Federal Assistance forPostsecondary Education:Options for Fiscal Year 1979

May 1978

CONGRESSIONAL BUDGET OFFICECONGRESS OF THE UNITED STATES

FEDERAL ASSISTANCE FOR POSTSECONDARY EDUCATION:OPTIONS FOR FISCAL YEAR 1979

The Congress of the United States

CONGRESSIONAL BUDGET OFFICE

For sale by the Superintendent of Documents, U.S. Government Printing OfficeWashington, D.C. 20402

PREFACE

In 1978, the Members of the 95th Congress are faced with anumber of proposals that could alter significantly the federalrole in postsecondary education. These proposals include modi-fications in student assistance programs and adoption of tuitiontax credits that would not only increase substantially theamount of federal funding for postsecondary education, but alsowould broaden the focus of federal efforts to provide increasedassistance to middle-income students and families in orderto reduce the burden of college costs. This paper examinescurrent federal funding for higher education and analyzes theprobable impact of the various proposals under discussion withinthe Congress.

This report is provided in response to requests from theSenate Budget Committee, the Senate Finance Committee, and theSubcommittee on Postsecondary Education of the House Committeeon Education and Labor. In accordance with the CongressionalBudget Office's mandate to provide objective and impartialanalyses of budget issues, the report contains no recommenda-tions .

The report was prepared by David Longanecker, with theassistance of Steven Chadima, Richard Wabnick, and Larry Wilson,under the direction of Robert D. Reischauer and David S. Mundel.John Shiels developed the tax credit simulation model used inpreparing estimates for this paper. Special thanks go to MarthaAnne Mclntosh for her clerical assistance throughout the prepara-tion of this paper, and to Jill Bury, Janet Fain, Norma Leake,and Toni Wright. The author also wishes to thank the many re-viewers, particularly Alfred Fitt, Deborah Kalcevic, and CherylSmith, who provided helpful guidance during the writing of thispaper. The manuscript was edited by Patricia H. Johnston.

Alice M. RivlinDirector

April 1978

iii

CONTENTS

Page

Preface iii

Summary xi

CHAPTER I. INTRODUCTION 1

Federal Goals in Postsecondary Education 1Results in Current Efforts in Meeting Federal Goals . 3The Shifting Focus of Federal Postsecondary

Education Policy 10

CHAPTER II. CURRENT FUNDING POLICIES FOR POSTSECONDARYEDUCATION 12

Sources of Federal Aid for Postsecondary Education. . 12Fiscal Year 1979 Funding of Major FederalPrograms for Postsecondary Education 16

The Distribution of Student Assistance Benefits ... 20The Effect of Extending Current Policy to FiscalYear 1979 29

CHAPTER III. MAJOR LEGISLATIVE PROPOSALS FOR FISCALYEAR 1979 32

Proposals Providing Assistance ThroughDirect Spending Programs 32

Proposals Providing Assistance Through TuitionTax Credits 35

The Impact of Current Proposals 36A Comparison of the Proposed Basic Grant ProgramChanges and the Tuition Tax Credit Proposals ... 45

CHAPTER IV. OTHER BUDGET OPTIONS FOR FISCAL YEAR 1979 . . 47

Options That Alter Direct Higher EducationStudent Assistance 47

Options That Alter Institutional Aid Programs .... 51(continued)

APPENDIX A. THE COSTS AND DISTRIBUTIONAL IMPACT OFH.R. 3946, THE TUITION TAX RELIEF ACT OF 1978,REPORTED BY THE SENATE FINANCE COMMITTEE ... 57

APPENDIX B. THE COSTS AND DISTRIBUTIONAL IMPACT OFH.R. 12050, A TUITION TAX CREDIT, REPORTED BYTHE HOUSE WAYS AND MEANS COMMITTEE 63

APPENDIX C. A TECHNICAL DISCUSSION OF THE BASIS FORTHE TAX CREDIT ESTIMATES 65

vi

TABLES

TABLE 1. PERCENT OF 18- TO 24-YEAR-OLD DEPENDENT FAMILYMEMBERS ENROLLED IN COLLEGE, BY FAMILY INCOME,OCTOBER 1967 TO OCTOBER 1976

TABLE 2. FAMILY INCOME AND STUDENT CHARGES, CALENDAR YEARS1967-1976 8

TABLE 3. SPENDING AND RECIPIENTS IN POSTSECONDARY STUDENTASSISTANCE PROGRAMS 17

TABLE 4. TAX EXPENDITURES FOR POSTSECONDARY EDUCATION,FISCAL YEARS 1977 AND 1978 21

TABLE 5. ESTIMATED DISTRIBUTION OF BENEFITS FOR STUDENTASSISTANCE, BY INCOME CLASS, FISCAL YEAR 1978 . . 22

TABLE 6. FAMILY INCOME DISTRIBUTION OF BENEFITS FORSTUDENT ASSISTANCE FUNDING, FISCAL YEAR 1978 . . 24

TABLE 7. PERCENT DISTRIBUTION OF STUDENT ASSISTANCEFUNDING AND RECIPIENTS, BY INSTITUTIONAL TYPEAND CONTROL 25

TABLE 8. PROJECTED DISTRIBUTION OF FUNDS FOR SOCIALSECURITY EDUCATIONAL BENEFITS, BY INCOME CLASS,FISCAL YEAR 1978 26

TABLE 9. DISTRIBUTION OF VETERANS IN POSTSECONDARYEDUCATION, THEIR BENEFITS, AND FAMILY SIZE, BYINCOME CLASS, FISCAL YEAR 1978 27

TABLE 10. ESTIMATED DISTRIBUTION OF POSTSECONDARY TAXEXPENDITURES, BY INCOME CLASS, FISCAL YEAR 1978 . 28

TABLE 11. DISTRIBUTION OF FUNDS AND RECIPIENTS FOR HIGHEREDUCATION, BY BUDGET SUBFUNCTION 30

(continued)

vii

TABLE 12.

TABLE 13.

TABLE 14.

TABLE 15.

TABLE 16.

TABLE 17.

INCOME DISTRIBUTION OF STUDENT ASSISTANCEFUNDING UNDER FISCAL YEAR 1979 CURRENT POLICY .

DISTRIBUTION OF RECIPIENTS AND BENEFITS OFTHREE CURRENT PROPOSALS FOR ALTERING THE BASICEDUCATIONAL OPPORTUNITY GRANTS PROGRAM, BYINCOME CLASS, FISCAL YEAR 1979 .

DISTRIBUTION OF NEW LOANS UNDER VARIOUSRESPONSE PATTERNS TO INCREASE IN ELIGIBILITYFOR GUARANTEED STUDENT LOANS, BY INCOME CLASS .

POSTSECONDARY TUITION TAX CREDIT PROPOSALS—DISTRIBUTION OF BENEFITS TO FAMILIES IN VARIOUSINCOME CLASSES FOR H.R. 3946, PROPOSED BY THESENATE FINANCE COMMITTEE (LANGUAGE OF BOTH THEBILL AND THE REPORT) AND H.R. 12050, PROPOSED BYTHE HOUSE WAYS AND MEANS COMMITTEE, FISCALYEAR 1980

DISTRIBUTION OF INCREMENTAL INCREASES OVERCURRENT LAW OF MAJOR STUDENT ASSISTANCEPROPOSALS, BY INCOME CLASS

31

37

39

43

46

DISTRIBUTION OF RECIPIENTS AND BENEFITSRESULTING FROM INCREMENTAL BASIC GRANTSALTERNATIVES, BY INCOME CLASS, FISCAL YEAR1979 49

viii

APPENDIX TABLES

TABLE A-l.

TABLE A-2.

TABLE A-3.

TABLE A-4.

TOTAL COSTS OF H.R. 3946, BY REFUNDED ANDNONREFUNDED COMPONENTS IN MILLIONS OF DOLLARS,AND PERCENT DISTRIBUTION OF BENEFITS BY INCOMECLASS, ASSUMING THAT ALL STUDENT AID GRANTSMUST BE USED TO REDUCE ELIGIBLE EXPENSES(TUITION AND FEES) PRIOR TO DETERMININGELIGIBILITY FOR THE TAX CREDIT

COSTS OF THE POSTSECONDARY COMPONENT OFH.R. 3946, BY REFUNDED AND NONREFUNDEDCOMPONENTS OF BENEFITS BY INCOME CLASS,ASSUMING THAT ALL STUDENT AID GRANTS MUSTBE USED TO REDUCE ELIGIBLE EXPENSES (TUITIONAND FEES) PRIOR TO DETERMINING ELIGIBILITY FORTHE TAX CREDIT

TOTAL COSTS OF H.R. 3946, BY REFUNDED ANDNONREFUNDED COMPONENTS (IN MILLIONS OF DOLLARS),AND PERCENT DISTRIBUTION OF BENEFITS BY INCOMECLASS, ASSUMING THAT OTHER FORMS OF STUDENT AID(GRANTS AND SCHOLARSHIPS) CAN BE APPLIED TO ALLEDUCATIONAL EXPENSES, THUS REDUCING ELIGIBILITYFOR THE CREDIT ONLY BY THE PROPORTION OF STUDENTAID APPLIED TOWARD QUALIFYING EXPENSES ....

COSTS OF THE POSTSECONDARY COMPONENT OF H.R.3946, BY REFUNDED AND NONREFUNDED COMPONENTS(IN MILLIONS OF DOLLARS), AND PERCENT DISTRI-BUTION OF BENEFITS BY INCOME CLASS, ASSUMINGTHAT OTHER FORMS OF STUDENT AID (GRANTS ANDSCHOLARSHIPS) CAN BE APPLIED TO ALL EDUCATIONALEXPENSES, THUS REDUCING ELIGIBILITY FOR THECREDIT ONLY BY THE PROPORTION OF STUDENT AIDAPPLIED TOWARD OUALIFYING EXPENSES

58

59

60

61

ix

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SUMMARY

This year may become the most important for postsecondaryeducation in the past decade. Not only are large increasesin the level of federal funding being considered, but the diverseproposals under consideration reflect quite different phil-osophies of how and to whom federal assistance should be pro-vided. Since the late 1960s, the emphasis of the federal govern-ment in postsecondary education has been on the goal of enhancingequality of educational opportunity, and students from low- andmoderate-income families have received substantial increases inaid. At present, however, a new focus appears to be evolvingthat would increase assistance to middle-income families (roughly$15,000-$25,000 in annual income) in order to reduce the burdenof college costs. In addition to expansion of the current directspending programs, tax credits for educational expenses have beenproposed.

