federal Government. And certainly a financial aid officer,
hopefully, would be aware of some of those opportunities that
might be available, locally.
I think in the circumstance you're describing, the
individual probably could claim the Life--I mean the Hope tax
credit. But again, I would have to study the specific situation
to be sure.
Mr. MCDERMOTT. I yield back the balance of my time, Mr.
Chairman. It is pretty clear that you have to have a Ph.D. to
wind your way through the financial aid system. And that is
standing in the way of an awful lot of people accessing--she
can't--this woman that I am talking about--can't take courses
if it is not related to her work and get the tax credit,
because it has to be just sort of related--Boeing can give
their employees time off, as long as it's supposedly related to
what the Boeing Aircraft Company does.
But if they want to get themselves upgraded somewhere else,
tax credits don't seem to work very well. I yield back the
balance.
Chairman NEAL. I thank the gentleman. The gentleman from
Georgia, Mr. Linder.
Mr. LINDER. Thank you, Mr. Chairman. Ms. Sowell, between
1990 and 2005, Federal aid to students increased by 77 percent,
and enrollment increased by 26 percent. Why this disconnect?
And why should we expect that this change is going to increase
enrollment?
Ms. SOWELL. Congressman Linder, that is a very interesting
observation that you are making. I must say that I am not
really qualified to make any observation on my own, with
respect to that.
Mr. LINDER. Mr. Brostek.
Mr. BROSTEK. We haven't studied that, either. George, do
you have any----
Mr. LINDER. Thank you. Wasn't able to say.
Chairman NEAL. With that, the gentleman from Connecticut--
maybe we could--okay, perhaps we will move to the gentleman
from Illinois, Mr. Emanuel, for inquiry.
Mr. EMANUEL. Thank you, Mr. Chairman. Thank you for holding
this. I also note that the cosponsor of our legislation on
simplification, Congressman Camp, was also here earlier. And I
would also like to acknowledge Dr. Watson, who is head of the
community colleges in Chicago--he is going to be testifying--
and for holding this hearing, both to you and to the Ranking
Member.
You know, I mean, what we have here--and I want to follow
up on what my colleague, Jim McDermott, was talking about--and
I helped in 1997, when we did the balanced budget, creating
Hope and Lifetime credits. Our intention here is a good thing.
It got messed up.
We just--one of the good things we will do is, if we figure
it out and acknowledge when you have 12 different credits and
deductions on the books with different instructions, all trying
to help people do one thing, go to college, it's time for some
reforms, because when 28 percent over a quarter can't get it
right, either are missing, are not filling it out right, errors
in their judgement, not getting the right type of credit or
deduction or missing dollars, we have a problem, Houston. We've
got a problem here.
And when the IRS--and the GAO, I think, found this out--
even H&R Block, which has professionals, 50 percent of the time
got it wrong, that is why Jim's example--there is no way this
woman will get it right. And these are well-intentioned
programs.
And as somebody who helped pass this, both the Hope and the
Lifetime tax credit being the two kind of more significant of
the 12, we--I believe it's time for reform to consolidate,
which is why Dave Camp and I introduced this legislation,
bipartisan legislation, with a lot of sponsors here, on the
Ways and Means Committee, because it is imperative that if
people are not getting the deductions or the dollars or the
resources they need to get the education, they not only suffer,
but the country suffers.
And the single largest reason people are not going to
college, be that a community college or a four-year
institution, is cost. The average graduate today graduates with
$19,000 in debt. So before they even get their diploma they get
their first Visa bill. And this is crazy.
Now, we have introduced this legislation to make it more
uniform, and to bring it in line where you consolidate the top
three and have all the standard deductions, so you get--there
is 80 pages of recommendations on how to fill it out. Get rid
of that, because if it's too complicated and you need a Ph.D.
before you fill out the information to get your bachelor's, we
got a serious issue here.
One question, though, for the Administration which I--
Treasury--which I don't understand, in 2005--in the 2005
budget, the President had proposed a series of reforms to
consolidation, et cetera. But the recent budget didn't.
I can't believe that folks in the Treasury thought that we
had been making a lot of improvements here, and that some--I
mean, either this is an oversight, a mistake, you know, or
there is another statement here. What is the reason for that?
Ms. SOWELL. Congressman Emanuel, you raise some very
interesting points in your question. The mere fact that our
2005 budget proposal is not included in subsequent years does
not indicate that we are not in support of simplification of
this complex web of tax incentives.
As your colleague, Congressman McDermott, pointed out,
assessing the tax incentive program and where we should go from
here inevitably requires a hard look at all the other
incentives that are available through the Federal Government,
as well as private institutions.
Mr. EMANUEL. Well, I am going to take that as an oversight
then, because I guess--I mean, I don't understand what you did
in--in 2005 you thought it was good enough. And whatever it is,
it is our responsibility here in congress to take this up.
I would like to note one thing on the--if I can, Mr.
Chairman--on the legislation, and I know the Ranking Member
also spoke about it, and I want to thank him--in favor of it--
is that if you consolidate Hope, Lifetime, and the other
credits, you would apply both to community colleges, four-year
institutions, and graduate schools, and have a standard $3,000.
We would go a long way towards simplification.
So, before we get to the debate of other things we got to
do, or other resources, simplification would increase
participation. That is true also, as we have argued before, on
the Earned Income Tax Credit (EITC), where we have great
programs that--participation rates are low because of
complexity, not because of missed something else that's wrong
with the program.
And I happen--in my office we have helped people fill out
tax returns in the Earned Income Tax Credit area every year. We
do over $1 million in EITC returns, and we need professionals
there because of the complexity. And I think that if we did
this, we would get participation rates up here.
I would note one other thing. To fill this out is about 80
pages, recommendations from the IRS. If you are Boeing or
Microsoft, or any other user of the export/import bank, which
has hundreds of lawyers and accountants, the entire form for
the loan is 13 questions. And they got lawyers, and all these
kids got are their parents--not that the parents aren't good,
but the forms for going to college--and, again, the Hope or
Lifetime tax credit or the FAFSA should not be the leading
cause for divorce in America.
[Laughter.]
Mr. EMANUEL. Okay? It's ridiculous. Now, I have nothing
wrong with giving Boeing and--the 13 questions. They figured
out how to make it easy. Let's help these kids and their
parents figure out how to make it easy to go to college. Thank
you, Mr. Chairman.
Chairman NEAL. That was very instructive, Mr. Emanuel.
Mr. EMANUEL. My parents are still married.
[Laughter.]
Chairman NEAL. It occurred to me you might want to start a
column called, ``Dear Rahm.''
All right. With that, the gentlelady from Pennsylvania, Ms.
Schwartz, will inquire.
Ms. SCHWARTZ. Thank you, Mr. Chairman, and thank you for
this hearing. And I really appreciate the work that is being
done by my colleagues to simplify this process.
Certainly, I think many of us have been talking a good deal
about the importance of going to college, of getting a higher
education in this really competitive world we live in. We
understand that access to college is increasingly important.
Always was, but even more so in such a competitive marketplace,
as we compete not only with each other, but certainly with
other countries as well.
The issue that I wanted to raise, in addition to this
simplification, is that I--as I went through the different
initiatives that are available to students, or potential
students, the income limit tends to be at least family income
under about $110,000. That's the upper income I could find in
all these different programs. And certainly in my district,
there are many families that are in that category, but there
are many families who are just above it. And I hear from them a
good bit.
And you know, particularly in this difficult economic time,
two wage earners earning $100,000 seems like a lot of money.
They thought they would be doing fine. But by the time they pay
their mortgage in--even if they got a better one than--didn't
get a really risky one, in the Philadelphia area, Philadelphia
or its suburbs, by the time they pay energy costs, obviously
health care bills are a major concern, maybe helping to support
parents, it's really--the idea of actually finding the hard
dollars--these are after-tax dollars, by and large, you know,
for college tuition, as well as the costs of room and board,
it's really difficult.
And I hear from many parents who are saying how--``I don't
know how I'm going to manage to do this,'' and yet they don't
really qualify for any of these programs if you're making
$120,000, $150,000 a year. And these are people, again, they
thought they would be much more comfortable. They assumed they
could send their kids to college, and they can't.
So, if they have more than one child, and they're actually
close together in age, and if you compound that--which is the
other issue I wanted to ask about, is also about--for non-
traditional students who are going back for additional
education, they are also saying to themselves, ``Well, how
could I possibly afford it,'' maybe at the same time their
children are going to college to be able to find those dollars,
and they may even be earning--they may be working full-time,
earning far more, but know that they need to get other--get a
college degree.
So, could you speak to whether you all agree that we might
need to look at, as we simplify the access to these loans, look
at the income eligibility, as well?
Do you--are you--could you speak to whether, in fact, you
think we're at the right place, or whether you would agree that
there are families that are making more money than are in any
of these programs, but in fact are also finding it very, very
difficult to be able to find the hard cold cash that they need
to go to college?
Mr. BROSTEK. It's clearly an important policy issue for
policy makers, such as yourselves, to decide who should be
assisted by the programs.
On your first example, part of what ran through my mind as
you were speaking, is that there is the college savings route.
And perhaps part of the problem is people not having sufficient
financial literacy early in their careers to understand how
much they need to set aside to fund their hoped-for college
expenses when their children are older.
So, it may not require an adjustment to the assistance that
is available while you're in college. It may require more
education up front of people early in their careers to set
money aside.
Ms. SCHWARTZ. And you determine the 529s, which certainly
we try to do in Pennsylvania, really be aggressive about
telling parents--and grandparents, potentially--about putting
dollars away.
But still, that is a certain amount of outreach to have
people know that it applies to them. What we know is that so
many families assume that they're not actually eligible for
government programs. So that's one that they need to know. But
even if they are doing what they thought they should do, in
terms of savings, it's still hard to have saved that amount of
money for a couple of kids--or maybe three kids, even--to go to
college.
Did anyone else want to make a comment about the upper
income levels? Ms. Sowell?
Ms. SOWELL. I think you make an excellent point, and I
would echo the comments by the GAO.
I think there is also some interesting and important
learning when you compare the current benefits as they relate
to families versus individuals students who are seeking higher
education, and I think that probably needs to go into the
determination of where the benefits would ultimately land.
I would also point out that any kind of wholesale rewriting
of these rules and trying to synthesize them and bring them
together could inevitably result in winners and losers. And
those groups of individuals would need to be assessed to
determine whether that is the right target group.
Ms. SCHWARTZ. All right. Well, it's something I would
actually sort of suggest I might want to have more--further
conversation with my colleagues about, how we do this.
Certainly targeting a low income is something we are deeply
concerned about, because they have the most difficulty. But
again, we are in a position where people who would have thought
they, of course, could go to college are finding themselves not
able to, or dropping out because their families absolutely
can't find the dollars.
So, I think it's something that I think I raise as an issue
for my colleagues, as much as for the panel. Thank you very
much.
Chairman NEAL. I want to thank the panelists, but I have
one last question.
I serve on the Board of Trustees at Mount Holyoke College.
And, Mr. Scott or the other panelists, Malcolm Gladwell
immortalized the term ``tipping point.'' Is there a tipping
point--and I ask this question annually at the Board of
Trustees meeting as tuition is raised--if tuition, for example,
is at $49,000 and the family says, ``We will do that,'' and all
of a sudden tuition goes to $50,000, do they say, ``We won't do
it at $50,000?'' Is there any sort of line that your data would
instruct us to pursue?
Mr. BROSTEK. We don't have any analysis that shows us that
kind of choice, definitively. But it certainly makes intuitive
sense. At some point, something is out of reach.
It does, then, suggest that there are other types of
educational institutions that someone might attend that are
less expensive, but maybe aren't what someone had kind of
dreamed of attending.
Chairman NEAL. Is there also any data that would indicate a
trend line as it pertains to ability to pay? Are we beginning
to see the really great collages--are they more and more taking
into consideration ability to pay, as opposed to a needs-based
assessment, in trying to put together a diverse student body?
Mr. SCOTT. Increasingly, we are seeing some schools--
primarily large schools; we talked about them previously, those
with relatively large endowments--are increasingly looking to
provide more grant aid versus loans, in terms of the financial
aid package.
Once again, now, that's a real small number of schools who
are in a position to do that. Some schools, for example, have
said, that for families with incomes less than $100,000, the
student won't be charged any tuition or fees, for example. Once
again, that's a small number of colleges.
I would like to just add one other thing, that despite the
number of challenges we see families facing, in terms of
sending children to school, when we looked at the data last
fall we did find that the number of folks attending college and
universities is continuing to increase, and that the vast
majority of students are at--or about 60 percent are at schools
charging relatively affordable tuition and fees. Only a small
percentage of students are actually attending college and
universities where the tuition and fees is over $25,000 a year.
So, despite the number of challenges, overall, the higher
education story continues to be a success story----
Mr. EMANUEL. Mr. Chairman, may I address this point when he
is done?
Chairman NEAL. Yes.
Mr. EMANUEL. I don't want to interrupt. Are you done?
Mr. BROSTEK. Yes.
Mr. EMANUEL. That is true, except for that's this side of
the ledger. Four million kids choose not to go to college
because of cost. That's four million people left out of the
American dream.
You are right, it's increasing, but that's a demographic
fact, not the one we're dealing with here, which is how to make
financial access to higher education less intrusive on people's
lives.
