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 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2023–
Decrease (-) in the Deficit -2.9 -14.4 -14.2 -14.1 -14.2 -14.0 -13.8 -13.6 -13.4 -13.2 -59.8 -127.7

Data source: Staff of the Joint Committee on Taxation.

This option would take effect in January 2023.

These estimates are relative to a baseline that does not reflect the effects of the Administration's recent proposed changes to student loan forgiveness and income-driven repayment plans.

Certain tax preferences, including two tax credits, directly support students pursuing higher education. First, the American Opportunity Tax Credit (AOTC) covers qualifying educational expenses for up to four years of postsecondary education. In 2022, 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. (Such payments are classified as outlays in the federal budget.) Second, the nonrefundable Lifetime Learning Tax Credit provides up to $2,000 per tax return per year for qualifying tuition and fees. The two credits are available to taxpayers whose income is below certain thresholds.

This option would eliminate the AOTC and the Lifetime Learning Tax Credit.