CURRENT POLICY FOR POSTSECONDARY EDUCATION

For fiscal year 1978, postsecondary educational institutionsand students will receive $9.9 billion in federal support throughdirect spending programs and foregone tax revenues. Most ofthis, approximately 75 percent, will go into programs designedprimarily to enhance equality of educational opportunity—enabling students from low- and moderate-income families toattend postsecondary educational institutions, an opportunitythat they would otherwise not have. Another 15 percent will bedirected to programs that primarily reduce the burden of attend-ing college for students who generally would be able to attendwithout the assistance. About 10 percent of all federal fundswill go directly to institutions of higher education.

The effect of the federal programs in achieving theseobjectives has been mixed. While a great amount of effort hasbeen expended to enhance equality of educational opportunity, thedisadvantaged and poor are only slightly more likely to be incollege today than they were ten years ago and they are stillless than half as likely to attend college as are children fromhigher-income families. There is no doubt, however, that federalstudent assistance programs make it possible for many students toattend college and to select institutions that meet their unique

needs who otherwise would have been unable to afford highereducation. Institutional aid has helped sustain such institu-tions as predominantly black colleges during financially troubledtimes, and has provided an effective incentive for other institu-tions to provide special services for disadvantaged students.

Different programs benefit different types of students.Need-based federal programs, such as Basic Educational Opportun-ity Grants (BEOG), Supplemental Educational Opportunity Grants(SEOG), and State Student Incentive Grants (SSIG), assist pri-marily students from lower-income families. In fiscal year 1978,94 percent of BEOG and SEOG funds will be provided to studentsfrom families with incomes under $15,000. Student loan programs,on the other hand, are more available to middle-income students.Nearly one-third of the loans provided through Guaranteed StudentLoans (GSL) and National Direct Student Loans (NDSL) in fiscalyear 1978 will be borrowed by students from families with incomesbetween $15,000 and $25,000. Benefits from tax expenditures alsoare spread throughout the population, although relatively few ofthese benefits help lower-income families. Veterans' benefitsand social security student benefits, though not based on need,assist primarily students from lower-income families because ofthe economic characteristics of the eligible populations.

THE SHIFTING FOCUS OF THE FEDERAL ROLE—MAJOR PROPOSALS FORFUNDING POSTSECONDARY EDUCATION

The shift in emphasis toward students from middle-incomefamilies has resulted from the perception that these students arebeing squeezed out of higher education opportunities because ofincreasing college costs and the lack of middle-income studentassistance. This perception of increasing burdens for middle-income students is not supported by the data. Enrollment ratesamong middle-income students declined somewhat in the mid-1970s,heightening concern that these youth were being forced out ofhigher education for financial reasons. More recently, however,enrollment rates of these students have increased. Furthermore,although the costs of college have risen faster than the cost ofliving, family incomes have continued to rise even faster. Stu-dent costs actually have declined slightly as a portion offamily income. Appreciable increases in the level of federalassistance available to students from middle-income families havealso occurred. Nevertheless, the concern for the plight ofmiddle-income families is great and has led to a number ofmajor proposals.

xii

Two approaches—altered direct student assistance programsand tuition tax credits—are being proposed as mechanisms fordirecting increased federal support to middle-income families inan effort to reduce the burden these families face in meetingrising college costs.

Three direct assistance proposals—the Administration'sproposal, S. 2539, and H.R. 11274—would extend eligibility forBEOG awards to students from middle-income families and alsoincrease the proportion of families eligible for subsidized(guaranteed) student loans. The Administration's proposal wouldguarantee that students from families with incomes below $25,000would receive at least a $250 Basic Grant. The House and Senateproposals would alter the BEOG grant allocation formula toprovide middle-income students awards that decreased as incomesincrease. Both the Administration and House proposals increasethe awards for students who are not dependent on their parents(who generally have lower incomes). All three proposals wouldincrease eligibility for Guaranteed Loans to students fromfamilies with incomes below $40,000 and would provide incentivesto banks to increase participation in the Guaranteed Loan pro-gram.

Two proposals would provide tax credits for tuition andfee expenses. The tuition tax credit: proposal reported out ofthe Senate Finance Committee (an amendment to H.R. 3946) wouldbegin in 1978 by allowing refundable $250 maximum credits forundergraduate college students. By 1982 the program wouldexpand to provide up to a $500 credit to all students in elemen-tary, secondary, and postsecondary education. (An analysis ofcredits for elementary and secondary education is not included inthis paper.) Currently there is a discrepency between the billand the committee report with respect to how other studentassistance should be considered in determining eligibility forthe credit. The bill states that all student assistance mustbe applied toward tuition and only the remainder of the tuitioncosts can be claimed as a credit. The report states that otherassistance could be applied to all educational costs.

The tax credit bill of the House Ways and Means Committeewould allow student assistance to be applied to all educationalexpenses, similar to the Senate Finance report language. Unlikethe Senate bill, however, the Ways and Means proposal is for anonrefundable postsecondary tuition tax credit only, with aconsiderably lower maximum credit limit ($100 in calendar year1978, $150 in 1979, and $250 in 1980).

xiii

A COMPARISON OF CURRENT PROPOSALS

Each of the five proposals aids different groups of stu-dents. Middle-income families and students would receive thelargest increase in support from the House and Senate student aidproposals. Higher-income families would receive the largestincrease in awards from the Senate Finance Committee tax creditproposal. Lower-income students would benefit most from theAdministration and House student aid proposals, though a largeportion of these increased benefits would be directed to in-dependent students. Lower-income families with dependent stu-dents in college would receive very little additional aid fromany of the Basic Grants proposals.

The Administration's proposal would increase slightly theBEOG awards to currently eligible students while providing aguaranteed grant of $250 to all students from families withincomes under $25,000. This proposal would provide the greatestnumber of grants, but in general they would also be the smallest.The effect of the Senate and the House BEOG proposals, whichdo not include a guaranteed minimum grant, is to provide largergrants to fewer students from middle-income families. The Houseproposal, like the Administration's, includes special provisionsfor independent students, and, thus, it would help more lower-income students than the Senate proposal. Though each of theseproposals focuses the increased assistance on middle-incomefamilies, some additional aid would go to students from lower-income families, generally in the form of increased awardsrather than more awards. Both the House and Senate proposalswould cost more than the Administration's proposal, $1,292 mil-lion and $1,161 million compared to $947 million in fiscalyear 1979 (all figures are increases above current law expendi-tures) .

The extent to which lower-income families would benefit fromthe tax credit proposals depends upon a number of factors. Ifall other assistance must be applied toward reducing tuitionprior to determining the credit, as currently stated in thelanguage of the Senate Finance Committee bill, lower-incomestudents would not benefit much from the Senate tax creditproposal. This would occur because lower-income students benefitmost from other forms of student assistance that would reduceappreciably their eligibility for the credit. On the other hand,if student assistance can be applied to all educational expensesrather than tuition alone, as reflected in the language of thereport that accompanies the Senate bill, the tax credit would

xiv

SUMMARY TABLE. DISTRIBUTION OF INCREMENTAL INCREASES OVER CURRENT LAW OF MAJOR STUDENTASSISTANCE PROPOSALS, BY INCOME CLASS: FISCAL YEAR 1979 FOR DIRECT SPEND-ING PROGRAMS AND FISCAL YEAR 1980 FOR TAX EXPENDITURE PROGRAMS, BENEFITSIN MILLIONS OF DOLLARS

IncomeClass

$0-15,000BenefitsPercent

$15-25,000BenefitsPercent

$25,000+BenefitsPercent

TotalBenefitsPercent

CurrentLaw BEOGFunding

1,88792

1678

00

2,054100

Admin •BEOGProposal

43846

50954

00

947100

SenateBEOGProposal

28625

75064

12511

1,161100

IncrementsHouseBEOGProposal

41832

74958

12510

1,292100

to CurrentSenateFinanceBill (TaxCredit)

10114

22231

39455

717100

LawSenateFinanceReport (TaxCredit)

35532

32329

43339

1,111100

House Waysand MeansBill (TaxCredit)

12821

20033

28446

612100

CHAPTER I INTRODUCTION

Establishing future federal policy in postsecondary educa-tion involves four steps. First, federal goals must be identi-fied. Second, it must be determined to what extent each goal hasbeen achieved and to what extent each remains a problem. Third,choices must be made among competing goals, determining whichones will receive the highest priority for action. Fourth,selections must be made among the various techniques or mech-anisms for accomplishing the goals that are to receive federalattention.

FEDERAL GOALS IN POSTSECONDARY EDUCATION

The role of the federal government in postsecondary edu-cation has never been clearly delineated by either the leg-islative or executive branch of government. The programs thathave been enacted and their budgetary importance, however, doindicate that federal policy has been focused primarily onachieving three goals: promoting equality of educationalopportunity, reducing the burden of college costs, and assuring astrong system of higher education.

Promoting Equality of Educational Opportunity

Equality of educational opportunity is a major goal ofthe federal government, reflecting a commitment to assure allAmericans access to higher education. By helping to removeeconomic and social barriers, the government hopes to encouragestudents, who otherwise might not continue their schooling,to attend college. Many programs—including the Basic Educa-tional Opportunity Grants Program (BEOGs), the SupplementalEducational Opportunity Grants Program (SEOGs), the NationalDirect Student Loan Program (NDSLs), and the College Work-StudyProgram (CWS)—focus on providing financial assistance to fam-ilies and individuals who are needy. In addition to providingaccess to higher education, these programs also have been de-signed to provide individuals of differing financial status withthe ability to select educational institutions that match theirintellectual capabilities and their unique educational inter-ests. In this way, these programs help to maintain the arena ofdiverse institutions that characterize American higher education.

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Reducing the Burden of College Costs

Whereas the first goal is to remove barriers for indi-viduals who would not otherwise be able to attend postsecondaryinstitutions, this second goal is to reduce the financial strainon families with students who most likely would continue theireducation even without government assistance. This federal rolehas most often found expression in the tax code or throughstudent loan programs. For example, all families can claim a$750 deduction and a $35 credit from their federal incometax for college students whom they support, regardless of thestudent's earnings.