So, I would--I want to--although you're right on that
statistic, we're dealing with something else here, which is the
cost of college education, the complexity of the Tax Code,
which is our purview, something we have enacted. Can we make it
better and easier? And when four million people choose not to
go because of cost, we've got a responsibility to see whether
we're a contributing factor to that.
Second, when over a quarter of the people who fill out the
form either don't get the right credit or deduction that's for
them, or B, make errors or mistakes because of the complexity,
that doesn't make us immune from our responsibility to
simplify. So, I agree with you on the demographics. I don't
agree with you on the purview of what this hearing is all
about.
And I left off one thing I wanted to add on my statement
earlier. When we pass the Higher Education Reauthorization bill
in the coming weeks, we will have in there the simplification
of the FAFSA form, which will dramatically reduce the 108
questions down in half, and force it to be consumer-friendly
English, like we force businesses to do. The government form
will actually come down on that.
And that is half the battle. The next half is making the
Tax Code as simplified as we are now doing with the FAFSA form,
which is for student aid. Thank you, Mr. Chairman.
Chairman NEAL. Thank you, Mr. Emanuel. And I want to thank
the panelists for their very informative and instructive
testimony today. And let me at this time call up our second
panel.
Let me welcome our panelists. And as a customary courtesy,
I would like to call on Mr. Emanuel at this time to introduce
one of his constituents.
Mr. EMANUEL. This is Dr. Watson, who runs the community
colleges in Chicago, who is a dear friend. And I just mentioned
the FAFSA form. When--I introduced that legislation when I
first ran for congress to simplify this FAFSA form. Dr. Watson,
with I at the Harold Washington Community College in Chicago in
the loop, was there. And that announcement of six years ago,
almost to the day, in about three weeks from now will hopefully
become law.
And Dr. Watson has been a great leader in making the
community colleges in Chicago--of which I have one, the Wright
community College in my district--is a great leader in
education and in our country, and has been a dear friend of our
family, let alone that we share a similarity, given that I have
a background in ballet and Dr. Watson has a background in tap
dancing. He is a far better dancer and educator.
Chairman NEAL. We thank you very much.
With that, Dr. Townsley, would you proceed?
STATEMENT OF DEBRA M. TOWNSLEY, PRESIDENT, NICHOLS COLLEGE,
DUDLEY, MASSACHUSETTS
Ms. TOWNSLEY. Good morning. Thank you, Mr. Chairman, and
Members of the Committee, for the opportunity to testify today.
I will keep my comments brief, and will leave written testimony
with more details for your review.
My name is Debra Townsley, and I am President of Nichols
College, in Dudley, Massachusetts. Nichols is a four-year
private institution with a student body of more than 1,500 full
and part-time students who are enrolled in Nichols's under-
graduate and graduate programs. We have an alumni body of about
11,000.
The mission of Nichols is to develop tomorrow's leaders
through a dynamic, career-focused business education. More than
90 percent of Nichols students achieve gainful employment in
their field of study within 6 months of graduation. And the
average starting salary of last year's class was about $40,000.
Many of our graduates and students are first-generation
college students. The vast majority of our students--93
percent--are dependent upon financial aid to help pay their
college expenses. Eighty-nine percent receive Nichols College
aid, specifically.
At Nichols College, we have an annual budget of about $27
million, and we give financial aid of about $10 million. Our
college does extensive outreach programs by providing education
and information on access to at-risk populations through
programs like Kids to College and Gear Up.
Our admissions and financial aid staff are active in the
community, facilitating dozens of financial aid information
sessions, both on campus and across the state. And we include
parent education on tuition tax benefits. There are several
higher education tax incentives, some current and some expired,
that are enormously important to the students and families of
private colleges, like Nichols.
Two provisions that I would like to mention first are the
tuition deduction and the IRA charitable roll-over. Both of
these provisions expired at the end of 2007, and have not yet
been renewed.
The tuition deduction allowed students or parents who could
not claim the Hope or Lifetime tax credits to deduct qualified
higher education expenses from their taxable income. This
deduction provides relief to self-supporting students and to
families whose adjusted gross income is too high to qualify for
the Hope and Lifetime learning credits.
The expiration of the deduction in December of 2007 has
caused great concern among students and their parents. I urge
the Subcommittee and full Committee to extend this important
education tax benefit.
The IRA roll-over is a relatively new charitable giving
incentive that allowed donors to roll over excess retirement
savings to any public charity without tax penalties for non-
retirement use of retirement funds. A recent survey by the
National Association of Independent Colleges and Universities
found that IRA roll-over gifts totaled $144 million.
Just a month ago, I received a call from a trustee, asking
if he could use an IRA roll-over to endow a $100,000
scholarship at Nichols. And, sadly, I had to tell him, ``Not
right now.'' This is private money that helps colleges and
universities with scarce resources and rising costs. As with
the tuition deduction, I urge the prompt and retroactive
extension of the IRA charitable roll-over.
Other current tax incentives important to colleges and
universities, our students and families, would include: the
student loan interest deduction; the sections of Internal
Revenue Code Section 127, which provide for employer-provided
education assistance; tax-favored education savings accounts;
and Section 529 college savings plans; and the Hope and
Lifetime Learning tax credits.
I applaud the efforts of the Members of this Committee for
extending important expiring provisions and simplifying the
credits.
Representative English has introduced H.R. 147, which would
make permanent those tax benefits set to expire at the end of
2010.
Representatives Emanuel and Camp have taken the lead on
simplification by introducing H.R. 2458. The bill would make
college more affordable for the middle class, by providing a
larger credit than current law allows, and it increases the
income caps for individuals eligible to claim the credit.
In conclusion, Mr. Chairman, I ask the Subcommittee and the
full Committee to continue their commitments to our students
and our institutions by retroactively extending both the
tuition deduction and the IRA charitable roll-over.
In addition, I urge Members to make permanent the important
provisions that will expire at the end of 2010. In return, I
offer the continued commitment of private institutions like
Nichols to advance and improve our own efforts to control
costs, increase transparency, and educate our students.
Thank you.
[The prepared statement of Debra Townsley follows:]
Statement of Debra M. Townsley, President,
Nichols College, Dudley, Massachusetts
Thank you, Mr. Chairman, and Members of the Subcommittee, for the
opportunity to testify today.
My name is Debra Townsley, and I am the President of Nichols
College in Dudley, Massachusetts. Nichols College is a four-year
private institution with a student body of more than 1,500 full-time
and part-time students who are enrolled in Nichols' undergraduate,
graduate, and certificate programs, and an alumni body of more than
11,000. Nichols College strives to develop tomorrow's leaders through a
dynamic, career-focused business education. The College offers quality
undergraduate degree programs in business, educator preparation and the
liberal arts, graduate degree programs in business and a comprehensive
continuing education program. More than 90 percent of Nichols students
achieve gainful employment in their field of study within six months of
graduation. The average starting salary for last year's class was about
$40,000. Many of our students are first-generation college students
while many others are second generation and/or children of alumni. Our
students come from 43 states and several foreign countries. We have
students from all socioeconomic backgrounds, but our typical student is
middle income. The vast majority (93%) of our students are dependent
upon financial aid, particularly college-funded aid programs, to help
pay their college expenses. And, 89% receive Nichols College aid
specifically.
The tax-exempt status of colleges and universities recognizes the
public good that institutions of higher education contribute to the
nation. In 2005, private colleges and universities employed nearly a
million people nationwide, and brought more than $355 billion into
their local economies.\1\ In Massachusetts, private colleges educating
the citizens of the Commonwealth save the state public education system
$2-$2.5 billion annually.\2\ Students attending private colleges and
universities today receive five times more grant aid from their own
institutions than from the Federal Government.\3\ At Nichols College,
which has an annual budget of $27 million, we give aid of about $10
million. Nationwide, private colleges enroll as many low-income and
minority students as public four-year institutions, but they graduate
from our institutions at a higher rate. Surprisingly, nearly 80% of the
minority students in Massachusetts attending a four-year college are
attending an independent institution.
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\1\ Data provided by the National Association of Independent
Colleges and Universities (NAICU).
\2\ Data provided by the Association of Independent Colleges and
Universities in Massachusetts (AICUM).
\3\ Data provided by NAICU.
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There are several higher education tax incentives--some current and
some expired--that are enormously important to the students and
families of private colleges like Nichols. Two provisions I would like
to mention first are the tuition deduction and the IRA charitable
rollover. Both of these provisions expired at the end of 2007, and have
not been renewed.
The tuition deduction allowed students or parents who could not
claim the Hope or Lifetime Learning tax credits to deduct qualified
higher education expenses from their taxable income. Self-supporting
students, including those who borrow to pay tuition, were also eligible
to take this deduction without filing a Form 1040. The deduction
provides relief to families whose adjusted gross income (AGI) is too
high to qualify for the Hope and Lifetime Learning credits. Single
filers with an AGI of up to $65,000 ($130,000 for joint filers) could
deduct $4,000 per year. While we don't collect specific information on
how many of our students have claimed the deduction in the past, I can
tell you that the expiration of the deduction in December of 2007 has
caused great concern among students and their parents that this
important benefit will no longer be available, since it has not yet
been renewed. I urge the Subcommittee and Full Committee to extend this
important education tax benefit.
The IRA rollover is a relatively new charitable giving incentive
that allowed donors to roll over excess retirement savings to any
public charity without tax penalties for non-retirement use of
retirement funds. The rollover was only in effect for the last few
months of 2006 and all of 2007. It was limited to gifts of $100,000 per
person, per year. Individuals age 70\1/2\ and older could withdraw
funds from either a traditional IRA or a Roth IRA, and gifts could be
made to any public charity, including colleges and universities. The
National Association of Independent Colleges and Universities conducted
a survey among its membership on the effect of the rollover on alumni
giving. Responses showed a powerful influence on giving, with over $144
million in gifts to independent colleges and universities. Just a month
ago, I received a call from a Trustee asking if he could use an IRA
rollover to endow a scholarship at Nichols. I had to tell him not right
now, but hopefully Congress will act in time to renew that incentive.
This is private money that helps colleges and universities with scarce
resources and rising costs. Endowments help colleges like mine fund
ongoing scholarships, and most of us do not have large endowments.
Sixty percent of Massachusetts independent colleges and universities
have endowments less than $50 million, and the median endowment of all
privates in Massachusetts is $32 million.\4\ As with tuition deduction,
I urge the prompt and retroactive extension of the IRA rollover.
---------------------------------------------------------------------------
\4\ Data provided by the Association of Independent College and
Universities in Massachusetts (AICUM).
---------------------------------------------------------------------------
Other current tax incentives important to colleges and
universities, our students and families, would include the Student Loan
Interest Deduction, Internal Revenue Code Section 127--employer-
provided education assistance, tax-favored education savings accounts
and Section 529 college savings plans, and the Hope and Lifetime
Learning tax credits. These tax benefits help students throughout their
lifetimes. Section 529 plans encourage families to save for higher
education expenses when their children are still young. The Hope and
Lifetime Learning credits and the tuition deduction help middle-class
families pay tuition while students are still in college. And the
Student Loan Interest Deduction gives a much-needed tax break to
graduates who are paying back student loans.
I applaud the efforts of members of this Subcommittee for extending
important expiring provisions and simplifying the credits. Rep. English
has introduced H.R. 1407, the Higher Education Affordability and Equity
Act, which would make permanent those tax benefits set to expire at the
end of 2010. Rep. Emmanuel and Rep. Camp have taken the lead on
simplification by introducing H.R. 2458. Their legislation would
consolidate the Hope and Lifetime Learning credits and the tuition
deduction into a simple, streamlined credit. The bill would make
college more affordable for the middle class by providing a larger
credit than current law allows, and increases the income caps for
individuals eligible to claim the credit.
According to our Financial Aid Office, and information collected on
the FAFSA--the Free Application for Federal Student Aid--approximately
half of the students enrolled at Nichols are eligible for the Hope and
Lifetime Learning tax credits. I understand that having multiple
credits and (hopefully) a tuition deduction can be confusing for
students and families, and I support efforts to simplify these
benefits. I'm aware that, according to a GAO study, 27% of all eligible
filers did not claim either the tuition deduction or the tax credits in
past tax years. While this makes a good case for consolidation, I would
urge caution that any legislation the Subcommittee or Full Committee
considers not eliminate any students or families currently receiving a
tax benefit. It would certainly be counterproductive to increase taxes
on many in the middle-class in order to bring down the cost of a bill
intended to help families access higher education tax benefits.
I recognize that many Members of Congress and the American public
have real questions about why college cost so much. Parents are
increasingly anxious about how they will pay for their children's
education. Private colleges and universities have recently undertaken
extensive efforts to increase transparency and to provide access to
extensive information for parents and students. In September 2007, the
National Association of Independent Colleges and Universities launched
U-CAN--the University and College Accountability Network--in response
to the call of public policy makers for more user-friendly information
about colleges. Though only seven months old, the U-CAN Website,
www.ucan-network.org, has already become a busy gathering place for
families seeking specific college information. Over 670 private
colleges are participating and the list continues to grow. Over 707,000
pages have been viewed so far by more than 236,000 visitors. We hope
that if families see how much aid is available, and understand the
range of pricing structures even just within the private college
sector, some of that anxiety will be alleviated.
