Tucked in the trillion-dollar tax bill that the House Ways and Means Committee is now working on is a provision of immense financial benefit to community college students.
The change would eliminate the taxation of Pell grants and change the American Opportunity Tax Credit (AOTC) law to, in effect, allow community college students to receive Pell grants as well as the $2,500 tax credit. The changes are particularly positive for community college students because in both cases their relatively low tuitions have resulted in reduced benefits.
Under current law, Pell Grant recipients must pay taxes on any grant award received that is not used for tuition and related expenses. Any grant amount in excess is subject to taxation. While exactly how many Pell Grant recipients pay tax on their grants is not known, the American Council on Education estimates that it exceeds 700,000.
In any case, the American Association of Community Colleges has long contended that it undermines the program’s purpose to tax grants targeted for those with demonstrated financial need. For most students in sectors outside of community colleges, their grants aren’t taxed because their tuitions exceed their grant amounts. However, with average tuition and fees of $3,770, and the current Pell Grant maximum of $6,495, community college students often must pay tax on their grants.
A similar dynamic prevents hundreds of thousands of community college Pell Grant recipients from qualifying for the $2,500 AOTC. Under current law, any expenses that the tax credit is allowed to cover, which include tuition, fees and course materials, are reduced by any Pell grants that aren’t taxed – i.e., those used for tuition. This immediately eliminates the bulk of community college students who receive Pell grants from also receiving the AOTC, while students attending costlier institutions with far less financial need continue to receive the full $2,500 tax credit, another vexing policy.
The Ways and Means reconciliation bill’s fixes for these problems are derived from legislation introduced by committee member Rep. Lloyd Doggett’s (D-Texas) Tax-Free Pell Grant Act, H.R. 4173. Doggett’s legislation drew three Republican co-sponsors, including Rep. Mike Kelly (R-Pennsylvania), who joined Doggett as an original co-sponsor of the bill along with Rep. Danny Davis (D-Illinois).
AACC worked with these legislators and other House members to secure the bill’s introduction and subsequently convince the Ways and Means committee to incorporate it into the reconciliation bill. However, the more important advocacy was undertaken by AACC members, including with Ways and Means Chair Richard Neal (D-Massachusetts).
With the House legislation addressing this key issue, attention now shifts to the Senate. Sen. Sheldon Whitehouse (D-Rhode Island) has introduced S. 2455, also called the Tax-Free Pell Grant Act. Whitehouse’s legislation expands upon the House bill by adding dependent-care expenses and computer costs to the AOTC and Lifetime Learning tax credit. AACC strongly supports this legislation, and AACC President and CEO Walter Bumphus has led a broad higher education effort behind Whitehouse’s bill.
However, all signs are that getting this legislation included in the Senate Finance Committee’s version will be a challenge, not least because the driving purpose of this legislation is to raise revenue, not reduce it. Also, as expected, Finance Committee members and other Senators are jockeying to have their priorities incorporated.
AACC thanks its members who have helped in its advocacy on this issue thus far, and we will continue to ask for their assistance. The stakes for the neediest community college students are enormous, while opportunities to change the tax code in this fashion are rare.