Distribution of Federal Support for Students Pursuing Higher Education in 2016

In 2016, the federal government provided students pursuing higher education with about $91 billion in direct financial support through a wide variety of spending programs and income and payroll tax preferences, CBO estimates. The largest programs and preferences give financial assistance to students to offset the cost of school, either through grants or tax credits. Other spending programs and tax preferences reduce borrowing costs for students and their families. Still other tax provisions seek to help families save for postsecondary education by providing tax-favored investment accounts.

How Much Support Does the Government Provide Through Spending Programs and Tax Expenditures?

Spending programs account for most of the support provided by the federal government, totaling $54 billion in 2016 (see figure below). Three programs account for the vast majority of that total.

• The Federal Pell Grant Program, which provides assistance to students on the basis of their financial need, cost about $28 billion in 2016.
• The Federal Direct Loan Program makes loans available to students and their families on more favorable terms than they could obtain from a private lender. About $95 billion in new loans was issued in 2016 through that program. Calculated using the fair-value approach to measuring costs, those loans cost the government about $13 billion (after accounting for repayments that will be made in the future), CBO estimates.
• Education benefits provided to current service members and veterans cost about $12 billion in 2016. Most of that assistance was authorized by the Post-9/11 GI Bill.

The value of income and payroll tax preferences for students pursuing higher education totaled an additional $37 billion in 2016, in CBO’s estimation. Those tax preferences are generally referred to as tax expenditures because, like government spending programs, they provide financial assistance for particular activities as well as to certain entities or groups of people. The largest tax expenditures for education considered in this report are for the American Opportunity Tax Credit and the Lifetime Learning Credit, which together accounted for $19 billion. The tax system also reduces students’ cost of attending school by allowing parents of students ages 19 to 23 to claim them as dependents on their tax returns and as qualifying children for the earned income tax credit. Other tax preferences allow taxpayers to exclude from taxation certain income related to education and to deduct qualifying educational expenses.

Students and their families can pay for their education using some forms of tax-preferred savings, such as withdrawals from individual retirement accounts, that are not included in this analysis. It is difficult to determine the extent to which those methods are used to fund higher education.

The federal government also provides funding, through numerous spending programs and tax preferences, directly to colleges and universities rather than to the students who attend them. That funding, in turn, may allow colleges and universities to reduce the cost of attendance or raise the quality of education. The distribution of those indirect effects, however, is very difficult to measure and is not considered in this report.

How Is That Assistance Distributed Among Households?

The support for higher education that is available to students and their families varies across the household income scale. Larger shares of the combined spending and tax benefits accrue to households in lower-income groups. Households in the lowest two-fifths (or two quintiles) of the population received more than 50 percent of the overall benefits in 2016, CBO estimates, whereas households in the highest two quintiles received about 30 percent (see figure below).

Viewed separately, however, the distributions of the benefits from spending programs and tax expenditures differ markedly. The benefits paid through spending programs are much more concentrated among lower-income households than higher-income households, in part because the largest spending benefits—Pell grants—are awarded on the basis of financial need. The benefits of tax expenditures, in contrast, are more evenly distributed among income groups, with middle-income households receiving a modestly larger share than the highest- and lowest-income households. Although many tax expenditures are restricted to households with income below particular amounts, the progressive structure of the tax system causes the value of certain tax preferences (such as deductions) to increase as income rates rise. In addition, students pursuing higher education are more likely to be from higher-income households than from lower-income households. Those two factors result in the largest share of tax benefits accruing to households in the three middle income quintiles.

Measured relative to students’ cost of attending school, the combined benefits of spending programs and tax expenditures are larger for lower-income households than for higher-income households. (Those costs of attendance include published tuition and fees before any reduction provided by the school, room and board, and other expenses.) Lower-income students tend to receive more combined federal benefits, and they are more likely to attend less expensive schools. All federal assistance, taken together, covers about one-third of the cost of attendance for students from households in the lowest-income quintile but less than 10 percent for students from households in the highest-income quintile.

How Is the Distribution Estimated?

This analysis distributes education benefits across households on the basis of their income in a single year. The distribution of benefits by households’ annual income may differ from one using an alternative measure of resources, such as wealth or lifetime earnings, particularly if higher education affects those measures. However, eligibility for federal assistance is typically based on annual income, and information on those alternative measures is generally unavailable.

This analysis focuses on the households who receive financial assistance for higher education from the federal government—either paid directly to the households or to the institutions on their behalf—even though other people or entities (including colleges and universities) may capture part of that benefit. Moreover, the analysis considers only the impact of federal assistance in reducing the households’ costs of higher education. It does not account for the effectiveness of that aid in boosting enrollment, completion of postsecondary education, or future earnings. Nor does this analysis examine the broader benefits to society associated with the government’s provision of financial aid to students.