Some have argued that Federal assistance--whether it be Pell
Grants, other forms of student aid, or tax benefits--has the effect of
driving up tuition. The Department of Education has done extensive
research over the past 10 years on the relationship of assistance to
tuition, and each study showed that Federal assistance is unrelated to
private college tuition.\5\
---------------------------------------------------------------------------
\5\ The Impact of Federal Student Financial Assistance on College
Tuition Levels (1997).
Study of Costs and Prices (2001).
Issues of Cost and Price in Higher Education (2001).
---------------------------------------------------------------------------
At its simplest level, prices have gone up because our annual costs
have gone up, and because we are providing more services than ever. The
principal cost drivers--health insurance, utilities, and financial
aid--remain constant year to year. Institutions are undertaking efforts
to counteract the effects of these rising costs, including innovative
affordability and cost-cutting initiatives. There is, however, no
single approach, because of differences in institutions' missions,
student population, and fiscal resources.
At Nichols College, we offer both merit-based and need-based grants
and scholarships to our students. As mentioned, 89% of our students
receive Nichols College aid. The average Nichols student receives
$11,902 in college aid and most qualify for some federal and/or state
grants, work and loan programs for a total average aid package of
$17,428 (including Nichols-funded programs). Our College does extensive
outreach programs by providing education and information on access to
at-risk populations through programs like Kids to College and GEAR UP.
Our Admissions and Financial Aid staff are active in the community
facilitating dozens of financial aid information sessions, both on
campus and across the state, including parent education on tuition tax
benefits.
In response to Rep. McKeon's concern about transfer credits and
affordability, at Nichols College we have recently begun to work with
community colleges to offer an ``A to B'' program--Associate's to
Bachelor's. For example, at Quinsigamond Community College, with whom
we signed our first agreement, students may earn an Associate's degree,
then take an agreed-upon third year of study at the community college
before transferring to Nichols College and earning their Bachelor of
Science in Business Administration degree. This program provides access
to a Nichols College degree for students who may not otherwise be able
to afford it. We also offer our Bachelor of Science in Business
Administration (BSBA) and Master of Business Administration (MBA)
programs entirely online.
Nichols also belongs to multiple consortia to reduce costs such as
purchasing consortia and the Independent College Enterprise (ICE),
which is a nonprofit consortium for our shared administrative software.
For example, joining ICE saved Nichols College about $800,000 in
implementation costs, and we estimate another $100,000 in annual costs.
We are trying to reduce energy costs by upgrading to environmentally-
friendly systems. As a business school, we understand offering a
quality education while running lean and mean!
Efforts such as this at Nichols and colleges across the country,
combined with tax benefits, offer much-needed additional assistance for
families in saving and paying for a quality higher education
experience.
In conclusion, Mr. Chairman, I ask that the Subcommittee and Full
Committee continue their commitments to our students and our
institutions by retroactively extending both the tuition deduction and
the IRA charitable rollover. In addition, I urge members to make
permanent the important provisions that will expire at the end of 2010,
including Section 127--employer-provided education assistance, the
improvements made to the Student Loan Interest Deduction, and the
preferential tax treatment of Education Savings Accounts.
In return, I offer the continued commitment of private
institutions, like Nichols, to advance and improve our own internal
efforts to control costs and increase transparency. This partnership,
between Congress and institutions of higher education, will allow us to
continue to provide the best college education available in the world,
as we prepare today's students to be tomorrow's leaders.
Chairman NEAL. Thank you, Dr. Townsley.
Dr. Watson.
STATEMENT OF WAYNE WATSON, PH.D., CHANCELLOR, CITY COLLEGES OF
CHICAGO, CHICAGO, ILLINOIS
Mr. WATSON. Thank you. Good morning, Chairman Neal, Ranking
Member English, and Members of the Subcommittee, including
Chicago's own Rahm Emanuel. I am Dr. Watson, Chancellor of the
City Colleges of Chicago, which enrolls more than 110,000
students annually. I am here today representing my colleges and
the American Association of Community Colleges, which
represents the nation's nearly 1,200 community colleges.
Many policy makers are still surprised to learn that our
colleges enroll 47 percent of all U.S. undergraduates.
Unfortunately, the tax incentives for post-secondary education
simply do not work for the financially disadvantaged college
students who need this help the most. A 2003 study by Harvard
researcher, Bridget Long, found that existing tax credits have
had no impact on increasing college enrollment.
A common thread runs between urban and rural America, and
that common thread is poverty, unemployment, and lack of access
to education. In 2006, rural areas tended to have higher rates
of poverty--15.2 percent--than urban areas, 11.8 percent,
regardless of race.
For students whose families live on or below the poverty
line, their personal resources are dedicated to survival needs
like food and shelter. Their decision to place education at the
bottom of the priority list is not a choice, but more a lack of
a choice.
The bridge that can help solve both urban and rural America
poverty is America's community colleges, and we believe that
some fairly simple changes to the Tax Code can alter the lack
of access to post secondary education by needy students that
needs to be a national priority.
As our written testimony outlines, access and success in
college remain highly correlated with income. With this by way
of context, let me outline three key principles.
First, major items in the Code of higher education finance
provision need to be consolidated. Although the Hope, and
Lifetime Learning Credits, and the tuition deduction share the
common goals of helping students pay for college, these
programs differ from--differ in the amount and type of expenses
they cover.
Since costs are essentially the same for students as they
move through college, the assistance available should remain
the same. The current patchwork of tax programs led the GAO to
conclude that post-secondary tax incentives are difficult for
families to understand and use. In fact, hundreds of thousands
of taxpayers fail to claim their tax preferences to which they
are entitled, and often do not even claim the preference that
would be most advantageous. Chairman Rangel is pursuing overall
tax reform, and these provisions cry out to be included.
Second, the higher education provisions must reflect total
student expenditures. The Hope, Lifetime Learning credits and
tuition deduction only cover tuition. This is profoundly unfair
to community college students. For them, tuition is only a
small component of their overall college costs. The average
tuition cost to a community college student tuition is $2,361
per year, while the total average cost of attendance is more
than $13,000. The exclusion of non-tuition expenses contradicts
long-standing Higher Education Act policies, as well as the
Code to college savings provisions.
Third, higher education tax incentives should better assist
financially disadvantaged students and be refundable. The
current tax incentive provides the bulk of the benefits to
students coming from middle-income and more affluent families.
While these students can use the help, it rarely makes the
difference as to whether they will attend college. According to
AACC's estimates, 1.3 million community college students had no
tax liability in 2007.
AACC urges enactment of the Universal Higher Education and
Lifetime Earning Act, because it efficiently consolidates the
Hope and Lifetime Learning credits and tuition deduction. Its
$3,000 tax credit would increase benefits for all students,
thus increasing college assets and reducing borrowing.
It uses the Higher Education Act student aid budgets for
eligible expenses. This provides consistent treatment across
the major Federal funding sources for college, and will treat
students attending low tuition colleges more fairly. This will
also enhance program administration.
Lastly, H.R. 2458 makes the new credit 50 percent
refundable. This Tax Code currently denies help to those who
need it most, precisely because they are too poor. Please note
the AACC supports full refundability, but the legislation
provision will represent a substantial advance.
I thank you for the opportunity to testify, and will be
happy to answer any of your questions.
[The statement of Wayne Watson follows:]
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Chairman NEAL. Thank you, Dr. Watson.
Dr. Dynarski.
STATEMENT OF DR. SUSAN DYNARSKI, ASSOCIATE PROFESSOR, HARVARD
KENNEDY SCHOOL OF GOVERNMENT, CAMBRIDGE MASSACHUSETTS
Ms. DYNARSKI. Thank you. Chairman Neal, Ranking Member
English, and Members of the Committee, I am honored to testify
before you today.
First thing I want to say is that a college education is a
good investment. Over a lifetime, a worker with a bachelor's
degree earns, on average, about $1 million more than a worker
with just a high school degree. Despite this fact, college
remains out of reach for many: 34 percent of young white people
earn a BA, but only 19 percent of African-Americans and 10
percent of Hispanics grab that golden ticket.
Now, I give you these statistics to get us thinking about
how we can best use tax incentives to encourage college
attendance. Tax incentives can increase schooling only if they
put money into the hands of kids for whom price is a barrier to
college. For tax breaks to truly act as tax incentives, they
need to cut the price of college for those students who would
not go to college without the subsidy.
Now, who are these potential college students? They are
disproportionally non-white or Hispanic. They are from low-
income families--just half of low-income youth go to college
right after high school, compared to 80 percent of their upper-
income classmates. Where might they go to school? The local
community college, where tuition and fees average $2,300 or a
State university, where costs average $6,200 a year.
Now, this is who we should keep in mind, as we design tax
incentives to get people into college: a low-income person
attending an inexpensive public college. The fortunate student
who is admitted to Yale or Williams or Swarthmore, whose family
earns upward of $100,000 is going to go to some college with or
without a tax incentive, and I feel that we should not build
our education policy around the prices that this student faces.
Now, as currently structured, the education tax incentives
do just about nothing for low-income students at inexpensive
public colleges. Because the tax incentives, first of all, are
not refundable, many low-income families can't get them. A
family of four needs to have an income above $40,000 to get the
maximum tax credit right now. One-third of all families and
half of families with kids have no tax liability and cannot get
an education tax credit, currently.
Only students who pay tuition and fees over $10,000 a year
can get the full Lifetime Learning credit. That's nearly double
the cost of the typical four-year college, and four times that
of the typical community college, right? Now, nearly 75 percent
of college students attend these inexpensive public colleges.
The tuition deductions are least valuable to those in the
lower tax brackets. A $1,000 tuition deduction is worth $330
for somebody in the 33 percent bracket, but it's only worth
$150 for somebody in the 15 percent bracket.
The regressivity of the tax incentives is not all that
hampers their effectiveness. They're just too complicated and
confusing to actually affect schooling decisions. Families
simply can't respond to a price subsidy if they don't
understand it or know about it.
Again, let's keep our target students firmly in mind, those
in the margin of college entry are disproportionately low-
income, non-white, Hispanic, parents did not go to college, or
perhaps even graduate from high school. For many of these
families, English is a second language. And viewed in this
context, it's clear that the tax incentives are currently too
complicated to do the intended job.
As was noted before, the publication devoted to explaining
them is 80 pages long. It may be clearly written, but the fact
that you need 80 pages to explain these incentives is prima
facie evidence that they're too complicated.
So, here is what I suggest: that we focus the incentives on
those who are on the margin of attending college, and we
simplify the incentives so that families can understand and
respond to them.
So, number one, as has already been proposed, I would
suggest creating a single, refundable tax credit for tuition,
fees, room, and board. A single credit would significantly
reduce complexity and enable families to estimate their credit
well in advance.
Make the credit refundable, so families in the lower tax
brackets can access it. Count tuition, fees, room, and board as
eligible expenses for the purposes of the credit. This matches
the definition used by the 529 and the Coverdell accounts,
which are available to upper-income families. It also extends
the full credit to the vast majority of students who do attend
public colleges.
Second, deliver the credit at the time of college
enrollment. The student who needs the credit most is the one
who drops out because she can't find the money to pay the
registrar in September, all right? She is not helped by a
credit that arrives a year or 14 months after the bills are
due. So we need to put our heads together and find a way to get
these credits to students at the time of enrollment. Otherwise,
we're excluding the very students whose enrollment depends on
the credit, and that's no way to design an incentive program.
There are a number of Federal aid programs that pay college
students prospectively, rather than after the fact, as the
credits do, but like the Pell Grant, and the Stafford Loan.
Veterans education benefits and the now-defunct Social Security
student benefit program all paid students at the time of
enrollment, rather than after the fact.
One suggestion is to use income from a previous year to
determine eligibility for the credit. So eligibility for the
credit for the 2008-2009 school year could be based on 2007
income. This is the approach used in determining eligibility
for the Pell Grant and the Stafford Loan.
We could even more radically simplify Federal benefits for
college by consolidating all of the Federal subsidies for
college students into one streamlined system. College students
and their families now face two parallel, duplicative, and
unwieldy bureaucracies that provide aid for college: the tax
system and the aid system. Consolidating this process would
substantially simplify life for the families of college
students, saving them tens of millions of hours now spent
filling out repetitive and mind-numbing forms.
Consolidation would also save billions of tax and tuition
dollars that are essentially spent moving pieces of paper back
and forth between different agencies of the Federal Government,
back and forth between IRS and the Department of Education.
And I have entered into the record a detailed
simplification proposal that I have written in coordination
with my coauthor, Judith Scott Clayton. It's in the record for
your perusal. Thank you, and I am happy to take any questions.
[The prepared statement of Susan Dynarski follows:]
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Chairman NEAL. Thank you, Ms. Dynarski.
Mr. Ebersole.
STATEMENT OF W. DANIEL EBERSOLE, DIRECTOR, GEORGIA OFFICE OF
TREASURY AND FISCAL SERVICES, ATLANTA GEORGIA
Mr. EBERSOLE. Thank you, Chairman Neal, Ranking Member
English, and Members of the Subcommittee. I am Dan Ebersole.
I'm the Director of the Georgia Office of Treasury and Fiscal
Services, which is the State Treasury of Georgia. My office
also administers the path to college 529 plan, Georgia's 529
college savings plan, which currently has over $600 million in
assets.