Recently, a number of proposals have been introduced thatfocus specifically on reducing the financial burden for middle-income families. _!_/ These proposals include expanding theeligibility for federally subsidized and insured loans, providinga tax credit for tuition and fee costs, and altering eligiblityfor existing direct student assistance programs (BEOGs, SEOGs,and CWS) to provide greater assistance to middle-income families.

Assuring a Strong System of Higher Education

Federal programs also assist in maintaining a strong andmultifaceted system of higher education. By designing programsthat allow individuals latitude in choosing the type of educationthey wish to pursue, the federal government helps sustaindiversity in American higher education.

In addition to indirect aid to educational institutionsthrough student aid programs, the federal government also assists

_!_/ "Middle-income" is difficult to quantify precisely. For onething, there are considerably divergent viewpoints on whatportion of the population represents "the middle." Further-more, income levels vary greatly throughout the UnitedStates, and incomes of equal size may have considerablydifferent purchasing power in different regions of thecountry. For the purposes of this paper, middle-income isassumed to include families with incomes between $15,000 and$25,000 in 1979. This range includes approximately themiddle one-third of families in the U.S.; thus, about one-third would fall below this middle-income range and one-thirdwould be above this range.

institutions directly. Through programs such as Title III of theHigher Education Act of 1965 (Strengthening Developing Institu-tions), the federal government provides financial assistance tocolleges and universities that provide unique contributionsto higher education and that need financial assistance to ensuretheir continued financial stability. The federal government alsoprovides financial assistance to institutions to encourage themto respond to federal priorities; to help defray the cost ofcomplying with new federal requirements; and to help them respondto unanticipated crises. For example, the federal governmentprovides assistance to institutions for the so-called TRIOPrograms (including Upward Bound, Talent Search, Special Servicesfor Disadvantaged Students, and Educational Opportunity Centers)in order to encourage institutions to attract and serve thespecial academic and social needs of students from disadvantagedbackgrounds. Currently Title VII of the Higher Education Act(construction, reconstruction, and renovation of academicfacilities) is being used to assist institutions respond to threenational concerns: the need for energy efficiency, the needfor greater occupational safety on campuses, and the need to makehigher education facilities more accessible to handicappedindividuals. 2/

RESULTS OF CURRENT EFFORTS IN MEETING FEDERAL GOALS

Promoting Equality of Educational Opportunity

For the past decade, the overriding objective of the federalgovernment with respect to postsecondary education has been toenhance equality of educational opportunity. In the fiscal year1978 budget, almost three-quarters of the $9.9 billion in federalexpenditures for postsecondary education (excluding researchsupport) is directed to accomplishing this goal. It is notclear, however, what specific measure would indicate that thisgoal had been achieved, although it is clear that poor anddisadvantaged youth have not been able to reach their potentialin the past because of financial barriers.

2/ Fiscal year 1978 is the first year in which funding ($4million) has been appropriated for construction, recon-struction, and renovation.

Substantial research indicates that financial assistanceought to affect enrollment rates, 3_/ but federal efforts have notbeen particularly successful in increasing the participation inpostsecondary education of young adults from lower-income fam-ilies. A recent Census study shows that the enrollment rate ofdependent students from lower-income families (with incomes under$8,525) increased from 20.1 percent to 22.4 percent between 1973and 1976. 4_/ This increase followed six years during whichenrollment rates for students from lower-income families fluctu-ated slightly but changed very little overall. During this sameperiod of time, enrollment rates for students from all otherincome groups were declining slightly. Despite this increase inenrollment rates relative to the enrollment rates for otheryouth, young adults from lower-income families still are lessthan one-half as likely to attend college as students from higherincome families. Other programs, that combine economic supportwith academic preparation (the Upward Bound program, for example)appear to have been relatively successful in encouraging disad-vantaged youth to attend college and in heightening theireducational aspirations. 5_/ These programs, however, havereceived limited funding and thus reach only a small number ofstudents. The Upward Bound Program, for example, reaches fewerthan 5 percent of the persons in the target population that theprogram was designed to serve. _6_/

_3_/ Stephen J. Carroll, Bryant M. Mori, Daniel A. Relies, andDavid J. Weinschrott, The Enrollment Effects of FederalStudent Aid Policies (Santa Monica, Calif.: Rand Corporation,June 1977).

k_l U.S. Bureau of the Census, Population Characteristics;School Enrollment—Social and Economic Characteristics ofStudents (October 1976); Current Population Reports, SeriesP-20, No. 319 (1978).

_5/ U.S. Department of Health, Education, and Welfare, Office ofEducation, Office of Planning, Budgeting, and Evaluation,Evaluation of the Upward Bound Program: A First Follow-Up(1977).

6_/ U.S. Department of Health, Education, and Welfare, Office ofEducation, Office of Planning, Budgeting and Evaluation,Annual Evaluation Report on Programs Administered by the U.S.Office of Education, Fiscal Year 1976.

In sum, there appears to have been some progress in pro-viding equality of educational opportunity. Existing federalprograms have made it financially possible for many disadvantagedstudents to continue their education. But lack of more sub-stantial success in attracting the poor and disadvantaged intohigher education indicates that more effort will be required toachieve the goal of equality of educational opportunity.

Reducing the Financial Burden For Middle-Income Families

Currently, much concern is being expressed about thefinancial burden that increasing college costs are creating forparents of college students, particularly for middle-incomefamilies. Two questions, however, must be addressed in examiningthis goal. First, what is the evidence that the burden exists?Second, to what extent have current programs helped to alleviatethe problem?

Financial burden is a relative concept: what is considereda reasonable financial obligation at: one time may come to beconsidered an unreasonable financial burden at another time.It is difficult, therefore, to estimate what absolute measurereflects the achievement of a reduced or increased financialburden.

One reason for the heightened level of concern that collegecosts were creating an undue hardship was a noted decline inenrollment rates for middle-income students during the mid-1Q70s.Recent data, however, show that this trend has been reversed (seeTable 1). ]_/ The earlier downward trend may have been a resultof other societal factors, including the end of the militarydraft and the effects of the recession, rather than the resultof a decline in ability to afford postsecondary education.

Another reason for heightened concern has been the growthof college costs. In fact, the relative level of college costshas remained essentially constant rather than increasing duringrecent years. Though the costs of college attendance haverisen faster than the cost of living (as measured by the ConsumerPrice Index [CPI]), this increase in costs has been offset by aneven larger increase in family incomes. As a result, student

]_/ Census Bureau, op. cit.

TABLE 1. PERCENT OF 18- TO 24-YEAR-OLD DEPENDENT FAMILY MEMBERS a./ ENROLLED IN COLLEGE, BYFAMILY INCOME, b/ OCTOBER 1967 TO OCTOBER 1976

Family Income

$0-8 ,525

$8,525-17,050

$17,

$25,

All

050-25,575

575+

Income Groups

1967

20.0

37.9

.51.9

68.3

39.1

1968

22.5

38.5

50.7

63.0

39.7

1969

24.8

38.8

50.6

65.2

41.3

1970

20.8

36.6

48.4

61.7

39.1

1971

22.8

35.4

46.4

61.8

38.9

1972

22.6

34.2

44.2

56.9

37.8

1973

20.1

31.2

42.7

56.6

36.6

1974

20.3

31.7

41.4

57.5

36.2

1975

23.5

35.1

45.4

59.6

38.7

1976

22.4

36.3

47.5

58.2

38.8

SOURCE: CBO calculations based on data supplied by the Census Bureau.

ji/ A dependent family member is a relative of the primary family head other than the wife.

b_/ Family income in 1976 dollars, civilian noninstitutional population.

costs for both the public and private sectors of higher educationhave declined slightly as a proportion of family income (seeTable 2). 8/

Concurrently, federal student assistance for middle-incomestudents has continued to increase. Since its inception in 1965,the Guaranteed Student Loan Program (GSL), which has been theprimary federal program designed to assist students from middle-income families, has continued to grow and assist increasingnumbers of students. In 1976, this program was amended to extendeligibility to students from middle-income families with adjustedfamily incomes up to $25,000. The dollar amount of loansdispersed has increased 19 percent between 1976 and 1978, andmost of the increase in volume has gone to newly eligible stu-dents from these middle-income families.

In sum, there is no evidence to indicate that the financialburden of sending children to college has been increasing.This should not be taken to mean, however, that the burden ofsending a child to college is not significant. While the situa-tion appears no worse than it was a decade ago, neither is itappreciably better. Therefore, to the extent to which collegecosts were a burden in the 1960s, they still present a financialstrain. And there are certainly many middle-income families—especially families with students in expensive schools, familieswith more than one child in school and families in which the headof the household is the student—that find it difficult to paythe costs of postsecondary education.

Assuring A Strong System of Higher Education

In fiscal year 1978, approximately 10 percent of federalexpenditures for postsecondary education (excluding researchfunding) will be directed to assuring a strong and diverse systemof higher education. It is difficult, however, to judge theextent to which this goal has been achieved or to ascertain thesuccess of existing programs.

_§_/ Congressional Budget Office, Federal Aid to PostsecondaryStudents; Tax Allowances and Alternative Subsidies, Back-ground Paper (1978).

TABLE 2. FAMILY INCOME AND STUDENT CHARGES, CALENDAR YEARS 1967-1976

Median Family Income a/

Year

1967196819691970197119721973197419751976

AllFamilies(1)

$ 6,8117,1897,7708,2688,6819,27610.27311,02511,50512,199

With18-24 yr.

Dependents(2)

$ 7,9238,4699,1239,62410,09510,90011.89712,56113,19914,164

Student Charges as a Per-cent of Income of Families

With 18-24 yr.Dep. in College

(3)

$ 9,81610,45211,29512,06312,72713,39214,67916,00516,78418,384

Total StudentPublic(4)

$1,0631,1171,2041,2881,3571,4581,5171,6171,7481,854

ChargesPrivate

(5)

$2,2052,3212,5312,7392,9173,0383,1643,3863,6673,896

with 18-24Public

(4)7(2)

12.912.612.212.512.812.412.312.112.312.3

yr. DependentsPrivate(5)̂ (2)

26.826.025.426.327.126.825.525.225.725.9

CPI

100.0104.2109.8116.3121.3125.3133.1147.7161.2170.5

PercentChange1967-1976 +79.1 +78.8 +87.3 +74.2 +76.7 -4.7 -3.4 70.5

SOURCE: U.S. Bureau of the Census, Current Population Reports and National Center for Education Statisticsdata; U.S. Department of Commerce, Survey of Current Business.

a_/ Family incomes are those reported in the Bureau of the Census, October Current Population Survey, in whichdetailed questions about education are asked. The traditional and more comprehensive reporting of incomes isdone in March of each year. The Bureau of the Census reports that, for the above period, October medianfamily incomes ranged from 82 to 86 percent of the median family incomes reported in March.

