Do Higher Education Tax Credits Work?

A new study argues that higher education tax credits, despite being quite expensive, do almost nothing to increase access to higher education and don't do a good job of targeting the most needy for financial assistance either. It states that:

In 2014, the federal government spent about $23 billion on three programs offering tax credits to households paying for higher education. In The Returns to the Federal Tax Credits for Higher Education (NBER Working Paper No. 20833), George B. Bulman [UC-Santa Cruz] and Caroline M. Hoxby [Stanford] find that the credits have little or no effect on college-going in the U.S. The credits do not affect whether students enroll at all, whether they attend four-year colleges, how expensive their colleges are, or the scholarships and grants they receive. The authors conclude that the tax credits are primarily "a transfer from some individuals to others." ... The credits are often justified as "paying for themselves" under the notion that they raise educational attainment and consequent earnings. The evidence does not support this justification.

FWIW, I've long felt that the best way to finance higher education is with scholarships that require a showing of both academic merit and financial need. Powerful evidence shows that equally academically able students from less affluent families are much less likely to attend college, to the great detriment of our economy and to their personal detriment.

But, a large share of aid provided by state governments who are the primary source of tuition reduction for students attending public colleges and universities is basically wasted because a surprisingly large share of it goes to affluent families who could comfortably afford to pay an unsubsidized price for attendance at a public college, and because another large share of it goes to students who are not academically ready to go to college and drop out while receiving few benefits for having attended (and sometime facing the harm of incurring student loans without getting the educational credentials that they need to pay for it). It appears that the tax credits also share the first problem to a significant extent.

If we withdrew public financial support for students that aren't academically ready for college (or at least limited it to the most cost effective form of higher education at non-residential public community colleges) and withdrew public financial support for tuition of those who can comfortably afford to send their kids to colleges and universities, the money saved could be redirected towards scholarships requiring both merit and need that could dramatically increase college attendance and completion by academically able less affluent students.

Few public expenditures would generate greater long term economic returns per dollar spent than this policy. And, few policies would do more to advance meritocracy while reducing government aggravated income inequality.