And I am also the Chair of the College Saving Plan's
Network. CSPN is an affiliate of the National Association of
State Treasurers, and represents the interest of State-operated
529 college savings and prepaid tuition plans since 1991. The
mission of the network is to encourage families to save for
college, and to help make higher education an affordable
reality for all.
To accomplish this mission, CSPN is the leading national
advocate for strengthening and enhancing college savings plans,
and we welcome the opportunity to work with Congress as you
strive to make higher education and Section 529 programs even
more accessible to all American families.
Beginning in the 1990s and through today, the States
working with Congress have been instrumental in creating and
improving 529 plans. 529 plans are enormously successful,
allowing millions of families to pre-pay or save for college.
Every state in the nation and the District of Columbia offer
these plans. We have seen growth from 2.6 million accounts in
2001 to over 10.5 million accounts by the end of last year.
Assets invested by these families and these plans have grown
over that same period from $15 billion to $130 billion.
As part of this growth, it is important to ensure that
families at all income levels are encouraged to save in 529
accounts. Because states are involved in the establishment and
administration of these plans, we ensure that outreach efforts
target all segments of the population, including those not
typically reached. The states leverage their experience as
major institutional investors to establish low-cost, low-fee
college savings investment options for families, and ensure,
for example, that a low initial investment in the range of,
say, $25--like in the Georgia plan--is all it takes to open an
account.
I would like to note that the states continue to seek new
and innovative ways to attract underserved populations to
participate in 529 programs. For example, in Illinois, State
Treasurer, Alexi Giannoulias, committed $3.5 million in
scholarships to Illinois students, including $2.8 million in
need-based grants, awarding up to 400 scholarships each year,
and almost 3,000 scholarships to Illinois students through the
life of the program.
In Pennsylvania, the State has developed an innovative
program that makes use of individual development accounts to
encourage college savings through 529 plans.
Finally, Massachusetts emphasizes outreach using grassroots
marketing initiatives targeting low to mid-income families
through early college savings seminars, financial aid seminars,
and educational events, such as literacy events at boys and
girls clubs, reading events at public libraries across
Massachusetts.
Given all the success of 529 plans, we believe that there
is still room for improvement in the Federal tax treatment of
these plans, specifically treating computers as an allowable
expense for Section 529 plans which would conform and simplify
the treatment across different types of education incentives.
Now, in a Coverdell plan, a kindergartner can get a computer as
an allowed expense, but not in a 529 plan.
We would also like to see 529 plan contributions by lower-
income families eligible for a saver's tax credit. And we
believe that more can be done in the employer/employee context
using 529 plans as a vehicle as either a training program for
the employee, or as an employee benefit.
In conclusion, thank you for allowing me to testify today.
States have worked hard to make sure Section 529 plans
encourage families to save early, providing pre-payment of
tuition and low-cost investment options paired with low-
investment minimums to ensure that everyone who wants to go to
college has a vehicle to save for college.
And finally, I want to touch on one aspect of Section 529
plans which is less concrete, but nonetheless, very important.
When families put savings in a Section 529 plan for a newborn,
a 5-year-old, or even a 15-year-old, that family is sending a
very important message to the child, that the family believes
that the child can and will go to college. A college education
remains the surest path to success and higher achievement.
Saving early in a Section 529 account sends a powerful and
positive message to our children, that they can and should go
to college. Thank you very much.
[The prepared statement of W. Daniel Ebersole follows:]
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Chairman NEAL. Thank you, Mr. Ebersole. Dr. Townsley, you
have said that one-half of your students may be eligible for
the Hope and Lifetime Learning tax credits. Since we have heard
so many eligible families miss out, do your financial aid
advisors help these families in any way to ensure that they get
the maximum credit available?
Ms. TOWNSLEY. Well, we do training. Our financial aid
office and admissions staff do training on FAFSA. And when--
because that's where we see it reported, whether or not they
might have claimed that, is on the FAFSA line.
So, we offer to all of our families, prospective parents
and current parents, training on how to fill out the FAFSA. And
we mention that when we get to that section there are
opportunities to apply for the Hope and Lifetime credit, or
tuition benefit deduction. That's how we do it with our
families.
Chairman NEAL. Okay. And, Dr. Watson, as you know, many of
us are very supportive of extending and expanding these tax
benefits. But we are also operating under, now, some very
significant budget constraints which certainly don't appear to
be improving any time soon.
Which of the tax benefits do you think provides the most
benefit to your community college students and their families?
Mr. WATSON. Well, we have to take a look at our students.
Our average--you know, one-fifth of our students are below the
poverty level. So they do not make enough money to even be
eligible for some of the tax credits, because they do not pay
taxes. Of course, Pell Grant is out there. But in terms of the
tax credits, I guess I would say the Hope.
Chairman NEAL. The Hope? Okay.
Mr. WATSON. But I must also say that it is possible--and I
highly commend, you know, what you have done back in 1997, the
intent was there--but as Congressman Rahm Emanuel stated, you
know, it's now time to enhance it. And we can consolidate it.
It's possible to consolidate the Hope Credit, Lifelong Learning
Credit, and the tax deduction.
And I feel kind of--not at ease, because you're, like,
asking me to choose between three children, you know? And after
hearing your----
Chairman NEAL. Two or three Congressman.
Mr. WATSON. Three Congressman? Okay. But after hearing your
statement, Sir, when you opened up, I mean, you're like the
poster child. I want to take you and put you on a poster for
what you're doing.
It is possible to consolidate it. The parents of the
poorest kid--and a lot of our kids are just independent,
they're 19, 20 years of age, they're living on their own, they
don't have parents they are living with, you know?
And then, the parents like yourself, they need all three.
Education is expensive. This $13,000 total, when you look at
all of the expenses for a community college student, our
students are actually making choices between eating and going
to college, between shelter and going to college, between
taking care of their child and going to college.
And when you have to make those choices, you know? And, on
top of it all, they still make the choice to go to college, and
to eat a little bit less, or they move in with somebody.
Chairman NEAL. In an earlier conversation this morning with
Dr. Townsley, we talked extensively about the role of the
community college in America's future. And I think there is one
thing that there is almost universal agreement upon, and that
is that the community college is going to continue to play a
more important role annually in resolving many of the issues
that you have raised. I don't think there is any question about
it. So, you have great advocacy here, on behalf of the role the
community college plays in America.
Mr. WATSON. I mean, community college is--you know, they
were the hallmark or milestone set in 1946, when President
Truman came up with the Truman Commission. And at that time he
put forth that community colleges are really the answer to
getting America back on their feet after World War II.
And at that time, it was his goal on the Truman Commission
to make college education either free or minimally a cost. And
he really struck out hard. And I commend Congress for, over the
years--for struggling to do that. But I think that now it is
almost 50 years exactly--no, it's not 50. Well, it's almost 60
years where we have an opportunity to take what President
Truman tried to put forth in the Truman Commission, and see if
we can enhance it again and make education, both community
college, four-year colleges affordable.
And I also represent the board of NAFEO. That's the
National Association for Equal Education. That's 112
historically black colleges. I also represent that board,
making it possible for all of these colleges and universities
to put young men and ladies through college, so that we can
compete nationally and internationally.
Chairman NEAL. Thank you. I am always very proud of the
fact that it was California and Massachusetts that made
pioneering commitments long before it was a well known
achievement, the role that the community college would play in
American life.
Dr. Dynarski, I was very interested in your suggestion that
we can deliver these credits in advance, rather than a year
later, when the taxpayer files the annual tax return. How would
you suggest that the IRS administer an advance credit?
Ms. DYNARSKI. I was speaking--I could punt this to Michael
Brostek. He had some ideas. I was speaking to him before the
testimony. There are a couple of programs that IRS runs right
now that are run through organizations that could provide a
template for what we would do here.
So, right now, you know, the Pell, the Stafford, they are
advanced, right? And what we do is we use the colleges to
confirm that the student has enrolled. And if the student
doesn't enroll, the money is withdrawn, all right? So I think
what we would need to do is use the institutions themselves to
basically administer the funds.
So, eligibility would run through IRS, but funds would flow
through the institutions themselves.
Chairman NEAL. Simple enough. And with that, I would yield
to Mr. English.
Mr. ENGLISH. Thank you, Mr. Chairman, and I appreciate the
opportunity to quiz a panel that has, I think, offered us some
very stimulating testimony.
First of all, Dr. Townsley, we have been told by some
experts that parents and students are aware of the Pell Grants
and financial aid available. However, many don't know about the
education tax credits.
When Nichols sends information to prospective students and
their parents about possible sources of financial aid, how do
you inform them about the Hope and Lifetime Learning credits?
Ms. TOWNSLEY. Well, as I mentioned, we do it through
training sessions at all of our open houses. We have training
sessions on financial aid. We have orientation, we have
students and families there.
We do training sessions, again, for parents and students,
and we cover the FAFSA and how to fill it out. When we get to
that section, we mention that they should look into those
opportunities on their tax form, because they would be able to
fill that in on FAFSA, as well.
So, we do it through all of our training sessions, at open
houses, at orientations with students and their parents, and
also when we do training at high schools across the State. We
send our financial aid staff out to do that.
Mr. ENGLISH. Very good. I was curious. Elsewhere in your
testimony you urge the prompt and retroactive extension of the
charitable IRA provision that expired last year. I am just
curious. How does extending the provision retroactively create
any incentive for new donations?
Ms. TOWNSLEY. Well, I think if it was within this year, it
would help us to be able to offer that currently to our donors.
I would actually call my board member right away and say,
``Okay, it's time for the scholarship, you can do it.''
Mr. ENGLISH. Okay. Mr. Ebersole, under the present law,
education tax benefits are received after filing one's tax
return in April. But the tuition is usually due in the fall of
the prior year. As a result, there is a considerable lag
between the time the cost is incurred and the credit is
received. We have noted this for a long time.
This lag may prevent the tax credit from fully achieving
its goal of making college accessible for more students. I am
curious. Would making the tax credit advanceable solve this
problem? And would an advanceable credit be easy for the IRS to
administer?
Mr. EBERSOLE. I am here representing the 529 college
savings plans.
Mr. ENGLISH. I understand.
Mr. EBERSOLE [continuing]. I don't think I am the one who
is able to answer your questions.
Mr. ENGLISH. Would anyone like to comment on it?
Ms. TOWNSLEY. I will comment. When you talk about the
advance tax credit?
Mr. ENGLISH. Yes.
Ms. TOWNSLEY. The--I think a private school like Nichols
and the Association of Private Independent Colleges and
Universities, we would take the position that to do it up front
would be a very difficult thing to accomplish.
Student aid comes up front. We do have systems in place to
manage that. If we had to do the up-front tax, I think we would
probably have to hire another staff member to carry that out.
And when we look at the higher education reauthorization,
one of the things that we do have concerns about is the
additional reporting. And the more and more reporting----
Mr. ENGLISH. Sure.
Ms. TOWNSLEY [continuing]. That we have to do, the more and
more costs go up, because we need people to actually fill all
those things out, because we do run lean and mean.
Mr. ENGLISH. Thank you, Dr. Townsley.
Ms. DYNARSKI. Could I comment on that?
Mr. ENGLISH. Also for the panel, the Lifetime Learning
credit is calculated as a percentage of eligible educational
expenses. This gives, I suppose, a greater tax benefit to those
who go to more expensive schools.
Dr. Watson, you obviously represent an institution with a
mission to reach out to a very broad cross-section. In your
view, is this an appropriate way to structure the credit?
Mr. WATSON. Well, our average tuition and fees is $2,260.
And a number of our students are not eligible, or fully
eligible, for the Hope tax credit. And I think that we do need
to take this into consideration, that--and one way to take it
into consideration is to expand it beyond just tuition and
fees. We need to make books, transportation, supplies, housing
eligible under the Hope tax credit.
Mr. ENGLISH. Thank you, Dr. Watson. Now, again, would
anyone else like--before my time completely runs out--to take a
run at the design of the tax benefit, and specifically the fact
that that Lifetime Learning credit right now provides a greater
tax benefit to those who go to more expensive schools? Is that
the appropriate way to structure the credit?
Ms. DYNARSKI. I would say that the student who is deciding
between whether to go to college or not is going to a community
college. So we would want to focus our efforts and our funds on
that type of student.
So, a structure that gives more money to people who are
going to the most expensive schools, no. I don't think that's
the right way to structure it.
Okay, I would also like to answer a question that you asked
a few minutes ago about the advanceability of the credit.
Mr. ENGLISH. Yes.
Ms. DYNARSKI. I agree. It would be hard to deliver the
funds up front. But it is incredibly important. It's the whole
point, is to make it possible for students to go to school.
They need the money when they register for college. They don't
need it a year-and-a-half later.
So, yes, it's the hardest part, but it's the part that
would actually make it possible for people to go to school who
can't afford it right now. And so, I think, given the brain
power that exists in this room and in the colleges and
universities of our country, we can find a way to make this
work, and we should find a way to make it work.
Mr. ENGLISH. I think both of your answers are thoughtful
and well-rounded, and I think we're going to have to wrestle
with that. Thank you so much.
Chairman NEAL. Thank you, Mr. English. The gentleman from
Washington, Mr. McDermott, will inquire.
Mr. MCDERMOTT. The more I listen, the more confused I think
my 30-year-old secretary is about what's available.
