Eliminate Certain Tax Preferences for Education Expenses

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

Billions of Dollars 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2021–
Change in Revenues 3.1 15.6 15.8 16.0 16.1 16.4 17.0 17.3 17.6 17.9 66.6 152.8

Data source: Staff of the Joint Committee on Taxation.
This option would take effect in January 2021.
The estimates include the effects on outlays resulting from changes in refundable tax credits.

Three major tax preferences support higher education. First, the American Opportunity Tax Credit (AOTC) covers qualifying educational expenses for up to four years of postsecondary education. In 2020, the AOTC can total as much as $2,500 per student and is partially refundable—that is, families whose income tax liability (before the credit is applied) is less than the total amount of the credit may receive a portion of the credit as a payment. Second, the nonrefundable Lifetime Learning tax credit provides up to $2,000 per tax return per year for qualifying tuition and fees. Finally, tax filers may deduct from their taxable income up to $2,500 per year for interest payments on student loans. Those tax preferences are available to taxpayers whose income is below certain thresholds.

This option would eliminate the AOTC and the Lifetime Learning tax credit and would gradually phase out the deductibility of interest payments for student loans in annual increments of $250 over a 10-year period.