How the Stimulus Helps You Pay for College

And that $780 is only a reduction in the student's tax bill a year after the tuition bill had to be paid, of no help to anyone trying to scratch up several thousand dollars to register for September or January classes. Little wonder, then, that research on the tax breaks has found no evidence that they have encouraged a single student to enroll who otherwise would not have done so. The importance of getting students the money when they need it to pay their bills—not a year later—is widely recognized. This led Obama during his presidential campaign to promise an educational tax credit that would be paid when a student enrolled.

Tax researchers say the stimulus bill education tax changes, while improving the generosity and simplicity of the credits, don't appear to fix some of the other faults that make the current tax breaks comparatively expensive and inefficient. Including textbook costs and granting even those with low incomes a tax refund "are steps in the right direction," says Andrew Reschovsky, a tax expert at the Robert M. La Follette School of Public Affairs at the University of Wisconsin-Madison.

"But the timing of the payments isn't right," and many taxpayers will still get back only a small percentage of their education costs. "This is a program that is fairly expensive and is not going to help stimulate the economy," Reschovsky says.

"What Obama originally proposed would have had a much more direct effect," although delivering the payments to schools each fall might have been a logistical nightmare, says Kim Rueben, a tax expert at the Urban Institute. Her group gave the education tax credit stimulus proposal a C because of the small, delayed payments.

Many other financial aid experts supported the overall stimulus bill because it has so many other improvements, such as the plan to raise the Pell grant.

The National Association of Student Financial Aid Administrators, for example, issued a press release supporting the overall bill. A NASFAA spokesman declined to comment specifically on the tax break provisions. But in 2003, NASFAA called for Congress to take the billions it gives away in education tax credits and use that money to increase the size and number of Pell grants. "Tax credits to middle- and upper-middle-income students do not encourage college attendance-they simply reward behavior that would have taken place in the absence of the tax credits," the NASFAA wrote. "On the other hand, Pell grants awarded to the neediest of students enable them to attend college, which was previously out of their reach." Pell grants are considered more effective because they are automatically credited against students' bills at the time of enrollment, reducing the need to scrape together ready cash.

Shifting the $10 billion to $14 billion a year that taxpayers most likely will be spending on education tax breaks to Pell grants would probably not be of much help to many in the middle class, however. The government is spending about $17 billion this year to send out checks of up to $4,731 to about 6 million students who generally come from families earning $40,000 or less. The stimulus bill will very likely raise the maximum Pell grant to about $5,350 in the fall of 2009 and by an additional $200 or so in the fall of 2010. It would also widen the Pell net to include about 800,000 more students from families earning a little above $40,000 a year. The additional cost: about $4 billion to $5 billion a year. Raising the Pell even further would help more students from families earning slightly higher incomes but still wouldn't be likely to help many families earning more than, say, $60,000 a year, estimates Rueben of the Urban Institute.