Washington, D.C., May 16, 2001—The largest federal tax relief program for college students, and one of the centerpieces of the Clinton administration's policy agenda—the HOPE Scholarship Program—is under fire in a newly released report that outlines widespread negative impacts on students and their families, colleges, higher education policy, and federal and state tax policies. The new study was written by Thomas R. Wolanin, a former Clinton administration education policy advisor and currently Senior Associate at The Institute for Higher Education Policy, a non-profit, non-partisan education research group.
In the first major review of this landmark policy that provides federal tax benefits for middle-income students who enroll in college, the report, Rhetoric and Reality: Effects and Consequences of the HOPE Scholarship, says the program fails to open higher education to qualified students who cannot attend and wastes limited taxpayer funds. The report adds significantly to the arguments for repeal of the HOPE program advanced in a recent report by the Congressional Joint Committee on Taxation.
The study claims the $6 billion annual HOPE program not only "squanders" its substantial funds by failing to produce significant national benefits, but also:
- encourages tuition increases;
- reduces financial aid benefits for low-income students;
- fails to encourage enrollment for those who need such incentives (especially in two-year colleges); and
- increases both the complexity and costs for students and families, higher education institutions, states, and the federal tax system.
Even the intended relief for middle-income students and their families has been negligible, the study states.
The HOPE Scholarship Program, part of The Taxpayer Relief Act of 1997, represented an unprecedented shift from the 30-year legacy of federal financial aid for needy college students. The study reports the costs of this middle-income tax program is projected to equal the cost of all other federal student financial aid programs combined. Annual costs for higher education institutions to comply with HOPE regulations alone are estimated at more than $100 million.
The report calls the program "wrongheaded" both in targeting middle-income students and in using the tax system to deliver benefits. The program's policy shift, it claims, virtually ignores the 13 million low- income Americans who could benefit from higher education and instead targets middle-income students who would have enrolled without the tax credit. In fact, due to this windfall, the program creates strong incentives for institutions to increase tuition or reduce financial aid and for states to reduce higher education expenditures.
Ultimately, the report states, the impact of the program will be to undermine both equity and access in higher education and therefore hamper future workforce productivity.
"Both the intended and the unintended consequences of the HOPE program undermine our fundamental educational goals: equal opportunity and access," stated Thomas R. Wolanin, Senior Associate at The Institute for Higher Education Policy. "We should repeal this program, re-think educational tax relief and the use of tax cuts as social policy, and reinvest these funds in our long-standing commitment to substantial financial aid for those who need it and who otherwise would not gain access to college."
The report shows that the HOPE program was instituted at a time when reducing the "burden" of college financing for middle-income families was a high political priority. However, college prices relative to income both then and now have increased more for low-income than for mid-income families. In 1972, the educational cost burden (ratio of price to income) for low-income families was three times that of middle-income families, and by 2000 it rose to four times.
According to the report, the HOPE program severely limits or disallows eligibility for low-income students by making HOPE benefits nonrefundable—eliminating those with no tax liability—by considering only tuition and fees, not overall educational costs, and by deducting tax-free education assistance (such as Pell grants) from tuition and fees. In this way, students with the lowest income, largest Pell grants, and lowest price of attendance will benefit least from HOPE despite having higher overall education costs.
Additionally, the study notes, the HOPE program fractures the federal higher education policy community and reduces both the federal and state tax base and revenues, compromises the fairness of the tax system, and produces market inefficiency.
Wolanin is the former Deputy Assistant Secretary for Legislation and Congressional Affairs at the U.S. Department of Education, and is now a Senior Associate at The Institute for Higher Education Policy. Also sponsoring the report was The Education Resources Institute (TERI), a Boston-based not-for-profit organization providing education information and financing services, and The Ford Foundation, as part of a series called "The New Millennium Project on Higher Education Costs, Pricing and Productivity."