A census family is two or more persons related by blood, marriage, or adoption, and residing together.All such persons are considered members of the same family. Columns (2) and (3) are incomes of primaryfamilies. A primary family includes a head of the household (family designated) as one of its members.Excluded from the sample of primary families here are those in which the 18-24-year-old dependent is eitherthe designated head, the wife, or married. Only those in which the 18-24-year-old dependent is attendingcollege full time are included in Column (3).

As with other federal educational goals, there is noabsolute, measure of success. What, for example, would be theideal mix of public and private institutions to ensure a diversesystem? Or, what share of its resources should the federalgovernment provide in helping to address this need? Thesequestions are not easily answered. The financial stability ofpostsecondary institutions is one indicator of how strong thesystem is, but there are conflicting reports on the financialhealth of postsecondary education. Some studies indicate thatcolleges and universities are in serious trouble and face a bleakfuture. Others contend that higher education is recovering wellfrom the financial problems of the mid-1970s. _£/

In some instances federal assistance, which was a boon forhigher education at one time, has become a liability in lateryears. For example, in the 1960s, considerable federal as-sistance was provided, both in the form of grants and low-interest loans, for the construction of educational facilities tomeet the demand of a rapidly increasing college population. Asenrollments have leveled off and declined on some campuses, thedebt service to the federal government for facilities that nolonger are being used to full capacity has become a financialburden for some institutions.

j)/ In September 1976, a research article in Change Magazinereported that approximately 50 percent of all institutions ofhigher education were in serious financial condition (eitherrelatively unhealthy or unhealthy), with private institutionsbeing in considerably worse financial shape than their publiccounterparts. (Andrew H. Upton, John Augenblick, and JosephHeyison, "The Financial Change of Higher Education," ChangeMagazine, Vol. 8, #8, September 1976.) The Change article,however, has been refuted by the findings of other research-ers. Bowen and Minter have indicated that "the phrase thatbest characterizes the current condition is stability withoutstagnation." They found little evidence of retrenchment inthe form of program cuts, alterations in student-facultyratios, or similar indexes. (Howard Bowen and John Minter,Annual Reports on Financial and Education Trends in ThePrivate Sector of American Higher Education, Vol. 2, Washing-ton, B.C.: Association of American Colleges, 1976.)

9

26-995 0 - 7 8 - 4

THE SHIFTING FOCUS OF FEDERAL POSTSECONDARY EDUCATIONAL POLICY

From the period following World War II to the mid-1960s,higher education was expanding rapidly, and enhancing the growthof a Strong system was a high national priority. In this milieu,institutional aid evolved as the dominant source of federal aid.Construction loans and grants assisted campuses in developingfacilities with sufficient capacity to accommodate increasingenrollments. The Department of Housing and Urban Developmentprovided low-interest loans for the construction of residencehalls in which to house the influx of students.

By the late 1960s, however, the federal role in post-secondary education began to take on a new emphasis, one thatfocused on improving equality of educational opportunity. It hadbecome increasingly apparent that many disadvantaged and minorityAmericans were unable to enjoy the benefits of postsecondaryeducation. To accomplish this new goal, institutional aidwas supplanted by student assistance. National Direct StudentLoans, College Work-Study, and Educational Opportunity Grants(which later became Supplemental Educational Opportunity Grants)were established to assist students with financial need. Theresponsibility for administering these programs, however,remained with the individual campuses. The Guaranteed StudentLoan program evolved somewhat differently. Its focus has beenmore on providing assistance to middle-income students, and it isadministered by private lending institutions.

Over time, student assistance programs have become moredirected toward helping only the most needy students. Thetwo newest programs, enacted in 1972, are the Basic EducationalOpportunity Grants Program (BEOGs) and the State Student In-centive Grants Program (SSIGs). The Basic Grants program isadministered directly by the Office of Education, with much morestrict regulation and oversight of the determination of studentneed than other older programs. SSIGs, though administered bythe states and thus not as strictly regulated as the Basic Grantsprogram, provide an incentive for states to increase theircommitment to the goal of enhancing equality of opportunity.

With increased concern being directed to the goal ofreducing the burden of college costs for middle-income families,two quite divergent approaches are being considered for providing

10

this assistance. The first, educational tax credits, is an ideathat, although discussed for more than two decades, has onlyrecently been receiving increased support. Tax credit proponentsbelieve their method of providing assistance is the most ef-ficient, effective, and easily implemented alternative. Thesecond approach, expanding directly appropriated educationprograms to provide educational benefits for middle-incomefamilies, is supported by the Administration as well as somemembers of the Congress. Proponents of this approach believethese programs represent the most equitable means of providinggreater student assistance.

11

CHAPTER II. CURRENT FUNDING POLICIES FOR POSTSECONDARYEDUCATION

In the fiscal year 1978 budget, almost three-quarters of the$9.9 billion in direct and indirect federal expenditures forpostsecondary education (excluding research support) is directedtoward programs with the principal purpose of providing equalityof educational opportunity, more than 15 percent is directed toeasing the financial burden of higher education to the populationin general, and approximately 10 percent is focused on programsdesigned to assure a strong and diverse system of higher edu-cation.

SOURCES OF FEDERAL AID FOR POSTSECONDARY EDUCATION

There are four general sources of federal aid for post-secondary education:

o The Office of Education within the Department of Health,Education and Welfare which administers the postsecondaryeducation programs authorized by the Higher EducationAct;

o Other agencies that provide educational benefits, such asthe Veterans' Readjustment Benefits and social securitystudent benefits;

o Tax expenditures that provide assistance in the form ofreduced tax liabilities; and

o Science funding agencies that provide resources to highereducation institutions.

Education Programs Authorized by the Higher Education Act

The Office of Education administers both student assistanceand institutional aid under the Higher Education Act of 1965 andthe Higher Education Amendments of 1976.

The major student assistance programs include:

o Basic Educational Opportunity Grants (BEOGs), establishedin 1972, provide financial assistance to undergraduate

students who are enrolled at least half-time in collegeor postsecondary vocational/technical schools. Thegrant amount is based on financial need. As currentlyauthorized the maximum grant is $1,800, or up to 50percent of educational costs, whichever is lower.Appropriations for the program in fiscal year 1978,however, have forced an effective maximum grant level of$1,600.

Supplemental Educational Opportunity Grants (SEOGs),established in 1965 as Educational Opportunity Grants,provide assistance to undergraduate collegiate studentsenrolled at least half-time in a degree program. Eligi-bility is based on financial need as assessed by theinstitutional financial aid officer. The maximum grantis $1,500, but the grant must be at least equally matchedby the institution with other forms of student financialaid.

State Student Incentive Grants (SSIGs), established in1972, provide state assistance to full-time undergraduatestudents. Eligibility is based on financial need asdetermined by the states. The grants, as authorized, canprovide up to $1,500 per academic year. The federalgovernment reimburses the states for 50 percent of theamount of these grants.

College Work-Study (CWS), initiated in 1965, providesassistance in the form of part-time employment to under-graduate students enrolled at least half-time in aparticipating college or postsecondary vocational/tech-nical school. Eligibility is based on financial need asassessed by the institution's financial aid officer.The federal government pays up to 80 percent of thecosts.

Guaranteed Student Loans (GSLs), established in 1965,help students borrow from private lenders. An under-graduate student is allowed to apply for up to $2,500 peryear, though an undergraduate's total outstanding debtmay not exceed $7,500. A graduate student may borrow upto $5,000 per year, but no more than $15,000 in total.All students are eligible to apply for these federallysubsidized loans, but for students from families withad-justed family incomes of less than $25,000, the federalgovernment pays all interest charges while the student

13

is in school and for up to a year after termination ofschooling. Interest of 7 percent is charged to theborrower thereafter. Loans made to students from fam-ilies with incomes greater than $25,000 bear 7 percentinterest to the student from the time they are issued.The federal government insures each loan. As an in-centive to encourage lender participation, the governmentalso pays a special allowance of up to 5 percent tolenders on all loans outstanding.

o National Direct Student Loans (NDSLs), established in1958 under the National Defense Education Act, providelow-interest federal loans to students at participatinginstitutions. Eligibility is based on financial need.The participating institution determines the size of theloan, but the total debt cannot exceed $5,000 for anundergraduate or $10,000 for a graduate student. Theloan is interest free to the student while in school, butaccrues interest at 3 percent per annum upon completionof schooling.

The major institutional assistance programs administered bythe Office of Education include:

o Special programs for the disadvantaged—including TalentSearch, Upward Bound, Special Services for DisadvantagedStudents, and Educational Opportunity Centers—werecreated in 1972 to provide incentives for institutions toestablish programs that meet the educational needs ofdisadvantaged students and that encourage disadvantagedstudents to attend college.

o Strengthening developing institutions, Title III of theHigher Education Act, was enacted in 1972 to provideassistance to strengthen the academic quality and manage-ment of developing institutions, particularly thoseserving primarily disadvantaged and minority students.

o Construction, reconstruction, and renovation of academicfacilities program was originally included as part of theHigher Education Facilities Act of 1963, and is now TitleVII of the Higher Education Act of 1965. This programprovides grants and loans to help defray the costs of re-trofitting facilities to accommodate handicapped studentsand to improve building safety and energy efficiency.

14

Postsecondary Education Programs Funded and Administered byAgencies Other Than The Office of Education

Both veterans' benefits and social security entitlementsinclude educational assistance that contributes significantamounts of money to postsecondary students and institutions.While these entitlements are not subject to annual appropria-tions, both veterans' educational benefits and social securityeducational benefits currently are the suject of debate in theCongress.

o Veterans' Readjustment Benefits. The Veterans' Readjust-ment Benefits program, which currently provides virtuallyall veterans' educational benefits, was enacted in1966. _!/ It provides up to 45 months of benefits toveterans who served prior to 1.977. The monthly stipend isbased on the size of the student veteran's family andwhether the veteran is a full- or part-time student. Theaward is not adjusted for need or for varying institu-tional costs. The benefit is available to all veterans,but the education must be completed no more than ten yearsafter discharge from active service.

o Social Security Benefits for Students. Enacted in 1965,these benefits provide continued social security benefitsto full-time college students under 22 years of age. Thesize of the benefit depends upon the category of eligi-bility of the student's family. 2^/

JY A new veterans' program has been created for individualsentering the service after December 1976. Those wishingto participate in this program must contribute towardtheir future education while in the service. Their contribu-tion is double matched by federal funds.