The question that I think--I am old enough to remember when
University of California was absolutely free, and when we
invested millions of dollars in this country in the GI Bill of
Rights, when we were pouring investment into education. And it
has been a gradual process over the last few years to gradually
shift the cost onto the student, and leave the student in debt
when they get out of college.
And I--it seems to me that one of the problems here is that
we have shifted some of our educational benefits over to the
military. ``Please join the military. And if you join the
military, well then we will give you some tax benefits, or we
will give you some money to go to college,'' as though our only
way of having a volunteer army is to somehow make it harder for
somebody to simply go to school, but a lot easier if they want
to go the military route and pick up the benefits.
And what I am concerned about is the fact that we seem
unable to figure out what the people--there are about 26
million families living at poverty or below in this country.
Now, their kids cannot--this IRA business, that's just
nonsense, to talk about IRAs with them, or that their parents
should have been putting something in the bank on the way while
they were growing up. All those programs are designed for
middle class and above.
The question is, what's the best program to help--if you
were designing--blank sheet of paper. What is the best program
to give--to deal with the people who are under $40,000 median
income, and who either themselves are trying to go, or trying
to help one of their kids go?
I would like to hear what you think the best thing we could
do in that regard, to deal with them, because the ones who got
money to start when their kid is one year old and putting money
in an IRA, you know, I am worried about them, but not very
worried in comparison to what I am worried about with this
whole, huge bunch of kids who are afraid to go to college
because they're going to get in debt, so they say, ``Let's go
in the military and see how it works out.'' So, I would like to
hear your best proposal. Any one of you.
Ms. DYNARSKI. I will jump in. I think the best system--and
I agree, it would not be the one we have right now--is one that
is transparent, simple, and certain. You want families to know,
when their child is in grammar school, that college is
affordable. We have got money spread across dozens of programs
at this point in the Tax Code and on the revenue side. And
pooling those funds into one, simple certain program I think
could make for a very powerful incentive.
So, I would love to see basically pooling the money that
we're spending on the tax incentives with the money that we're
spending on the Pell Grant and the other campus programs into
one super program that we can communicate simply to students
and say, up front, ``You've got $7,000 a year for college.
That's enough to cover, you know, a 4-year university, State
university,'' and you know that when you're in grammar school,
and you know that when you're graduating from high school.
Application could be through the tax form itself, just to
check off on the tax form, and basically base it on income and
on family size, and those would be the criterion. If you look
at the financial aid formula, really what drives almost all of
it is income and family size. The other 125 questions on the
financial aid form don't really have much of an effect on the
Pell Grant.
So, put it together with the tax expenditures that we're
using right now, and make one, super-effective program.
Mr. WATSON. Sir, I think we have made a major step, or
right on the verge of getting ready to make a major step with
regards to the Universal Higher Education and Lifetime Learning
Act.
That's a major step, if we were to do that, the
consolidation, raising it to $3,000, non-tuition being
included, and 50 percent refundable. Now, being that you gave
me a blank check, though, I would make that 100 percent
refundable, all right? And I would think that we would have
done the Truman Act a major a complement 60 years later.
In terms of combining the tax credits with the Pell Grant,
I would be hesitant to at this point, just because of the fear
of the bureaucracy that might follow along with it. I would
like to keep them separate at this point. But if we are able to
do the Universal Higher Education and Lifetime Learning Act,
and change it from 50 percent to 100 percent, this congress
would have made a major step in helping the 40 million
individuals that you spoke of.
Mr. MCDERMOTT. Do you run your own program of Pell Grants,
or do you put it out into the banks? University of Washington
runs their own Pell Grant. They don't have a bank intermediary.
What do you do, in the community college system in Chicago?
Mr. WATSON. We have the Stafford Loan, and we give out
very, very few loans. But in terms of Pell Grants----
Mr. MCDERMOTT. The student loans question is what I'm
asking you.
Mr. WATSON. Oh, so you're talking about loans? Oh, okay.
Very few loans. We do not encourage our students to take out
loans. Let me be very clear on this one.
The City Colleges of Chicago made a list that came out
about two weeks ago, saying that there are some colleges that
are not encouraging their students to take loans. We are one of
those colleges, because we see thousands, tens of thousands of
students come to us after having attended schools where they
have $19,000, $20,000 in loans, and still have not graduated
from college.
We are a community college, and we are there for the
purpose of trying to get young men and young ladies through
college without a debt. You can attend the City Colleges of
Chicago and attend all two years and not have to take out a
loan. Our tuition is $2,200 per year. And with Pell Grant, and
if we're able to do this with the Universal Higher Education
and Lifetime Learning Act, with the change that is being
proposed, loans are not necessary for my cohort of students
with the AACC--that's 1,200 colleges, that is 46 percent of all
students in higher education. It would not be necessary, Sir,
except for those very, very select programs.
So, I don't want to mislead you and say, ``Well, there are
no loans.'' I do have some programs where students must take
loans, because the programs are extremely expensive: dental
hygiene, a very, very expensive program. Other than that, I
would say 80 percent of my programs we do not encourage it.
Ms. TOWNSLEY. Representative McDermott, I would take the
same position as my colleague in the community colleges. I
think that that would benefit students greatly.
I would also encourage that we do maintain opportunities
for middle income families as well, who are trying to send
their children to school. That is the real beauty, I think, of
American higher education, is that there is diversity in choice
in higher education.
And at Nichols, we work strongly with the community
colleges through articulation agreements. And so, students that
might not have an opportunity to go all four years certainly
can start at a community college and have great savings.
And, in fact, in some community colleges--we have begun in
Massachusetts to work on what we're calling an A-to-B program,
which is an associate to bachelor's program, and students can
take certain courses through the community college that we have
agreed to ahead of time for three years. And they earn an
associate's plus one year.
And then, the fourth year, they can transfer to Nichols
College and they can either do it online--because we have our
programs online at a lower cost--they can come for the
residential experience in the last year if they would like,
which is obviously the most expensive option, or they could
take classes in the evening, which, again, is a relatively low
cost. And the students then have the opportunity to earn an
associate's and a private school bachelor's and business
administration degree from Nichols College.
So, we do work closely with community colleges. A lot of my
colleagues in private higher education do. So I would encourage
that we maintain those benefits across all levels and income
groups for opportunity.
Chairman NEAL. Thank you. We can come back if there is time
at the end.
Mr. MCDERMOTT. Thank you, Mr. Chairman, for your
indulgence.
Chairman NEAL. Thank you, Mr. McDermott, very much. The
gentleman from Connecticut, Mr. Larson, is recognized.
Mr. LARSON. Thank you, Mr. Chairman, and thank you for
putting together these very thoughtful panels.
Continuing along a similar line of questioning that Mr.
McDermott had, what kind of shape are our computer labs in, in
our community college systems today? Mr. Watson, would you be--
--
Mr. WATSON. Yes, Sir. You know, you have heard of unfunded
mandates, and that is something that community colleges and
universities are pretty much faced with.
There is software upgrades that we must do, in order to
respond to the GAO, and all of the different bodies that ask us
for reams of data every year. And we must upgrade. Those
software upgrades cost tens of millions of dollars to each
community college. That is an unfunded mandate.
There are under-funded mandates, which gets to your
question, and that is in order for our students to remain
competitive internationally and nationally, and just for
locally, sometimes, we are being put in a situation where we
have to turn over our hardware, like every four to five years.
That is expensive, Sir. And there is no--there are very few
funding sources that make revenue available to us.
Mr. LARSON. So you have got a serious infrastructure
problem that is both under-funded and mandated but not funded
at all.
Now, if I could take that a step further, when I was
looking at your statistics, Mr. Watson, you were saying how--
you were comparing how 80 percent of a particular socio-
economic group goes on to higher education, whereas 40 percent
of a lower socio-economic group goes.
Well, if you do the math, that means 60 percent or 20
percent. Where are those students, or those individuals going,
who don't go to colleges? And where do they get their training
to facilitate a lifetime of work in a global economy?
And if our community colleges don't have appropriate labs
and are able to provide the transition and don't become what I
fear is just a minor league for the college system, where you
can't afford to go to college, well, if you spend a few years
in the minors you will be okay and then we can matriculate you
on up, but it still leaves out a vast majority of people not
only who seek to enter college or higher education every year,
but those that are in the work force currently, untrained and
without skills, in a global economy that is shrinking as fast
as technology and innovation can make it.
Would community colleges be open to keeping--if they were
funded, keeping their buildings open during the evening for the
retraining of individuals within the community? Because, as you
noted, the level of technology changes, and skill levels, and
whether it's IT or IP, or how people are going to process
information, it's changing rapidly all the time. And if our
community colleges aren't the facile, flexible means of dealing
with this, where are we?
And what do you think that cost would be to, say, on
weekends or----
Mr. WATSON. That's right.
Mr. LARSON [continuing]. Three nights a week, to keep the
colleges open, and make sure that they had appropriate labs and
teachers to do the training? Any idea what----
Mr. WATSON. Yes. Right now, my community college--and I can
speak for the other 1,200 community colleges--we are now
opening our doors on the weekends and at night. We all have
night school, we all have weekend programs. The Borough of
Manhattan Community College, they have 8,000 students taking
courses on the weekend, all right, 8,000 students.
You know, we, City Colleges of Chicago, have thousands of
students taking courses on the weekend, and we are to a point
right now where we're open at 8:00 in the morning until 10:00
every night. We are now working out a plan where we are
thinking about going up to 12:00 at night, in order to meet the
need.
We, Sir, as you have clearly stated, we are that economic
engine that can get America back to work. No question about it.
We are it. You know, my----
Mr. LARSON. Where do you get the resources from, then?
Mr. WATSON. You know, and we have made a mistake, as
community colleges. We are like the ``Mikey'' at the table, you
know. ``Feed it to Mikey, he will eat it.''
And the reason why I say it's a mistake is because we
always make do, to make sure that we try not to ever turn
anybody away. And we have taken our dollars over the last
decades, and we have not turned students away. And we have
raised tuition--and you've seen the creeping tuition of
community colleges--we are up to $72.
You know, when my father attended my community college--my
father--my grandfather gave my father $10. He said, ``You go up
there and get enrolled, and bring back the change.'' And that
was a full enrollment, all right? We have gone a long way from
that. We have to charge more tuition to our students. We are
$72, some of my sister community colleges are $110.
But you also said something else, Sir, I must address. And
I really thank you for the opportunity. You said that some
community colleges, we don't want them to become second-class
schools, well individuals say, ``Well, we will just go to a
community college because we can't go to a regular college.''
I am very proud to share with you that just approximately
three weeks ago there was a national competition between
universities and community colleges. It was a scholastic
competition. And I can't give you more details, because it's
going to be on television, and the network will shoot me. But I
will just say that the community college beat out eight
universities and colleges in a national scholastic competition.
And I said more than what I should say. I will talk to you
privately and tell you exactly what it was, but I can't say it
here.
So, I am only getting to the point of saying that community
colleges--the word ``junior college'' was created in 1901 by
William Rainey Harper, the president of the University of
Chicago. We have gone from junior college in 1901 to community
colleges, which was created by Truman in 1946.
We are legitimate, two-year institutions that, as my
college stated, we matriculate students. And research shows
that students who come to us for the first two years, they do
as well or better than students who start out at a university.
And we have an equal or higher rate of success than the junior
and senior year.
Mr. LARSON. I would agree with all of that. I see my time
is up. I thank the chairman.
Mr. WATSON. Okay, thank you.
Mr. LARSON. But if I could get some numbers--and I will
speak with you after the hearing, Mr. Watson, in terms of what
you think that that would cost, to upgrade the labs in our
schools to make sure the mandates are funded, and then how we
can matriculate people into our community colleges, as opposed
to having to bring in immigrants to man the jobs that we ought
to be training our people for.
Mr. WATSON. You're right. You're right, Sir.
Chairman NEAL. I thank the gentleman from Connecticut. The
chair recognizes the gentleman from New York, Mr. Crowley, to
inquire.
Mr. CROWLEY. Thank you, Mr. Chairman. Thank you for
affording me the opportunity. I would just from the outset, Dr.
Watson, it sounds like a movie in the making. So I'm paying
attention.
Listening to the witnesses, it appears that there is strong
support amongst you all for making the Hope and Lifetime
Learning tax credits refundable, which are right now non-
refundable, to help those students that Dr. Watson made
reference to and highlighted before when he said that one in
five of his students are below the poverty line.
Are you all in agreement that the Hope and Lifetime
Learning tax credits be refundable?
Ms. TOWNSLEY. Well----
Mr. CROWLEY. You're all nodding your heads, I just want
to--if you could, for the record, just say, ``Yes.''
Ms. TOWNSLEY. Yes, Sir. I--we would be in favor, and
private colleges, we have had a discussion around this, and we
would be in favor of the refundability, as long as the cost to
do the refundable credit is not a burden, and----
Mr. CROWLEY. To the institution.
Ms. TOWNSLEY. To the institution. Because then we have to
continue to increase costs, which we're trying to hold the line
on.
Mr. WATSON. We are strongly supportive of the
refundability, because a number of our students, because of
their income, do not have a liability. They do not pay any
taxes.
Mr. CROWLEY. Right, okay.
Mr. EBERSOLE. We are here on behalf of the college savings
plans to promote college savings, and credits are apart from
that. So----
Mr. CROWLEY. Well, Harvard, if I could hear from----
Ms. DYNARSKI. Well, I don't represent Harvard.
