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Summary and Prospects for Further Research

For nearly a decade, federal higher education subsidies have increasingly been delivered through the tax code rather than through direct spending programs such as grants, loan subsidies, and work study. Recent tax provisions related to higher education include the creation of the Hope and lifetime learning credits, Section 529 (college saving) plans, Coverdell accounts (education IRAs), and the deduction for higher education expenses. Apart from some fairly substantial increases in the maximum Pell Grant (particularly between academic years 1995-96 and 2002-03) and a broadening of the population receiving loan subsidies, almost all new federal resources have been provided through the tax code and directed toward students from middle- and upper-middle-income families.

Beginning with the passage of the Higher Education Act in 1965 the principal goal of federal policy was to equalize higher education opportunities through programs designed to expand the enrollment of low- and moderate-income students. Basic (now Pell) Grants enacted in 1972, along with revised support service programs, were intended as the foundation upon which all other forms of aid—federal, state, and institutional—would be built. The framers of this landmark legislation sought to raise the aspirations and academic preparation of the target populations and not only improve their college attendance rates but also provide such students with broader institutional choices and better chances of completing college. These intentions remain unfulfilled. While the college participation rates of low-income students have improved over time, the gap in attendance between them and students from the highest income quartile is still nearly 30 percentage points. Even after controlling for ability as measured by test scores, the gap remains at 22 percent (Dynarski 1999). Moreover, low- and moderate-income students are disproportionately enrolled in two-year institutions and even more heavily in shortterm programs in for-profit and technical schools.

Since the passage of the Middle-Income Student Assistance Act of 1978 and the 1997 tax expenditure programs in support of higher education, federal policymakers have adopted an additional goal—namely, emphasizing and providing more resources to middle-and higher-income students and their families.

The shift in federal higher education assistance from direct expenditures toward tax expenditures and the shift in emphasis to new populations raise several concerns. For example, the shift toward subsidizing education through the tax code has thus far delivered little benefit to the lower end of the income distribution. The combination of the shifts in program types and intended beneficiaries may reduce the impact of federal support on narrowing of the college enrollment gaps between lower-income students and their middle- and higher-income counterparts.

To evaluate the impact of the current and alternative mixes of higher education tax and spending policies, it is necessary to assess who currently receives what subsidies and how the patterns of assistance would change as a result of changes in tax and expenditure programs. Key to the accuracy of this type of assessment is an ability to analyze the interactions among current programs and the impacts of combinations of potential program alternatives. Such an effort requires a different type of analysis from that typically applied to assessing alternative higher education assistance policies.

This paper describes an initial effort to build a microsimulation model that can provide detailed estimates of the distributional impacts of both tax and expenditure programs and the interdependencies of these two types of policy instruments. This new model was developed by the Urban Institute-Brookings Institution Tax Policy Center (TPC) with support from the Lumina Foundation for Education. This development effort involved creating new education modules for use in two different microsimulation models—the TPC's tax model and the Urban Institute's transfer income model (TRIM).

This paper reviews the results of using this new microsimulation model to estimate the distributional impacts and expenditure and revenue effects of major federal higher education tax and spending policies. In addition, the paper reports estimates of the effects of some prototypical policy changes as examples of the analysis that can be performed using these new models.

Note: This report is available in its entirety in the Portable Document Format (PDF).

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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