The Taxpayer Relief Act of 1997 provides to eligible students and, in many cases,
their families, a wide array of federal income tax benefits, including tax credits,
savings incentives, and a student loan interest deduction. This new law represents
a dramatic increase in the federal government's investment in higher education; once
the new benefits are fully used by taxpayers, the tax provisions are projected to
almost equal all other forms of federal student financial aid programs combined.
The new law also represents a dramatic shift in how the federal government invests
in education after high school, for two reasons. First, the new law uses the incentives
of the tax code rather than outright grants, scholarships or loans to help students
and their families pay for college. As a result, estimates of the cost of the provisions
are based not on expected expenditures, but on foregone revenues. Secondly, the new
tax provisions are not need-based. In fact, as the analysis in this guide reveals,
the primary beneficiaries of the new tax credits and savings incentives are middle
income and upper-middle income taxpayers. The student loan interest deduction will
most likely benefit students of all incomes.
While the benefits of the new federal tax provisions flow directly to individual
taxpayers, the new law has significant implications for state higher education finance.
Many states have already begun to consider the implications of the new law for their
college-going populations, and to discuss state policy alternatives. This guide recommends
that as each state considers whether and, if necessary, how to adapt its own policies
in response to the federal initiative, the governor and legislature should affirm
- affordability problems are addressed for all income groups, and
- any new state policies at least maintain current levels of state support for
This guide recommends that each state conduct its own analysis of the effects
of the tax provisions on its own current and prospective college-going populations,
so that state policy makers can know how citizens are benefiting from the federal
tax policies, can identify gaps in college opportunity, and can effectively analyze
the options for addressing them.
The overriding purpose of the new federal tax provisions is to make college more
affordable. It now depends on state policy makers to ensure that families from all
income levels receive assistance as they aspire to one of America's most important
goals: sending their children to college.