Mr. CROWLEY. Okay.
Ms. DYNARSKI. I represent me.
Mr. CROWLEY. Okay.
Ms. DYNARSKI. But I do support the refundability of the
credits, and I do--I want to echo that the colleges are
understandably apprehensive about bearing the costs of some new
program, that they currently bear the vast bulk of the cost in
administering the need-based financial aid system and the tax
credits.
And so, I understand their fears about any changes to the
tax program that would make it even more complicated for them,
because they tend to be unfunded complexity. We don't recognize
the cost of the complexity in the government programs. They're
not on the line, they're not a budget item. They are paid for
by billions of dollars by the colleges themselves in running
their financial aid offices.
So, I would hope that Congress would be cognizant of this
in considering any changes. But I also hope that we would be
focused on designing a program that is, first and foremost,
centered upon the needs of students and their families and,
secondarily, on the needs of the institutions that those
students attend.
Mr. CROWLEY. Well, thank you all. I just want to follow up
again on a question by Chairman Neal in regards to the outreach
that is being done by colleges as it pertains to students
taking advantage of the tax credits.
And we have been doing some work, my office along with
Chairman Lewis, on the EITC, the Earned Income Tax Credit, and
how we can help those who are eligible for those tax credits to
access them, as well. And we have been--we've told employers
that they have to do more, in terms of outreach.
One, do you--should we require--should there be a
requirement that schools--is that something that you think
would be helpful, in terms of making that outreach to students?
I know that, Dr. Townsley, you mentioned that you put it on
your FAFSA forms when people are applying to your institution.
But I would like to ask if there is anything else that we can
be doing--that you all can be doing--in terms of communicating
and encouraging those who may be eligible for these tax credits
to make access to them.
Ms. TOWNSLEY. I think--and the discussion that--it's
probably helpful if it is noted on the FAFSA as a note, you
know, ``You are eligible,'' so when they're filling it out they
will see that, ``Oh, I could have maybe done something.''
Mr. CROWLEY. Okay.
Ms. TOWNSLEY. So that might be beneficial, because we have
to point it out, because they don't really know what should
have gone there. So that might be helpful on the new--when the
FAFSA does get redesigned.
And then, I think colleges and universities, along with
banks, actually, where loans come through, could put it in
their literature, as a note. I hate to require more, to be
honest. I would say maybe a suggestion. But certainly the FAFSA
would bring it right to them.
Mr. CROWLEY. Okay, thank you.
Mr. WATSON. So, one thing that I would--well, one you're
getting ready to do, hopefully, and that is you're going to
consolidate the Hope Credit, Lifelong Learning Credit, and the
tax deduction, and simplify. That will help immensely. You
know, Congressman Rahm Emanuel's and Mr. Camp's--their proposal
will help immensely, the simplification and consolidation.
And second is my colleagues keep speaking of ``our
financial aid advisors,'' you know. Let's be honest. We need to
move this one step further. There are high school counselors
and advisors. They need to be required to communicate this to
every kid that graduates.
I run across young men who live in my neighborhood, and I
say, ``Are you going to college?'' ``Well, no, no, no, I can't
afford to.'' I say, ``Well, are you aware of Pell Grant?''
``No.'' ``Are you aware of Hope?'' ``No.''
These young men and young ladies, if you were to take a
survey of kids that graduated from the high schools in urban
and rural America--and I keep connecting the two, because there
is no difference between urban and rural America in this
country today, the poverty level is the same. The unemployment
level is the same. The crime level is the same. The drug usage
level is the same. And if those high school counselors were
required to give these students information on Pell Grants,
Hope, Lifelong Learning Credit, you will see a significant
difference. We are basically getting a horse after it leaves
the barn.
Mr. CROWLEY. Right, right. Well, thank you. And I know my
time has expired. I want to thank the Chairman for extending
the courtesy, and thank you all for what you do.
Ms. DYNARSKI. Thank you.
Mr. EBERSOLE. Thank you.
Mr. WATSON. Thank you.
Ms. TOWNSLEY. Thank you.
Chairman NEAL. Thank you very much, Mr. Crowley. Mr.
English and I want to thank all of our witnesses today for
their thoughtful testimony. It is most helpful. We may have
some written follow-up questions, and we hope you will respond
promptly.
If there are no further comments, this hearing is
adjourned.
[Whereupon, at 11:59 a.m., the Subcommittee was adjourned.]
[Submissions for the Record follow:]
Statement of Paul J. LeBlanc, Manchester, NH 03106-1045
You probably do not remember me, but when my wife Pat Findlen and I
lived in Springfield we worked on your first congressional campaign. We
happily see you in the news from time to time and delight in knowing
that you still serve and we had some very small part in helping you get
to Washington.
I am writing in my role as President of Southern New Hampshire
University and as a member of the Board of Trustees for the Council for
Adult and Experiential Learning (CAEL), I am pleased to endorse the
testimony provided by CAEL and M+R Strategic Services to the
Subcommittee on Select Revenue Measures for its hearing on Education
Tax Incentives. I would also like to express my strong support of
federal tax policy to advance Lifelong Learning Accounts (LiLAs).
In New Hampshire and in New England more generally we see an aging
demographic and a struggle by employers to find well trained people to
sustain economic growth. Conversely, in our work, we see many adult
students who struggle to pay for school with little in the way of
financial assistance. CAEL, a national non-profit organization
dedicated to advancing lifelong learning, developed LiLAs as a strategy
to close this financing gap and put education and training within the
reach of working adults. I think LiLAs may be one of those
groundbreaking, paradigm sifting pieces of legislation and I hope you
will support the proposal around federal tax policy before you.
LiLAs are an innovation that is needed to build the skills of our
current and future workforce. I support the introduction of legislation
that would help to put LiLAs within the reach of all working Americans.
Statement of B. Russell Lockridge
As Vice President and Chief Human Resource Officer for Brunswick
Corporation, and a member of the Board of Trustees for the Council for
Adult and Experiential Learning (CAEL), I am pleased to endorse the
testimony provided by CAEL and M+R Strategic Services to the
Subcommittee on Select Revenue Measures for its hearing on Education
Tax Incentives. I would also like to express my strong support of
federal tax policy to advance Lifelong Learning Accounts (LiLAs).
Investment in education is one of the best ways for companies to
help their employees gain new skills and advance in their careers.
CAEL, a national non-profit organization dedicated to advancing
lifelong learning, developed LiLAs to encourage workers and businesses
to co-invest in education and training activities that would meet the
demands of the changing global economy while helping more Americans to
achieve their career and education goals.
We know that adult students often face difficulties in affording
the education and training they need to succeed in our country's
skills-based economy. CAEL, a national non-profit organization
dedicated to advancing lifelong learning, developed LiLAs to encourage
workers and businesses to co-invest in education and training
activities that would meet the demands of the changing global economy
while helping more Americans to achieve their career and education
goals.
LiLAs are an innovation that is needed to build the skills of our
current and future workforce. I support the introduction of legislation
that would help to put LiLAs within the reach of all working Americans.
Statement of Dr. Shirley Robinson Pippins
As President of Suffolk County Community College and a member of
the Board of Trustees for the Council for Adult and Experiential
Learning (CAEL), I am writing to express my support of testimony
provided by CAEL and M + R Strategic Services related to the education
tax incentives being considered by your subcommittee, particularly with
regard to Lifelong Learning Accounts (LiLAs).
With approximately 90% of all new high-wage jobs requiring a
college degree or post-secondary training, institutions of higher
education serve as vital engines for our economy. As Ben Bernanke,
Chairman of the Federal Reserve Board recently stated, ``policies that
boost our . . . investment in education and training can help reduce
inequality while expanding economic opportunity. A substantial body of
research demonstrates that investments in education and training pay
high rates of return both to individuals and to the society at large.''
LiLAs are an effective way to ensure that Americans, particularly
older Americans, have the resources they need to achieve their career
and education goals, and are encouraged to invest in education and
training activities that would meet the demands of the changing global
economy. On a state and national level, as operating costs at colleges
and universities increase more rapidly than family income, and at
steeper rates than increases from government funding sources, the
opportunity to provide access to higher education for residents,
particularly those from low- and moderate-income families, becomes more
and more difficult. LiLAs represent a real opportunity to build the
skills of our current and future workforce by establishing a commitment
between employees and employers which is endorsed and encouraged with
federal incentives.
I strongly urge the Subcommittee to favorably consider legislation
creating Lifelong Learning Accounts on a national scale.
Statement of Experience Wave and the Council for
Adult and Experiential Learning
Summary
When amending the higher-education tax incentives package, Congress
should take into consideration the unique needs of workers at all
stages of their careers, including those nearing traditional retirement
age, who need to continue their education or retrain for a new career
in a different field. Workers of all ages are facing challenges due to
a number of factors, including shifting economic conditions, family
obligations, and jobs going overseas. The Country's education-related
tax policy should be crafted to provide opportunities for workers to
overcome these challenges.
Lifelong Learning Accounts (``LiLAs'') are one way to address these
training and education needs. LiLAs are employer-matched, employee-
owned individual educational accounts used to finance workers'
education and training. With LiLAs, mature and older workers would have
funds available so that they can continue to be productive even though
their jobs or personal circumstances have changed. Younger workers
would be able to save for education and training to upgrade their
knowledge and skills to better position themselves in the labor market.
In addition, LiLAs would provide a mechanism for individuals to pursue
``encore'' careers that will last during retirement.
Learning new skills can open doors to more fulfilling and
potentially lucrative career opportunities. But the ability to do so is
often limited, especially for workers who may not qualify for
assistance that is traditionally available for younger traditional
college-age students.
Background
This testimony is being submitted by Experience Wave and the
Council for Adult and Experiential Learning (``CAEL''). Experience Wave
is a national initiative designed to advance federal and state policies
that will facilitate the continued engagement of older adults in work
and civic life. Experience Wave, funded by the Atlantic Philanthropies,
focuses on the interests of mid-life and older people by promoting
policies that
remove barriers and provide wider opportunities for
older people to continue working when they are willing and
able, or re-enter the workforce if they have already retired,
enhance lifelong learning for older people and
consider the unique needs of mature and older workers who want
to advance in or change careers through accessible high quality
and affordable education and training, and
open doors for older people to engage in meaningful
charitable or ``pro bono'' work.
CAEL is a national, non-profit organization whose mission is to
expand education and training opportunities for adults. CAEL works to
remove policy and organizational barriers to learning opportunities,
identifies and disseminates effective practices, and delivers value-
added services. Since its founding in 1974, CAEL has been providing
colleges and universities, companies, labor organizations and state and
local governments with the tools and strategies they need for creating
practical, effective lifelong learning solutions. CAEL's clients
include major employers such as Verizon Wireless, Starbucks, CVS
Pharmacy, Pennsylvania State University, and Kentucky Community and
Technical College System.
Need for Change
A significant portion of the Subcommittee's hearing on education
tax incentives (May 1, 2008) was devoted to educational opportunities
for traditional aged children and their families. However, it is
equally important to expand postsecondary education and workforce
development opportunities for working adults.
During the hearing, Congressman McDermott asked the panel what
education-related tax incentives would work best for a hypothetical,
single mother of two children; whom he described as a 30-year old
secretary making $30,000 and having one year completed at the local
community college towards her legal assistant degree. The panelists
before the Subcommittee did not have an answer. Congressman McDermott
followed up his question by saying that the tax credits and other
incentives generally do not work for someone trying to get into a new
line of work, just those trying to get ahead within the same industry.
The point of Congressman McDermott's hypothetical was to illustrate
that tax-related education incentives are too complex. He also
highlighted the inadequacy of current education-related tax incentives
for working adults: who need training or retraining to increase their
future prospects or to adapt to shifting economic conditions. As
detailed below, LiLAs would make it possible for that working mother to
go back to school and get the credentials she needs to advance in her
career and support her family.
Recently, while discussing the Trade Adjustment Assistance Act,
Senator Baucus lamented the lack of investment and training
opportunities available to today's workforce. He said,
[T]he new global economy conjures images of competition in
European, Chinese and Indian markets . . . [W]e can do more to invest
in our workforce and make training available to our workers. We can do
more to be creative and innovative. We can do more to think about what
the competitiveness of our economy and [what our] workers should look
like five and 10 years down the road. Challenges posed by globalization
and technological change require new workforce strategies.\1\
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\1\ Congress Daily, ``Baucus, Panel Say National Agenda Is Needed
To Compete,'' May 1, 2008.
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However, as the American Society for Training & Development stated
in their Fall 2006 publication entitled, ``Bridging the Skills Gap: How
the Skills Shortage Threatens Growth and Competitiveness . . . and What
to do About It,'' U.S. businesses are finding themselves ill-equipped
to compete in the 21st-century economy because too many workers lack
the necessary skills to help their business grow and succeed. A part of
the solution involves individuals taking responsibility for their own
skill development and career development and being proactive in
acquiring skills, furthering their education, and committing to
lifelong learning. In addition, businesses and the government need to
provide support and develop programs that encourage individuals to
adapt to the changing landscape.
