Simplifying Tax Incentives and Aid for College: Progress and Prospects (An NBER Working Paper)

By: Susan Dynarski, Judith Scott-Clayton, & Mark Wiederspan | National Bureau of Economic Research | January 2013

The application for federal student aid is longer than the tax returns filled out by the majority of U.S. households. Research suggests that complexity in the aid process undermines its effectiveness in inducing more students to attend college. In 2008, an article in Tax Policy and the Economy showed that most of the data items in the aid application did not affect the distribution of aid, and that the much shorter set of variables available in IRS data could be used to closely replicate the existing distribution of aid. This added momentum to a period of discussion and activity around simplification in Congress and the U.S. Department of Education.

This paper provides a five-year retrospective of what has changed in the aid application process, what has not, and the possibilities for future reform. While there has been some streamlining in the process of applying for aid, it has fallen far short of its goals. Two dozen questions were removed from the aid application and a dozen added, reducing the number of questions from 127 to 116. Funding for college has also been complicated by the growth of a parallel system for aid: the tax system. A massive expansion in federal tax incentives for college, in particular the American Opportunity Tax Credit, has led to millions of households completing paperwork for both the IRS and the U.S. Department of Education in order to qualify for college funding.