27 Social Security Benefits for Students, a May 1977 CBO Back-ground Paper, discusses social security student benefits andanalyzes various options for the programt

15

Tax Expenditures for Postsecondary Education

Various tax expenditures provide benefits for postsecondaryeducation in the form of reduced tax liabilities. _3/ Theseinclude a $750 personal exemption and a $35 tax credit forstudent dependents, the exclusion of fellowships and scholarshipsfrom taxable income, the exclusion of veterans' benefits andsocial security student benefits from taxable income, and thededuction of Rifts and bequests to educational institutions.

Funding for Academic Science

Postsecondary education also benefits appreciably, thoughindirectly, from federal funding of research and development. Intotal, universities receive more than $3 billion annually infunds to conduct basic and applied research. This funding ischannelled through a number of federal agencies to the receivinginstitutions. Because of the different nature and purposes ofthis funding, research and development is not discussed furtherin this paper.

FISCAL YEAR 1978 FUNDING OF MAJOR FEDERAL PROGRAMS FOR POST-SECONDARY EDUCATION

Major federal programs for postsecondary education areincluded in three areas, or subfunctions, of the budget. Inaddition to direct spending programs (see Table 3), there are taxexpenditures, or revenue losses, associated with each of theseareas. The three budget subfunctions are as follows:

o Subfunction 502, Higher Education, encompasses all pro-grams included in the Higher Education Act of 1965 and theHigher Education Amendments of 1976.

_3/ Tax expenditures are revenue losses from provisions of thetax law that provide special or selective tax relief. Theserevenue losses are called tax expenditures because they arevery much like payments by the federal government, exceptthat they are made through a reduction of taxes rather thanby direct spending.

16

o Subfunction 601, Social Security, includes the paymentto full-time student dependents of eligible disabled,retired, or deceased workers.

o Subfunction 702, Veterans' Readjustment Benefits, includespayments made under the G.I. Bill.

For fiscal year 1978 the projected direct funding andtax expenditures in these three subfunctions amount to $9.9billion. Although this is less than was spent for the same areasin each of the preceding two years, the decline is fully attrib-utable to a declining population of veterans using the G.I. Bill(see Table 3).

TABLE 3. SPENDING AND RECIPIENTS IN POSTSECONDARY STUDENT AS-SISTANCE PROGRAMS: FUNDS IN MILLIONS OF DOLLARS,RECIPIENTS IN THOUSANDS, BY FISCAL YEARS

Budget Account 1976 1977 1978

Higher Education Account (502) a_/Budget Authority 2,933 3,224 3,785Outlays 2,213 2,632 3,304Recipients W 5,671 5,838 6,352

Social Security Account (601)Budget Authority 1,097 1,276 1,446Outlays 1,097 1,276 1,446Recipients 660 690 727

Veterans' Readjustment BenefitsAccount (702)

Budget Authority 4,550 3,626 2,094Outlays 4,151 2,930 2,596Recipients 2,089 1,426 1,186

a_/ Includes BEOG, SEOG, CWS, NDSL, GSL, and SSIG.b/ Duplicated counts of recipients who receive more than one

type of federal student assistance.

17

26-995 0 - 7 8 - 5

Higher Education (Subfunction 502)

Funding has increased steadily for the major programsadministered by the Office of Education. For student assistanceprograms, the budget authority increased 17 percent from fiscalyear 1977 to fiscal year 1978. This was more than twice theincrease of 8 percent in the total federal budget. Coincidentwith this increase in funding, the number of recipients ofassistance from these programs increased by about 9 percent,which means the average benefit for each recipient increasedapproximately 8 percent. 47 This is greater than the estimatedincrease of 6 percent in student costs between academic years1977-1978 and 1978-1979. 5/

The growth in these programs results from a combination oflegislative and administrative changes. The 1976 amendments tothe Higher Education Act authorized an increase in the maximumBasic Grant award from $1,400 to $1,800 beginning with the1978-79 school year, and increased funding in fiscal year 1978appropriations for the BEOG program provided grants up to amaximum of $1,600.

Several changes increased the budget for the GuaranteedStudent Loan program. The eligibility for subsidized loans wasexpanded to include students from families with adjusted familyincomes under $25,000, up from a previous maximum of $15,000. Anumber of incentives also were provided to encourage lendinginstitutions to increase their student loan portfolios.

4/ The number of recipients refers to the total number of awardsfrom these programs. The actual number of students receivingfederal aid is considerably smaller than the reported numberof total awards. A survey by the American Council on Edu-cation indicates that more than 40 percent of the studentsreceiving federal student assistance receive more than oneform of federal assistance.

_5_/ The increase in educational expenses reported by the CollegeScholarship Service reflect only the increasing costs to thestudent (i.e., tuition, books, fees, travel, and room andboard). The costs of providing higher education are increas-ing at a much higher rate than 6 percent. The CongressionalBudget Office projects that the costs of providing thisservice will rise 9.1 percent in fiscal year 1978.

18

Even a quite substantial increase in the number of loans,however, results in relatively modest increases in federalcosts. For example, in fiscal year 1977 $6.2 billion in loanswere outstanding, requiring a federal subsidy of $325 million. _6_/But only $1 billion of this total was dispensed during fiscalyear 1977. Even if banks expand their aggregate portfolios by 25percent in response to the various incentives introduced in 1977,thus increasing the money available for loans in fiscal year 1978to $1.25 billion, subsidy payments during this year would in-crease by only 7.4 percent, from $325 million to $349 mil-lion. ]_/

Social Security Benefits (Subfunction 601)

Social security benefits for students are another growingsector of postsecondary funding. Expenditures will increaseabout 11 percent between fiscal years 1977 and 1978, from $1.3billion to $1.4 billion. Automatic benefit increases and in-creases in the number of beneficiaries caused this increase.

Veterans' Readjustment Benefits (Subfunction 702)

During the past decade, veterans' benefits have providedmore federal assistance to students than any other single pro-gram. At its peak in fiscal year 1976, the veterans' benefitsprogram was providing more aid to students than were all theOffice of Education student assistance programs combined.

Though the individual benefit package for veterans cont-inues to increase, the number of eligible recipients is declining

6_/ Fifty-six percent of the guaranteed loans outstanding areto students in school, with family incomes under $25,000, andthus require the full subsidy of 7 percent plus the specialallowance subsidy to the lending institutions. The remainingloans are in repayment status and require only specialallowance subsidies to lenders. The $325 million refers onlyto the payment of subsidies on loans that are not in de-fault.

Tj This increase is for a full year's subsidy on the additionalloans. Loans, however, are dispersed throughout the year,thus some loans would not require payment of the full sub-sidy, and the resulting fiscal year increase would be lessthan the estimate provided in the text.

19

rapidly as Vietnam era veterans pass beyond the period for usingtheir educational entitlements. Newly enacted revisions toveterans' benefits, which assist certain veterans beyond theten-year period for using benefits and which may acceleratebenefits for others, may slow but not halt this funding decline.Between fiscal years 1977 and 1978, expenditures for the veter-ans' program will fall approximately 11 percent and the number ofrecipients will decrease by 17 percent. j8/

Tax Expenditures

Another segment of postsecondary funding that is increasingis tax expenditures. The revenue lost through postsecondary taxallowances will increase from $2.1 billion in fiscal year 1977 to$2.2 billion in fiscal year 1978, an increase of 5 percent (seeTable 4).

THE DISTRIBUTION OF STUDENT ASSISTANCE BENEFITS

In combination, the many programs that channel assistanceto postsecondary students will provide $8.6 billion in benefitsin fiscal year 1978 (see Table 5). This represents 87 percentof all federal expenditures for postsecondary education. Thelargest portion of the benefits in fiscal year 1978 will go tolower-income students, addressing the goal of enhancing equalityof educational opportunity. But one-third of the benefits willgo to students from families with incomes greater than $15,000,an indication that student assistance programs already aredirecting some attention toward decreasing the burden of collegecosts for middle-income families.

Higher Education (Subfunction 502)

Most federal higher education programs focus on meeting"student need," defined as the difference between the amount thatthe student and his family are expected to contribute to edu-cational expenses and the costs of the education.

8/ The percent decrease in the number of recipients is greaterthan the percent decrease in expenditures for the veterans'program because of the benefit level increases each year thatoffset the decline in costs for the program.

20

TABLE 4. TAX EXPENDITURES FOR POSTSECONDARY EDUCATION, FISCALYEARS 1977 AND 1978: IN MILLION DOLLARS

PercentTax Expenditure 1977 1978 Change

Exclusion of Scholarships &Fellowships 245 295 20.4

Parental Personal Exemptionsfor Students 750 770 2.7

Deductibility of ContributionsIndividual 525 585 11.4Corporations 235 255 8.5

Exclusion of GI Bill Benefits 260 200 -23.1

Exclusion of Social SecurityStudent Benefits

Total

100

2,115

107

2,212

7.0

4.6

SOURCE: Budget of the United States Government. Fiscal Year1979, Special Analyses, Table G-l, page 159.

Postsecondary institutions play an important role in deter-mining how federal aid will be apportioned to eligible students.Most federal student assistance programs, excluding Basic Grants,are administered by the institution in which recipients areenrolled or by the lending institutions from which studentloans are provided. Students with equivalent levels of financialneed might be treated quite differently by different schoolsor banks. In the Basic Grants program there is more directfederal control; eligibility for a Basic Grant is determined byapplying a standard federal needs analysis.