Post-secondary educational attainment is tied to improved
employability and higher earning power. Among citizens aged 18-64, for
example, those who earn an associate's degree can expect on average an
additional $7,000 in annual earnings, and in states like California and
Texas, an additional $10,000. Attaining a bachelor's degree adds, on
average, $15,000 in annual income, and in some states as much as
$18,000. This increase in income level also translates to increased
state and federal tax revenues, and a higher skilled workforce that can
staff positions of critical importance to the economy, national
security, and public health.\2\
---------------------------------------------------------------------------
\2\ Tate, Pamela, ``Testimony on Higher Education in the United
States and the Needs of Adult Learners: Recommendations for Strategic
Directions,'' January 31, 2006.
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Once a global leader, the United States is losing its historic
world dominance with respect to higher levels of education attainment
for its adult citizens. According to figures released by the
Organization for Economic Co-operation and Development, several
countries have already surpassed or are close to surpassing the United
States in proportion of 25-64 year olds who have attained a tertiary
credential. These countries include Canada, Norway, Finland, Sweden,
Japan, Korea, the United Kingdom, Spain, Australia, Belgium, the
Netherlands, and France. In a world economy that depends more than ever
on knowledgeable workers, as well as the possession of advanced
literacy and problem-solving skills among line workers, the imperative
could not be greater for U.S. leaders and policymakers to recognize and
strategically address challenges to expanding adult learning.\3\
---------------------------------------------------------------------------
\3\ See id.
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But more important that our standing, vis-a-vis other countries, is
our ability to staff positions that are of critical importance to the
economy, national security, and public health. If our current workforce
does not gain new skills and credentials, we may not have enough
skilled workers for the growing need. It is estimated that 15 million
new U.S. jobs requiring a college education will be created by 2020,
but based on current attainment rates, projections show a net gain of
only 3 million new workers with college credentials. To meet the skill
demands, we cannot only focus on traditional-aged college students--
there will not be enough of them. The nation must also place strategic
priority on educating the large number of adults in the workforce who
have earned high school credentials, but for one reason or another have
not previously entered or completed postsecondary study.\4\ These
individuals are more likely than their peers to live in poverty and to
be unemployed or working in a low-wage service sector job. Any while
many workers are interested in increasing their skills and knowledge,
those that do enroll in postsecondary programs are twice as likely to
be enrolled part-time and three times as likely as traditional-age
students to be enrolled less than half time.\5\
---------------------------------------------------------------------------
\4\ See id.
\5\ See id.
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Another source of workers is older Americans. The United States'
workforce demographics are undergoing a tremendous shift. In the next
decade, the number of workers over 55 will grow at more than five times
the rate of the overall workforce.\6\ But most baby boomers are not
planning on going the way of traditional retirement. According to an
AARP survey, 79% of baby boomers plan to work in some capacity during
their retirement years.\7\ The shifting economic conditions will force
many baby boomers to continue to work because their jobs have been
downsized or they have not saved enough for retirement. However, others
will want to change to less demanding careers or will just want to give
back to their community. With the wisdom and experience older Americans
bring to table, investing in their education could be a boon for
evolving businesses and distressed labor sectors, such as education and
health care.\8\
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\6\ The Washington Post, ``One More Time, With Meaning,'' January
27, 2008.
\7\ The Wall Street Journal, ``Second Acts: Career Paths for Worn-
Out Executives,'' April 9, 2008.
\8\ See id.
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With those challenges in mind, we urge the Subcommittee to consider
passing tax legislation to stimulate the creation of lifelong learning
accounts.
Lifelong Learning Accounts
As mentioned above, LiLAs are employer-matched, employee-owned
individual educational accounts used to finance workers' education and
training. The vision is for all workers to contribute to LiLAs and have
those contributions matched by their employers--much like a 401(k), but
for education and training. LiLA contributions could also be matched by
third parties, including philanthropic, federal, state, and local
government resources. LiLA's have the following features:
Universal Eligibility. All individual workers are
eligible for accounts.
Broad Use of Funds. Eligible expenses include tuition
and fees, supplies, materials, and books. Allowable educational
activities include, but are not limited to, studies related to
a worker's job or industry and training for a new career.
Portability. LiLAs stay with the employee regardless
of the person's current employer or employment status.
Voluntary Participation. Individuals and employers
have the option of participating.
Matched Funding. LiLAs are funded through individual
contributions, employer matches, and potentially third party
funds.
Informed Choice. Individual participants choose the
training and education they need to meet their career goals
that are grounded in an individual learning plan developed with
educational/career advisors.
CAEL and Experience Wave have been working with leaders across the
country to advance policy in support of lifelong learning accounts--in
particular federal tax incentives for employer and employee LiLA
account contributions.
On January 4, 2007, Senator Cantwell introduced a ``demonstration
project'' version of this proposal under which up to 200,000 taxpayers
who are residents in 10 designated states could participate. The bill,
S. 26, has two co-sponsors, Senator Snowe and Senator Collins.
Congressman Allen introduced companion legislation, H.R. 2901, on June
28, 2007, which was co-sponsored by Congressman Michaud.
The bills are very similar. Both bills establish tax incentives for
Lifelong Learning Accounts. The accounts are funded through employee
and employer contributions. The employee and the employer both are
allowed an income tax credit not to exceed $500 for their account
contributions. The account funds would be excluded from taxable income
if the funds are spent on higher education expenses. Any amounts
withdrawn in excess of the individual's higher education expenses would
be included in income and assessed an additional 15 percent tax.
In addition, Congressman Emanuel and Congressman Ramstad just
introduced a national lifelong learning accounts bill (H.R. 6036). The
bill provides tax incentives to participating employees and employers,
including a refundable tax credit equal to 50% of the first $500
contributed and 25% of the next $2,000 contributed by the employee. The
employee can use the funds in his or her account at any time for
education or courses of instruction (including training and
apprenticeship programs). These bills are a model of what can be done;
the Subcommittee and its Members are free to fashion their own
legislative solution.
The Success of LiLAs
Since 2001, CAEL has launched several pilot LiLA projects in
partnership with LiLA champions across the country. These projects have
been located in Chicago, northeastern Indiana, San Francisco, Kansas
City, and the states of Illinois and Maine. The pilot programs have
transformed many participants' lives Here are some examples:
Paul Kelvington, a participant in the Chicago
demonstration site, set money aside for college while he waited
tables. After eighteen years out of school, he is now earning
his bachelor's degree with the goal of working in the area of
alcohol and drug counseling. ``There are a lot of young kids
out there that don't have a positive role model in their
lives,'' he says. ``I want to be that type of person and in
order to impart wisdom I have to education myself. I want to be
able to help people and point them in the right direction.''
The LiLA program helped Paul reach his education goals
affordably: ``People should never stop learning. The LiLA
program helps you financially and it won't break the bank.''
Becky Miller, a married mother of 9-year-old twin
boys, found saving for education difficult before the LiLA
program. She was promoted from an assembler to an inspector at
ITT Aerospace Industries in Fort Wayne, Indiana while
participating in the LiLA demonstration. She says, ``I never
had the money to finish [my degree] until the Lifelong
[Learning] Account program came around. When I found out I
could finish my degree, I was thrilled!'' Becky is now inspired
to continue to save--this time for her retirement.
Fanni Munoz stated taking English as a Second
Language courses from City College of San Francisco as soon as
she was accepted into the LiLA program. By improving her
language skills, Fanni earned a promotion shortly after she
began her classes. After observing Fanni's improved work
performance and her high motivation level for increasing her
skills, Fanni's supervisor nominated her for the Outstanding
Employee Award at UCSF Medical Center. She has achieved two
promotions in two and half years. Fanni completed her Human
Resource Management Certificate at San Francisco State
University, Extended Learning. ``Thanks for LiLA! Without the
program, I would not be where I am right now. I can see many
more career opportunities in front of me after I have completed
the certificate. [It] is such a fantastic program that helps me
advance my career!'' \9\
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\9\ Yahoo! News, ``Senators Cantwell and Snowe Introduce Education
Account Bill to Make American Workers More Competitive,'' January 8,
2007.
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At age 54, Vicki went back to school with the help of
a LiLA to pursue her Teaching Certificate. She completed her
program in 2004 and is currently pursuing a full-time
elementary school teaching position. She says, ``[T]he program
is wonderful . . . . [the] LiLA program helped me keep my head
above water.'' \10\
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\10\ Due to time constraints, we could not reach the individual for
consent to use her story, so a fake name has been substituted.
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Christie, at age 57, used a LiLA to enroll in
numerous French language classes because she wanted to add to
the authenticity of her French restaurant. Now that she is
semi-fluent in French, Christie is in the process of taking
other classes, including accounting and a computer course in
Lotus, that will help her in the future. Christie says, ``I
haven't been back to school for 30 years and going back to any
classroom can be intimidating . . . . [O]nce you put your foot
in the door and have success, it motivates you to do more. [A
LiLA] made this much easier for me.'' \11\
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\11\ Due to time constraints, we could not reach the individual for
consent to use her story, so a fake name has been substituted.
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With a LiLA, the mother working as a legal secretary in Congressman
McDermott's hypothetical could have a similar success story as Paul,
Becky, Fanni, Vicki, and Christie. And who knows, maybe after working
as a legal assistant she will decide to continue her educational
pursuits like Christie. Whatever she decides, a LiLA can help her
fulfill her dream.
Conclusion
LiLAs provide employees with the opportunity to increase their
future prospects, whether by attaining a higher level of education or
by acquiring new skills to meet the demands of a changing economy. We
strongly urge the Subcommittee pass legislation to encourage the
creation of LiLAs and help adult learners fulfill their dreams.
Statement of Joseph B. Moore, Cambridge, MA 02138-2790
As President of Lesley University in Cambridge, Massachusetts, and
Chair of the Board of Trustees for the Council for Adult and
Experiential Learning (CAEL), I am pleased to endorse the testimony
provided by CAEL and M+R Strategic Services to the Subcommittee on
Select Revenue Measures for its hearing on Education Tax Incentives. I
would also like to express my strong support of federal tax policy to
advance Lifelong Learning Accounts (LiLAs).
In our work, we see many adult students who struggle to pay for
school with little in the way of financial assistance. CAEL, a national
non-profit organization dedicated to advancing lifelong learning,
developed LiLAs as a strategy to close this financing gap and put
education and training within the reach of working adults. Our
experience with employers also reveals that employees who are enrolled
in post-secondary education pursuing a college degree are more reliable
and productive employees. The return on the modest financial investment
is immediate and substantial.
Statement of Reid Cramer
I work in the Asset Building Program of the New America Foundation,
a nonpartisan think tank in Washington, D.C. Our work is committed to
identifying programs and policies that expand asset ownership in ways
that help more Americans achieve economic security, which today,
perhaps more than ever, requires access to both income and assets.
Clearly, one of the most significant factors in generating these
resources is education, particularly post-secondary education. The
problem, also clearly stated, is that for many Americans high and
escalating tuition costs make it increasingly difficult to afford and
access a post-secondary education.
In 2007, the total cost of attending a four-year public university
jumped to $13,589--an increase that far exceeds the rate of inflation
at a time when median wages were largely stagnant. As government and
institutional aid fails to keep pace with increased costs, few families
can expect to afford higher education expenses out of their existing
resources. For families wary of taking on costly and onerous levels of
debt, savings has become central to accessing education and training.
Accordingly, these costs are especially challenging for families with
fewer resources. More than half of academically-qualified low-income
students are prevented from attending a four-year college because of
cost considerations.\1\ Given rising tuition costs and the value of a
college degree, it is imperative to provide all Americans, and
especially lower-income families, the opportunity to save for their
futures.
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\1\ Christina Milano (2003). Hearing on ``Expanding Access to
College in America: How the Higher Education Act Can Put College Within
Reach'' Washington, D.C.: Committee on Education and the Workforce's
Subcommittee on 21st Century Competitiveness.
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It is hard to argue with anyone claiming to be confused by the
array of tax incentives the Federal Government has created with the
purpose of promoting education, especially when considered along with
the broader set of tax expenditures intended to support savings. In
general, there is much to be said for reform efforts that consolidate
and simply the tax treatment of savings in general and post-secondary
educational savings in particular. This should be as part of a larger
tax reform effort.
One of the fundamental problems with our current approach is that
by using the Tax Code, including deductions and the promise of tax-free
earnings, we fail to assist many families that could benefit from
assistance the most. We should be striving to realize more inclusive
policies that create opportunities for all aspiring Americans,
regardless of their tax liabilities. This critique applies particularly
to one of
the newest policies, which has quickly developed into the preeminent
savings vehicle for post-secondary education, 529 college savings
plans.\2\
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\2\ Section 529 of the U.S. Tax Code defines the tax rules that
govern qualified tuition programs for post-secondary education. These
qualified tuition programs are administered by each state, and include
prepaid tuition benefit contracts and savings accounts. Most of my
comments focus on the accounts held in state-run 529 savings plans.
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These 529 savings plans are established and maintained at the state
level. Each state plan includes the administration of an account
system, the offering of investment options, and the oversight of
private-sector investment management. The Federal Government allows for
earnings from these personal accounts to be withdrawn tax-free when
used to pay for qualified higher education expenses and many states
offer additional incentives, such as tax deductions on state income tax
calculations.
By the end of 2006, deposits in 529 plans exceeded $91 billion--up
from just $20 billion four years ago. More than 7.2 million individual
accounts have been established, with an average account size of
$12,500. Participation in 529 plans is expected to increase rapidly,
with total investments expected to exceed $257 billion by 2011.
