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Tax Incentives for Higher Education in the Internal Revenue Code: Education Tax Expenditure Reform and the Inclusion of Refundable Tax Credits

47 Pages Posted: 19 Feb 2009  

Sean Michael Stegmaier

O'Melveny & Myers LLP

Date Written: January 1, 2008


The notion of improving access to - and affordability of - higher education is a theory long transfused into American politics and social policy. In the 2006 Congressional elections, Democratic candidates advocated improved access to higher education through tax reform as a pivotal point in their campaigns. However, as this paper attempts to demonstrate, more fundamental measures for reform are needed to improve access to higher education, especially for those lower income taxpayers who stand to gain the greatest marginal benefits from improved incentives. The focus in reforming education tax incentives in the Code should be on those students not otherwise likely to attend institutions of higher learning. In other words, instead of focusing on easing the burden of those who will attend college regardless of a tax benefit, tax expenditures should be designed with those students in mind who may ultimately be persuaded to pursue post-secondary education by the availability of the tax benefit.

Government subsidies for post-secondary education are highly desirable because they promote domestic and global economic efficiencies and economic equity. Given the fact that college tuition is now rising more rapidly than inflation, government subsidies through refundable credits, scholarships, loan forgiveness programs and similar tax incentives are invaluable in encouraging potential students to seek higher education in the United States. However, though the United States was once considered the world leader in educational attainment, recent studies show that it is now ranked twelfth among major industrialized countries in this category.

In addition to making educational tax incentives more widely available to those who stand to benefit most, any reform must address the daunting multitude of education tax incentives currently available to taxpayers. As the GAO noted in 2006, the currently existing tax incentives are so numerous, overlapping and complicated that they impose a significant burden on students and families to "identify applicable tax preferences, understand complex rules concerning their use, and correctly calculate and claim credits or deductions."

Unless otherwise noted, this paper operates on the assumption that all recommendations for Code and tax expenditure reform are to be revenue-neutral. Part II of this paper briefly discusses the various tax benefits for education expenses of individuals currently existing in the Code. The current tax incentives are analyzed according to when the tax benefit is realized by the taxpayer, either for current expenses, previously incurred expenses, or saving for future expenses. Part III provides an analysis and critique of the current tax incentives, with a special focus on their complexity and inability to reach target taxpayers effectively. Part IV of this paper proposes use of a refundable credit as the most effective means of structuring an incentive through the Code, both from an economic and from a policy standpoint. This Part goes on to discuss potential arguments against the use of refundable tax credits and concludes with a discussion about ways to structure a refundable higher education tax credit.

Suggested Citation

Stegmaier, Sean Michael, Tax Incentives for Higher Education in the Internal Revenue Code: Education Tax Expenditure Reform and the Inclusion of Refundable Tax Credits (January 1, 2008). Southwestern University Law Review, Vol. 37, No. 1, January 2008. Available at SSRN:

Sean Michael Stegmaier (Contact Author)

O'Melveny & Myers LLP ( email )

610 Newport Center Drive
17th Floor
Newport Beach, CA 92660
United States

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