The nature of all of the major federal student aid programshas assured that a large share of these funds go to more needy,

21

TABLE 5. ESTIMATED DISTRIBUTION OF BENEFITS FOR STUDENT ASSIST-ANCE, BY INCOME CLASS, FISCAL YEAR 1978: IN MILLIONS OFDOLLARS AND PERCENTS

Expenditure

Income Class15,000- All

0-15,000 25,000 25,000+ Incomes

Higher EducationStudent Assistance a./

DollarsPercent

Social SecurityStudent Benefits

DollarsPercent

Veterans' Readjust-ment Benefits

DollarsPercent

Tax Expenditures b/DollarsPercent

TotalDollarsPercent

308685

92364

1,12954

73454

5,87269

47313

26018

80438

40129

1,93823

782

26318

1618

23717

7398

3,637100

1,446100

2,094100

1,372100

8,549 c/100

a./ Includes BEOGs, SEOGs, GSLs, NDSLs, and CWS but does notinclude SSIGs which would add an additional $64 million.

b/ Includes scholarship/fellowship exclusion, dependencyexemption and credit, and veterans' and social securityexclusions.

c/ With SSIG benefits would be $8,613 million.

22

lower-income students (see Table 6). In each of the HEW studentassistance programs, between 60 and 95 percent of the funds go tothese lower-income families. Even in the Guaranteed Loan pro-gram, devised as an assistance program for students from middle-income families, about 63 percent of the federal subsidy accruesto students from families with incomes under 515,000.

In fiscal year 1978, $0.5 billion (or 14 percent) of thetotal aid from the five major student assistance programs willbe distributed to students from families with incomes in the$15,000 to $25,000 range. Students from these families are morelikely to receive awards through the two loan programs and thecollege work-study program than through the federal student grantprograms.

Although student aid programs are not aimed specificallyat either public or private colleges, each program provides adifferent distribution of aid among types of schools (see Table7). In the Basic Grants program, about 68 percent of the $2.1billion in fiscal year 1978 funding will go to public institu-tions; 25 percent to nonprofit private schools; and 8 percent toprivate proprietary institutions. Average awards to publicschool students will be slightly more than $800, or approximately$250 less than their private school counterparts. In the campus-based programs, about 59 percent of the $1.0 billion in fiscalyear 1978 funds will go to public institutions. Private, non-profit schools will receive 37 percent, and the share going toprivate, proprietary schools will be about 4 percent.

Social Security (Subfunction 601)

In the 1977-1978 school year, approximately 727,000 post-secondary students will receive $1.4 billion in benefits fromthe social security system. Because these student beneficiariesare dependents of retired, disabled,, or deceased wage earners,they are often from families with lower incomes. In fiscal year1978, the median adjusted gross income of families with socialsecurity student beneficiaries will be approximately $15,155,about three-fourths of the median income for all families withchildren in college. Almost two-thirds of the social securitystudent benefits will go to students from families with incomesbelow $15,000 per year (see Table 8).

23

TABLE 6. FAMILY INCOME DISTRIBUTION af OF BENEFITS FOR STUDENTASSISTANCE FUNDING, FISCAL YEAR 1978: IN MILLIONS OFDOLLARS AND PERCENTS

Family IncomeProgram $0-15,000 $15,000-25,000 $25,000+ All Incomes

Basic GrantsDollars 1,947 129 0 2,076 b_/Percent 94 6 0 100

Supplemental GrantsDollars 248 22 0 270Percent 92 8 0 100

Direct LoansDollars 212 98 16 326Percent 65 30 5 100

College Work-StudyDollars 348 78 9 435Percent 80 18 2 100

Guaranteed LoansDollarsPercent

Total c/DollarsPercent

33163

3,08685

17232

49914

275

521

530100

3,637100

a/ The distributions used in this table assume that independentstudents are distributed in proportions equivalent to de-pendent students. The distributions for Supplemental Grants,Direct Loans, College Work-Study, and Guaranteed Loans arederived from the 1975 Office of Education Fiscal OperationsReport, adjusted to 1978 values.

b_/ The total cost of the BEOG program would be $2.16 billion.The amount available to students would be $2.076 billion.Administrative costs account for $24 million of the differ-ence and elementary and secondary offsets account for another$60 million.

c_/ The SSIG program, which is appropriated $64 million forfiscal year 1978, is not reflected in this table. Includingthe funding for SSIGs and the additional BEOG costs fromfootnote b, the total amount available for student assistancethrough the Office of Education would be $3.8 billion.

24

TABLE 7. PERCENT DISTRIBUTION OF STUDENT ASSISTANCE FUNDING AND RECIPIENTS,BY INSTITUTIONAL TYPE AND CONTROL

Program

Basic Grants a_/BenefitsRecipients

Supplemental Grants b/BenefitsRecipients

Direct Loans b/BenefitsRecipients

College Work-Study _b/BenefitsRecipients

Guaranteed Loans _c/BenefitsRecipients

Univ.

3735

3836

4142

4038

2627

Public4-yr.

76

89

68

88

1912

Private2-yr.

2430

1419

69

1920

57

Univ.

97

1411

2218

1312

510

4-yr.

1311

1917

1818

1517

2522

2-yr.

32

23

22

33

22

Pro-prietary

89

56

64

11

1919

NOTE: Rows may not add to 100 percent because of rounding.

aj Percent distribution for academic year 1976-1977, from Division ofBasic Grants, Office of Education.

W Fiscal Operations Division, Office of Education, fiscal year 1975.cj Unpublished data, Office of Guaranteed Student Loans, Office of Educa-

tion.

TABLE 8. PROJECTED DISTRIBUTION OF FUNDS FOR SOCIAL SECURITYEDUCATIONAL BENEFITS, BY INCOME CLASS, FISCAL YEAR 1978

Income Class Percent Funds(in millions of dollars)

$0 - 4,999

$5,000 - 9,999

$10,000 - 14,999

$15,000 - $19,999

$20,000 - $24,999

$25,000+

Total

31.5

16.5

15.8

13.9

4.1

18.2

100.0

456

239

228

201

59

263

1,446

SOURCE: Social Security Administration; U.S. Bureau of theCensus, The Survey of Income and Education (1976).

Veterans" Benefits (Subfunction 702)

The Veterans' Readjustment Program will provide $2.6 billionin financial assistance to 1.2 million veterans attending collegein fiscal year 1978. As with social security benefits, but incontrast to other student assistance programs, the veterans'educational benefit program is not "needs based;" that is, twostudent veterans with the same number of dependents but differentincomes or attending differently priced schools receive the sameaward. Because many veterans are self-supporting students,60 percent of the participating veterans have family incomesunder $15,000 and more than 90 percent are from families earningless than $25,000 (see Table 9).

26

TABLE 9. DISTRIBUTION OF VETERANS IN POSTSECONDARY EDUCATION,THEIR BENEFITS, AND FAMILY SIZE, BY INCOME CLASS,FISCAL YEAR 1978: RECIPIENTS IN THOUSANDS, BENEFITS(OUTLAYS) IN MILLIONS OF DOLLARS

VeteransBenefitsPaid

Income Class Number Percent Dollars PercentNumber ofDependents

$0-15,000 707 59.6

$15,000-25,000 378 31.9

$25,000+ 101 8.5

AllIncomes 1,186 100.0

1,399 53.9

997 38.4

200 7.7

2,596 100.0

1.5

2.0

1.5

1.6

SOURCE: The distribution is derived from a Congressional BudgetOffice estimate, based on 1976 Survey of Income andEducation, adjusted, U.S. Bureau of the Census.

Tax Expenditures

The existing set of tax expenditures will provide $2 billionin educational benefits in fiscal year 1978. For a number ofreasons these various provisions of the tax law tend to benefithigh-income families more than low-income families. For example,all current education-related tax expenditures are nonrefund-able—that is, they are available only to people with taxes topay. Therefore, very low-income families with no tax liabilityreceive no benefit from these tax expenditures. Because they aredeductions from income rather than credits against taxes, taxexpenditures are also worth more (in terms of lowered tax pay-ments) to higher-income taxpayers who have higher marginal taxrates.

Overall, the current set of tax expenditures will providebenefits for individuals in all income classes, but the distribu —

27

tion of benefits to higher-income students and families isappreciably greater than that of direct spending programs. About41 percent of the benefits will go to taxpayers with incomesabove $25,000. There is considerable variation in the distribu-tion of benefits among the various tax expenditures. Forexample, only 10 percent of the implicit tax expenditure forscholarships (which are not taxed) goes to families with incomesabove $25,000 while 23 percent of the dependency exemptionexpenditure goes to families in that income range (see Table 10).

TABLE 10. ESTIMATED DISTRIBUTION OF POSTSECONDARY TAX EXPENDI-TURES, BY INCOME CLASS, FISCAL YEAR 1978: IN MILLIONSOF DOLLARS AND PERCENTS

Expenditure $0-15,000Income Class$15,000-25,000 $25,000+

AllIncomes

Exclusion ofScholarships,Fellowships

Dollars 197Percent 67

DependencyExemption

Dollars 308Percent 40

Contribution•Deduction a/(Individual)

Dollars 6Percent 1

G.I. BenefitsExclusion

Dollars 158Percent 79

Soc. SecurityBenefitsExclusion

Dollars 71Percent 66

All TaxExpenditures

Dollars 740Percent 38

6823

28537

183

3015

1817

41921

3010

17723

56196

126

1817

79841

295100

770100

585100

200100

107100

1,957100

SOURCE: Congressional Budget Office estimate based on TreasuryDepartment data,

a/ Does not include corporate contributions.

28

These tax provisions have a mixed impact on educationalinstitutions. The current provisions that provide relief forstudents and their families may improve the competitive positionof less expensive public schools because they provide the sameconstant dollar reduction for all families that have the samemarginal tax rate. The dollar reduction represents a largerpercent reduction in the cost of a less expensive school andthus might make that school more attractive to the student. Onthe other hand, private institutions and larger, more prestig-ious, public schools garner most of the contributions made tocolleges and universities; thus, the provision that allowsdeduction of contributions works clearly to the advantage ofthese schools and to the families who contribute to them.