The advent of 529 savings plans reflects the general trend to
employ an account-based approach to encourage savings. Still many
higher-income families would likely send their children to college even
without 529 plans and their tax benefits. For lower-income families,
the ability to save for post-secondary education is certainly likely to
increase access to post-secondary educational opportunities.
Unfortunately, they are not expected to greatly benefit from the tax
advantages of the 529 plans.
However, there are several promising features of 529 plans which
make them a potentially attractive savings platform for families up and
down the income scale. I would like to use this testimony to highlight
these features and then identify how they could become the basis of a
more inclusive savings policy that help provide more Americans, from
all income levels, the opportunity to save for their future.
Using 529 Plans as a Savings Platform
Collectively, these state-run 529 plans have characteristics that
make them a powerful tool to facilitate saving. While each state is
responsible for constructing their own 529 plan, they all have the
following beneficial features: (1) public sector oversight that allows
incentives and coordination with other policy efforts; (2) centralized
accounting functions; (3) a limited number of investment options; and
(4) the ability to cross subsidize between large and small accounts.\3\
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\3\ Marget Clancey, Reid Cramer, and Leslie Parrish (2005). Section
529 Savings Plans, Access to Post-Secondary Education, and Universal
Asset Building. Washington, D.C.: New America Foundation.
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Public Sector Oversight and Policy Coordination
Because each state controls their savings plan, they have the
ability to facilitate coordination with other program efforts and
policy objectives. Some states are more active than others in reaching
out to lower-income families. These states' actions include broad
outreach efforts, small minimum deposit requirements, scholarships for
accountholders, and other incentives. A number of states offer a
savings match to low- and moderate-income families who are state
residents. With these targeted incentives, 529 plans are a preferred
route for many families to save for post-secondary education compared
to other tax-advantaged vehicles such as Coverdells or IRAs. Also,
partnerships with public and non-profit entities allow states to market
their 529 savings plans in non-traditional venues, such as in schools,
public libraries and other social service systems.
Centralized System of Accounting
As each state is responsible for overseeing plan participation,
they create a centralized system of account management. This means that
all participants are in the same system, and a single provider carries
out all accounting functions. With this centralized system, it becomes
easier and less expensive to service the accounts. This is similar to
how a 401 (k) plan works. These systems are capable of tracking
contributions, investments, and earnings for all plan participants. It
also creates the opportunity to match deposits for low- and moderate-
income state resident families.
Limited Investment Options
In most 529 plans there is a prevailing simplicity in investment
options. Usually only a limited number of funds are offered that
capture a range of risk and return characteristics. Professionally-
managed mutual funds generate a degree of diversification. Most states
generally offer a conservative guaranteed-return fund based on
government bonds, balanced funds based on the beneficiary's age, and a
small set of funds that track different aspects of the securities
market. The notion is that a limited set of investment options provides
account holders adequate investment choice in pursuing their investment
strategies and is preferable to the information overload that may be
experienced if choosing among an unlimited number of investment
options. Recent studies focusing on 401(k) plans have found that too
many investment choices can lead to financial inertia, paralysis, and
low participation--qualities to avoid in long-term investing.
Small Accounts Viability
Centralizing administrative functions also creates economies of
scale that can help lower costs. With such a large asset pool, states
are in a strong position to negotiate a more competitive fee structure
with their private sector investment managers than would be offered to
individual investors. In many states, these advantages have been
realized and investment companies have departed from their normal
business practices to offer pricing and minimum contribution
concessions. As a result, many 529 plans have relatively low initial
deposit requirements compared to the mutual fund industry. There is the
potential to lower fees further as assets under management rise.
Because large- and small-value accounts are held in the same plan,
there is a natural cross-subsidy where the smaller accounts (which may
be unprofitable) can be supported by the larger accounts (with higher
profit margins). As the state negotiates and controls the fee
structure, there is an opportunity to support small accounts within the
529 college savings plan structure.
Several potential drawbacks should also be recognized that
potentially undermine the appropriateness of using 529 plans as a
savings vehicle for lower-income families. These include consideration
of how these savings will interact with eligibility for financial aid
and public assistance programs, high administrative costs which some
state plans charge that erode earnings, and penalties for non-qualified
uses if a recipients opts not to choose post-secondary education. Each
of these issues should be addressed directly as part of a reform effort
to make 529 plans more effective and inclusive savings vehicles.
Options to Make 529 Plans More Effective and Inclusive Savings Vehicles
Over the last thirty years, the number of specialized savings
accounts has expanded significantly, extending well beyond 529 savings
plans.\4\ While this policy trend represents a shift toward asset-based
policy, the implementation of these efforts has been considerably more
regressive than the proceeding social insurance and means-tested
transfer programs developed since the New Deal. Furthermore, the need
to save for college is an extension of the underlying importance of
savings as the basis for more extensive asset building. As such, there
is a case to be made for government to support a more inclusive asset-
building policy, which could include a reformed 529 Savings Plan
program.
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\4\ The list includes traditional Individual Retirement Accounts
(IRAs) in 1974, Coverdell Education Savings Accounts in 1997, 401(k)
plans in 1978, and Health Savings Accounts first created in 1996, and
Roth IRAs in 1997.
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The involvement of state governments in 529 savings plans has
provided a laboratory of innovation and led to a series of insights.
First, it is clear that the public sector can play a leading role in
defining and overseeing policy. Second, private financial firms can
build upon their expertise to effectively manage assets and keep
administrative costs down with high account volumes, limited
transactions, and a small set of investment choices. Third, incentives
must be crafted for each target population. Fourth, consumers must have
access to timely and transparent information to make informed
investment decisions that are right for them.
While the structure of most state-run 529 plans offers an effective
savings platform, the federal tax incentives associated with these
accounts primarily restrict benefits to middle- and upper-income
families. Accordingly, it is unlikely that this federal policy, if left
unchanged, will significantly increase access to post-secondary
education opportunities.
Building on these insights, there are a series of policy options
that would improve the effectiveness and inclusiveness of this policy
effort. These proposals built on the guiding principles of
transparency, inclusiveness, and offering saving incentives for those
who need them most, will enable families to evaluate and make informed
choices as to how best to save for college.
Use 529 Plans as a Platform for Lifetime Education Savings
529 plans have qualified uses that include a range of post-
secondary educational expenses. These uses should be clarified and
expanded to cover more asset-building activities. While commonly
associated with saving for a child's higher education expenses, these
accounts can work just as well for working adults looking to save for
their own higher education and skills training needs. For workers
looking to command a higher wage in their current field, or switch
fields altogether, higher education and training is essential. For
individuals who cannot pay for tuition, books and fees out of pocket--
and are wary of taking on onerous debt--saving is the answer. Instead
of creating new workforce training accounts, the Federal Government
should use the existing infrastructure available through 529 accounts
and work with states to promote and incentivize the use of these
accounts by working adults
Add 529 Plans to the List of Products Eligible for the Saver's Credit
The Saver's Credit currently provides a 50 percent match--in the
form of a non-refundable tax credit--to low-and moderate-income people
who contribute to a retirement account such as a 401(k) or IRA. To
further promote savings in general, a range of savings products,
including 529s, could be added to the list of products that trigger
this credit; the administration proposed such a change as part of the
FY 2008 Budget. Certainly one could argue that pre-retirement assets--
especially a post-secondary education--is a critical element of
retirement security, and it should be noted that all IRAs already
permit tax-and penalty-free withdrawals for post-secondary education.
Matching Grants to Low-Income Savers
Currently 529 plans are largely underutilized by low- and middle-
income families. A number of states have dedicated funds to match
savings in 529 plans as an additional incentive for low-income
families. These incentives appear to be successful in encouraging
families to contribute to 529 plans. Seven states--Colorado, Louisiana,
Maine, Michigan, Minnesota, Rhode Island, and Utah--already provide
matching funds to low-income savers, and Arkansas will begin providing
targeted matches in 2008. Additional resources could be devoted to
helping states develop matching grant programs.
Create a State Innovation Fund
A variety of state and private sector actors have enacted
innovative programs within their 529 plans to primarily help low-income
children pay for college. For example, a few non-profit organizations
have offered matches to families saving for college through parallel
529 scholarship accounts. In SEED for Oklahoma Kids, 1,000 newborns
will receive a 529 plan with a starter deposit of $1,000. Financial
information and matching deposits will be provided as incentives for
families to continue to save for a post-secondary education. Coalitions
are being formed in states such as Kentucky and Michigan to look into
the possibilities of universal 529s for every child in the state with
progressive savings incentives incorporated to help low-income
families. The Federal Government could encourage these types of
innovative activities by sponsoring a competitive grant process where
states could receive awards to help seed these initiatives.
Facilitate Better Disclosure and Comparison of 529 Plans
Because they are created by state governments, 529 plan investments
are not subject to federal security laws such as those covering most
mutual funds. In addition, research shows that individuals saving in
broker-sold plans were frequently doing so in out-of-state plans, even
if they would potentially benefit more from saving in their in-state
plans because of state tax incentives. This raises the question of
whether brokers recommend plans that benefit themselves rather than
seeking the best plan for their client. At a minimum, brokers should be
required to inform clients about any benefits that exist from utilizing
their own state's 529 plan. In addition, the Federal Government should
support efforts to allow the easy comparison of all plans in a
particular state and among states. Websites, such as
savingforcollege.com, provide a simple comparison of 529 plans which
could be promoted or serve as a model. Finally, states should be
encouraged to market their direct-sold plans to their residents, which
are usually a less expensive alternative to the broker-sold options.
Collect Better Data on Who Saves and Benefits from 529 Plans
Because data is generally not collected about 529 plan
accountholders' socioeconomic details, we do not know how plan
ownership varies by income and which segments of the population benefit
from these tax incentive the most. If this data were collected, it
could help shape improvements to 529 plan policies in the future,
helping to ensure that tax breaks and other incentives are serving
their intended purpose. Useful data about the saving habits of low-
income families in 529 plans could be gained from those states offering
matching grants, since an application disclosing income must be
provided.
Require Employers to Offer Payroll Deduction into 529 Plans
One of the most effective ways to encourage families to save is to
make the process automatic. Millions of Americans have already opted to
direct a portion of their paycheck into a restricted account such as an
IRA or 401(k), allowing them to save for retirement with minimal
effort. Payroll deduction has enabled workers to build retirement
security by making one, initial decision to divert a portion of their
income; the same process should be used to facilitate saving for higher
education. Employers should be required to offer payroll deduction into
Section 529 higher education savings accounts if requested by their
employee. Small- and medium-sized employers that do not already offer
payroll deduction can be offered a small tax credit to cover the costs
associated with implementing the change.
Statement of Robert Shireman
I am writing to request that as the Members of the Subcommittee
consider how best to structure tax incentives for higher education,
they also address a tax disincentive that runs counter to the purpose
of the federal financial aid system in general, and to the intent of
important new loan forgiveness programs in particular.
As part of the College Cost Reduction and Access Act
of 2007 (CCRAA), Congress created three new programs aimed at
reducing the burden of student debt and increasing incentives
for students to pursue careers in public service. The Income-
Based Repayment program (IBR) will keep loan payments fair and
manageable for borrowers with low earnings relative to their
debt, and forgives any debt that may remain after 25 years of
repayment. The new Loan
Forgiveness for Public Service Employees program will
forgive any debt that remains after borrowers have made 10
years of qualifying payments while working in an eligible job.
Qualifying payments for public service loan forgiveness include
IBR payments made in the Direct Loan Program, as well as
payments under the existing, and much smaller, Income-
Contingent Repayment program (ICR). Eligible jobs include those
in state, local, and Federal Government as well as 501(c)3
nonprofit organizations.
The new TEACH program provides future teachers with
loans that will be treated as grants--forgiven in full--if they
meet certain teaching criteria within eight years of
graduation, but must be repaid if they do not meet the
criteria.
In general, the Code treats canceled or ``forgiven'' loans as
taxable income, although there are specific exceptions for some student
loans in certain circumstances. It seems likely--though neither the IRS
nor the Education Department has addressed the issue--that loans
canceled under the new programs (2) and (3) would already be exempt
from taxation under Section 108(f) of the Internal Revenue Code, since
they involve loan forgiveness by a third party (the Federal Government)
as part of a program to forgive student loan debt of individuals
working for a certain time in certain professions.
However, it seems clear that loans forgiven for those in IBR and
ICR do not qualify for tax exemption because they are not job-specific.
This is a particular concern because borrowers who meet the income-
based forgiveness criteria are the most likely to face significant
hardships if the forgiveness results in a tax liability.
We are seeking an amendment that would make clear that loans
canceled under all three of these new programs, which apply only to
federal student loans in these limited circumstances after a number of
years of repayment, would not be considered income for federal income
tax purposes. Otherwise, the very borrowers whom these programs are
supposed to protect from unmanageable repayment burdens will instead be
burdened with unmanageable tax obligations.
At the same time that this issue is being addressed, we want to
make sure that other loan cancellation provisions that are not
currently taxed continue to be treated in that manner. This includes
loans canceled due to school closures, falsely-certified loans, and
discharges as a result of death or permanent disability.
Thank you for the opportunity to submit this recommendation for the
record. The Institute (www.ticas.org), which sponsors the Project on
Student Debt, is a nonprofit policy research organization with offices
in Washington, D.C., and Berkeley, California.