To Choose or Not to Choose: Federal Income Tax Credits and Deductions and College Choice Decisions

41 Pages Posted: 7 Jan 2013 Last revised: 19 Nov 2013

See all articles by Tatyana Guzman

Tatyana Guzman

Indiana University - School of Public and Environmental Affairs (SPEA)

Date Written: January 7, 2013


Education-related tax preferences studied in this paper (Hope credit, Lifetime Learning credit, and tuition and fees deduction) are a form of federal aid available for qualifying students who are currently enrolled in postsecondary institutions and paying certain college-related expenses. Such tax-based aid simply reduces personal federal income tax liabilities. The Hope and Lifetime Learning credits have been around since 1997 and education-expense deductions since 2001. Since then, the federal government has spent hundreds of billions of dollars on these tax preferences according to the Office of Management and Budget (OMB). In 2010 alone, the OMB estimates that education-related tax preferences for individuals cost the federal government about 36 billion dollars in foregone taxes. Despite the magnitude of these tax preferences and the fact that they have been around for fifteen years, research on the ability of tax preferences to actually promote college matriculation and success is very limited. Three prior articles examine this issue: all look at the effect of tax credits on the decision to enter college (Long, 2003; Turner, 2011; LaLumia, 2012); one additionally looks at the choice between two and four year institutions and college pricing (Long, 2003).

I use four waves of a National Postsecondary Student Aid study (NPSAS) (NPSAS:96, NPSAS:00, NPSAS:04, and NPSAS:08) restricted-use data files to learn how tax-based aid affects college choice decisions. The Tax Relief Act of 1997 was an important change in tax code related to educational tax preferences which created a natural experiment. I estimate an instrumental variable difference-in-differences model, where the 1995-96 school year, two years before the major changes in tax preferences’ legislature occurred, is treated as a reference year. The other three waves of data are considered post years (two, six, and ten years after the policy implementation). I find that students eligible for the tax-based financial aid are more likely to attend private for-profit and two-year colleges. In addition, eligible students are more likely to attend college part-time.

JEL Classification: H31, H24, H52, I22

Suggested Citation

Guzman, Tatyana, To Choose or Not to Choose: Federal Income Tax Credits and Deductions and College Choice Decisions (January 7, 2013). Indiana University, Bloomington School of Public & Environmental Affairs Research Paper No. 2013-01-01, Available at SSRN: or

Tatyana Guzman (Contact Author)

Indiana University - School of Public and Environmental Affairs (SPEA) ( email )

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