THE EFFECT OF EXTENDING CURRENT POLICY TO FISCAL YEAR 1979

A total of $10.2 billion—an additional $0.3 billion overthe fiscal year 1978 level—would be required to maintain theexisting set of postsecondary education programs at the currentpolicy level of commitment for fiscal year 1979 (see Table 11)._9/ The largest portion of this funding, more than $3.8 billion,would go into the major student assistance programs. Approxi-mately 80 percent of these funds would be channelled to students

_£/ Current policy assumes sufficient funding is provided tomaintain programs at their current real dollar value infuture years. Current policy assumptions for the BasicEducational Opportunity Grants program maintains funding atthe level appropriated in fiscal year 1978; thus the ef-fective maximum award is $1,600, and the amount of assetsexcluded from consideration in determining family contri-bution is $17,000. Current policy assumptions for theGuaranteed Student Loan program hold the number of loans forfiscal year 1979 at fiscal year 1978 level. The size of anaverage loan is projected to increase slightly to compensatepartially for projected increases in the costs of attendingcollege. Current policy assumptions for all other post-secondary education programs included within the HigherEducation Act (budget subfunction 502) increase spending by9.1 percent, the CBO estimated increase in the costs ofproviding higher education services. Social security andveterans' benefits are increased by 6 percent based on theestimate of changes in the Consumer Price Index.

29

TABLE 11. DISTRIBUTION OF FUNDS AND RECIPIENTS FOR HIGHER EDU-CATION, BY BUDGET SUBFUNCTION: BUDGET AUTHORITY INMILLION DOLLARS, RECIPIENTS IN THOUSANDS, BY FISCALYEARS

Percent1978 1979 Change

Subfunction 502 (Higher Education)Student AssistanceBudget authority $3,785 3,864 2 1Recipients 6,352 5,789 -8.9

Other Higher EducationBudget authority 341 372 9.1

Subfunction 601 (Social Security)Budget authority 1,446 1,580 9.3Recipients 727 749 3.0

Subfunction 702 (Veterans' Benefits)Budget authority 2,094 2,056 -1.8Recipients 1,186 1,007 -15.1

Tax Expenditures—Expected Forgone Revenue(millions of dollars) 2,212 2,337 5.7

Total 9,878 10,209 3.4

from families with incomes under $15,000 (see Table 12). Thus,as in previous years, most of these funds would be applied tothe goal of enhancing equal educational opportunity. Extend-ing current policy to fiscal year 1979 would include $0.3 billionfor institutional aid. Most of this would fund programs designedto aid the educationally disadvantaged.

The current policy costs of the postsecondary componentsof the social security program ($1.6 billion) and the veterans'readjustment program ($2.1 billion) reflect inflationary in-creases in benefits and the anticipated increases and decreasesin the number of recipients. Tax expenditures would provide abenefit of $2.3 billion.

30

TABLE 12. INCOME DISTRIBUTION OF STUDENT ASSISTANCE FUNDINGUNDER FISCAL YEAR 1979 CURRENT POLICY a_/: BENEFITSIN MILLIONS OF DOLLARS, RECIPIENTS IN THOUSANDS

Program Family Income$0-15,000 $15,000-25,000

All$25,000+ Incomes

Basic GrantsRecipients 1,898Benefits 1,732

Supplemental GrantsRecipients 388Benefits 242

Direct LoansRecipients 505Benefits 204

College Work-StudyRecipients 501Benefits 324

Guaranteed LoansRecipients 515Benefits 264

SSIGRecipientsBenefits

All ProgramsWithout SSIGRecipients d/ 3,807Benefits 2,766

All ProgramsRecipients -Benefits

272126

7649

272105

201116

438225

1,259621

8646

6141

8343

239134

2,1701,858 W

473295

863355

763481

1,036532 c/

28070

5,3053,521

5,5853,591 e/

a/ Assuming independent students are distributed in proportionsequivalent to dependent students,

b/ Total cost of the BEOG program would be $1.912 billion;amount available to students would be $1858. $24 millionof total goes to administrative costs and $30 million goesto nonpostsecondary students.

cj Total cost of the GSL program would be $529 million. Subsidypayments for current loans or loans in repayment would be$338 million; remainder covers default payments.

_d/ Duplicated count of recipients who receive more than one typeof federal assistance.

&J With added costs reflected in footnotes b & c, total costwould be $3.9 billion.

CHAPTER III. MAJOR LEGISLATIVE PROPOSALS FOR FISCAL YEAR 1979

Five major proposals that would increase significantlyfederal student assistance have been proposed by the Congress andthe Administration. While these proposals all have basicallythe same purpose—increasing student assistance to middle-incomefamilies—they differ in the strategies they embody for achievingthis goal. The two different mechanisms for providing federalassistance are:

o Providing Assistance Through Existing Student Assist-ance Programs. The Administration, the Senate HumanResources Committee, and the House Education and LaborCommittee all have presented proposals that would utilizeexisting student assistance programs, primarily BasicGrants and Guaranteed Loans, to provide aid to middle-income families.

o Providing Assistance Through Tuition Tax Credits. TheSenate Finance and House Ways and Means Committees haveproposed assisting middle-income families by allowingthose with students to claim a tax credit for tuitionexpenses.

In this chapter each of these five proposals is discussed.The major components of each are presented, and the probableimpact on the budgetary costs and distribution of benefits areanalyzed. The proposals are compared with respect to how theyaddress the federal goals of achieving equality of educationalopportunity, reducing the burden of college costs, and assuring astrong and diverse educational system.

PROPOSALS PROVIDING ASSISTANCE THROUGH DIRECT SPENDING PROGRAMS

The Basic Grants program is the primary focus of all threeof the proposals for providing assistance through direct spendingprograms. Each of the three proposals relies on a unique set ofchanges to provide greater assistance to students from middle-income families. There are two changes, however, that all three

proposals share in common. Each would fund the Basic Grantsprogram at its fully authorized level, thus increasing themaximum award from $1,600 to $1,800, and each would increase from$17,000 to $25,000 the amount of assets excluded from consider-ation in determining the family's contribution to the student'seducation. These two changes would cost $314 million more thanextending current policy to fiscal year 1979 and would provide40,000 more awards. The full-funding option of a maximum grantof $1,800 and an asset exclusion of $25,000 is used as the basein comparing the various Basic Grants proposals.

The Administration's Proposal

The Administration's proposal would increase the funding forBasic Grants and College Work-Study, plus raise the eligibilitylimit on Guaranteed Student Loans from $25,000 to $40,000 adjust-ed family income. _!_/ The major component of the President'sproposal is a modification of the Basic Grants program thatwould:

o Increase the family living allowance considered nondis-cretionary income by $750 for each family.

o Change the treatment of self-supporting students by in-creasing from $1,100 to $3,400 the income recognized asneeded to sustain a single student and by reducing theassessment on assets of self-supporting students withfamilies from 33 percent to 5 percent in line with assess-ment rates for other families.

o Provide a guaranteed award of $250 to full-time dependentstudents or independent students with dependents from fam-ilies with incomes below $25,000.

With these changes, the cost of the Basic Grants program forfiscal year 1979 would be $3.1 billion, an increase of $1.0 bil-lion over the fully funded current program for fiscal year

_!_/ Adjusted family income represents the families' taxableincome. $40,000 in adjusted family income is equivalent toan average gross income of $47,000.

33

1979. "1J The revised program would reach 4.7 million students,an increase of 2.5 million, or more than 100 percent, over afully funded current program. Roughly 2.3 million students wouldreceive the $250 guaranteed grant.

Congressional Proposals

Senate. The Senate Human Resources Committee has approved abill (S. 2539) that expands the Basic Grants program, extendseligibility for Guaranteed Loans to all students, and increasesthe authorization for Supplemental Grants and College Work-Study.As with the Administration proposal, the most significant changesare proposed for the Basic Grants program. In addition to fullyfunding the program at its authorized level ($1800 maximum grant)and increasing the asset exclusion to $25,000, the Senate pro-posal decreases the assessment rate on disposable income.Currently, families are expected to contribute toward a student'seducation 20 percent of the first $5,000 of disposable income(that amount above the basic family living allowance) and 30percent of the remaining disposable income. The Senate proposallowers this expected contribution to 10.5 percent for all dis-posable income. These alterations would result in a Basic Grantsprogram costing $3.3 billion in fiscal year 1979, an increase of$1.2 billion over full funding for 1979. It would reach 3.7million students, an increase of 1.5 million, or 66 percent.

House. The House Education and Labor Committee has reportedthe "Middle Income Student Assistance Act of 1978" (H.R. 11274).The proposed changes to the Basic Grants program in this bill arethe same as those presented in the Senate (fully funding to $1800award level, increasing the asset exclusion to $25,000, andreducing the assessment rate on discretionary income to 10.5percent) , _3_/ except that the House bill includes the Admin-istration's two provisions for self-supporting students. These

For the Basic Grants program, projected incomes and edu-cational costs are altered to reflect estimated inflationaryeffects.

The House proposal also includes a provision for fundingBasic Grants if the program is not funded at the fullyauthorized level. In such a case, the assessment rate wouldbe adjusted upward from 10.5 percent to 12 percent.

34

provisions would increase the income allowance for independentstudents without dependents to $3,400 and the assessment rate forindependent students with dependents would be decreased to 5percent. These two provisions add an additional cost of $131million to the bill and increase the number of recipients by46,000. The overall cost of the Basic Grants program with thesechanges would be $3.4 billion, an increase of $1.3 billion abovefull funding of the current programs. It would reach more than3.7 million students.

The House version proposes slightly different alterations tothe Supplemental Grants and Work-Study programs, and includes aproposed small increase in funding for the State Student In-centive Grants program. The House also would extend eligibilityfor Guaranteed Student Loans to all students.

PROPOSALS PROVIDING ASSISTANCE THROUGH TUITION TAX CREDIT

Both the Senate and the House have before them bills thatwould provide tuition tax credits to assist middle-income fam-ilies.

Senate. The Senate Finance Committee has reported "theTuition Tax Relief Act of 1978," an amendment to H.R. 3946. 4_/This bill would gradually introduce tuition tax credits over thespan of five years. Beginning August 1, 1978, individuals couldclaim a credit equal to 50 percent of tuition and fees, with amaximum credit of $250 per student for expenses incurred infull-time undergraduate colleges or vocational schools. OnAugust 1, 1980, the credit would be increased to a maximum of$500, and elementary and secondary school students would becomeeligible. On August 1, 1981, graduate students and part-timestudents would become eligible. The revenue loss associated withthis bill increases appreciably as the size of the allowablecredit is increased and the eligible population is expanded.

House. The House Ways and Means Committee has reportedH.R. 12050, which would introduce a tuition tax credit graduallyover a three-year span. This bill differs from the SenateFinance Committee tuition tax credit proposal in a number of

4/ H.R. 3946 is an act to suspend the tariff duty on certaingrades of wool.

35

ways. First, the Ways and Means bill is nonrefundable; that is,the taxpayer can receive a credit only up to the limit of his taxliability. Second, the bill applies only to undergraduate stu-dents who attend school more than half-time, and is limited to25 percent of tuition and fees. And finally, the maximum creditallowed in H.R. 12050 would be much lower than the levels pro-posed in the Senate: $100 for calendar year 1978, $150 for 1979,and $250 for 1980, after which the program would be terminatedunless renewed.

THE IMPACT OF CURRENT PROPOSALS

Impact of Proposed Changes to the Basic Grants Program

Each Basic Grants plan has a somewhat different impact.As Table 13 shows, the Administration's proposal would providethe greatest number of grants, but the average grant would bemuch smaller because most of the students would receive only the$250 minimum grant. The Senate and House bills, on the otherhand, would provide fewer grants but those available would bemuch larger. Under these proposals, the average grant for arecipient in the $20,000 to $25,000 income class would be ap-proximately $575. Unlike the President's proposal, however, lessthan fifty percent of the students from families in this incomerange would qualify for grants. The House bill provides largeraverage grants to lower-income families because most independentstudents fall in these lower-income categories, and H.R. 11274includes the two provisions to assist independent students. Forexample, students in the lowest income group, $0 to $5,000, wouldbenefit most from the House proposal which would increase eachgrant $188 on average, to $1,257.

Clearly, these proposals would increase the emphasis offederal aid on the goal of reducing the burden of college costsfor middle-income families. None of the proposals, however,would reduce the commitment to ensuring equality of opportunity.The Administration and House Basic Grants proposals, in fact,would increase the funding related to achieving equality ofopportunity by channeling more benefits to one specific sub-group—independent students, many of whom have lower incomes.None of the Basic Grant components address directly the goal ofassuring a strong system of higher education, but they would nodoubt have some effect on this goal, too. Middle-income students

36

TABLE 13. DISTRIBUTION OF RECIPIENTS AND BENEFITS OF THREECURRENT PROPOSALS FOR ALTERING THE BASIC EDUCATIONALOPPORTUNITY GRANTS PROGRAM, BY INCOME CLASS, FISCALYEAR 1979: RECIPIENTS IN THOUSANDS, BENEFITS INMILLIONS OF DOLLARS, AVERAGE AWARD IN DOLLARS

IncomeClass

$0-5,000RecipientsBenefitsAvg . Award

$5-10,000RecipientsBenefitsAvg. Award

$0-15,000RecipientsBenefitsAvg. Award

$15-20,000RecipientsBenefitsAvg . Award

$20-25,000RecipientsBenefitsAvg. Award

$25,000+RecipientsBenefitsAvg. Award

SubtotalRecipientsBenefitsAvg. Award

AdministrativeOffsets (mil-lions ofdollars)

Total Costs(millionsof dollars)

(1)CurrentLaw, BEOGFull Funded

437467

1,069

777855

1,100

691565818

269154572

3513

371

000

2,2092,054930

54

2,108

(2)Administra-tion BEOGProposal

452562

1,243

959976

1,018

1,220787645

957385402

1,135291256

000

4,7233,001635

81

3,082

(3)SenateBEOGProposal

441469

1,063

775881

1,137

822823

1,001

676547809

646370573

312125401

3,6723,215876

71

3,286

(4)HouseBEOGProposal

447562

1,257

804910

1,132

834833999

677545805

644371576

312125401

3,7183,346900

71

3,417

are more likely to select more expensive institutions if moremoney is available to them. Therefore, the proposed increases inthe Basic Grants program could result in some shift in enrollmentfrom lower-cost public institutions to higher-cost public andprivate institutions.

Impact of Proposed Changes to the Guaranteed Student LoansProgram

Each of the direct spending proposals also includes anexpansion of the GSL program. But simply increasing the avail-ability of federal funding for guaranteed loan subsidies will notensure increases in loan volume because the loans are provided byprivate lending agencies tViat determine who receives the loansand how much they get.

For fiscal year 1979, the Administration has proposedincreasing eligibility to students from families with adjustedfamily incomes up to $40,000. The Administration also proposesraising the special allowance subsidy paid to banks by one-half percent. The Administration projects that these changeswould increase dramatically the size of the Guaranteed StudentLoan Program—that not only would student loan portfolios in-crease sufficiently to absorb the newly eligible borrowers, butthat the overall participation rate would rise from 11 percent to13 percent of those eligible.

There is no adequate way to verify the Administration'sassumptions; they are only one of several possible responses bybanks to the proposed changes. The Administration's assumptionsand two other possible response patterns are examined here.

Lenders Increase Significantly Loan Availability. If thelending institutions respond as expected by the Administration,there would be 1.6 million loans dispensed in fiscal year 1979,an increase of 400,000 over fiscal year 1978 (see Table 14).This increase includes about 200,000 newly eligible students fromhigher-income families and an increase in the participationrate of eligible students from 11 percent to 13 percent. Assum-ing the average size loan is $1,600, the total disbursement forloans in fiscal year 1979 would be $2.5 billion. The federalinterest subsidy for this loan volume, including the proposedincrease, would be $255 million.

38

TABLE 14. DISTRIBUTION OF NEW LOANS UNDER VARIOUS RESPONSE PATTERNS TOINCREASED ELIGIBILITY FOR GUARANTEED STUDENT LOANS, BY INCOMECLASS: NUMBER OF LOANS IN THOUSANDS

IncomeClass

$0-15,000No. of loansPercent

$15-25,000No. of loansPercent

$25,000+No . of loansPercent

Total No.of Loans

EstimatedFiscal Year1979, NoChange InEligibility

57249.7

48642.3

928.0

1,150

IncreasedLoan Volume,Increase inParticipationRate aj

68544.1

58237.5

28618.4

1,553

IncreasedLoan Volume,No Increasein Participa-tion Rate b/

57246.8

48639.8

16413.4

1,222

No IncreaseIn LoanVolume, De-crease inParticipationRate _c/

53846.8

45839.8

15413.4

1,150

SOURCE: Congressional Budget Office estimates based on Office of Edu-cation data.

ji/ Lenders increase loan volume sufficiently to absorb newly eligiblestudents and to increase participation rate to 13 percent.

b/ Lenders increase loan volume sufficiently to absorb newly eligiblestudents and retain previous participation rate of 11 percent.

cj Lenders maintain current level of funding student loans; portfoliosare not increased.

39

Lender Response Only Increases Sufficiently to RetainCurrent Participation Rate. A somewhat less optimistic possibleoutcome of the Administration's proposal is that banks wouldrespond favorably to the new incentives but only at a ratesufficient to absorb the newly eligible students at the oldparticipation rate of 11 percent. This would add 164,000 newloans for a total of 1.3 million dispersals. Assuming theseloans and only these loans would go to the newly eligible stu-dents, the previously eligible population would realize no changein the availability of loans. The federal subsidy for totaldispersements in this situation would be $215 million for fiscalyear 1979.

Lenders Maintain Current Level of Funding Student Loans.This response assumes that the aggregate size of student loanportfolios neither increases! nor decreases as a result of theproposed changes. Thus, there would be no room for growth in thenumber of loans. Because of the increase in the size of theeligible population, the participation rate would decline to lessthan 10 percent. About 154,000 of the recipients would be newlyeligible students from families with adjusted family incomesgreater than $25,000. Thus, 154,000 fewer loans than beforewould be available to students from families with incomes below$25,000. The effect could be even more exaggerated. It is inthe banks' best interest to loan to lower-risk, higher-incomestudents. It is possible, therefore, that even fewer loans thanprojected in these estimates would remain available for lower-income students (see Table 14). Thus loans may no longer beavailable for students who need them the most, but rather maybecome used predominantly as a technique for supplementing theresources of students from relatively high-income families.

Responses to Senate and House Proposals. The same basiclender responses exist for the Senate and House GSL proposals,although each bill has unique features that alter the probableeffects slightly. Both bills would make all students eligiblerather than just those from families with adjusted family incomesunder $40,000. This would add approximately 750,000 more stu-dents to the pool of eligible borrowers than would the Admin-istration's proposal. At previous participation rates, approxi-mately 83,000 of these students would apply for and receiveloans.

The Senate bill removes the eligibility ceiling but includesno new incentives for lenders to increase loan volume. Under

40

these circumstances, it would be unlikely that loan volume wouldincrease appreciably to absorb the newly eligible population.This likely would result in a rather dramatic redistribution ofGSL recipients among income groups, with lower-income studentsreceiving fewer loans.

The House bill removes the eligiblity ceiling and includesa one-half percent increase in subsidy payments to banks as anintended stimulus to prompt lenders to provide more studentloans. With the proposed increases, the federal government wouldpay banks an estimated 10.25 percent in fiscal year 1979 forall student loans in repayment. 5_f At this rate, student loansstill would not be fully competitive with other consumer loansthat assess higher levels of interest, have shorter repaymentperiods, and have lower default rates, even though these otherconsumer loans are not federally insured against loss. There islittle doubt that increasing the loan subsidy as proposed wouldlead to some increase in the number of available student loans.Given the constraints enumerated above, however, it is difficultto estimate the magnitude of the increase or the effects on thedistribution of loans to students from families of differentincome levels.

Impact of the Tuition Tax Credit Proposals

The distributional impact and revenue loss associated witha tax credit depend primarily on four conditions of the specificcredit proposed:

o the maximum credit allowed;

o the number of families eligible to claim the credit;

o the way in which direct student assistance is consideredin determining eligiblity for the credit; and

o whether the tax credit is nonrefundable or refundableto those families with taxes that are less than thesize of the credit for which they are eligible.

5_l The estimated federal payment of 10.25 interest to banks forGSLs in repayment (7 percent for basic interest and 3.25percent special allowance) is an increase from the approxi-mate current rate of 9.75 percent.

41

Table 15 shows the revenue loss and distribution of benefitsfor fiscal year 1980 that are associated with the tuition taxcredits currently proposed in the Senate and in the House, kj

Senate. In the Senate, there is a discrepency betweenthe language of the Senate Finance Committee bill itself and thelanguage of the accompanying report with respect to the way inwhich other forms of student financial assistance (grants andscholarships) should be considered in determining how muchtuition a family has to pay in a year. The bill (reflectedin column A of Table 15) states that any student asistance notincluded in gross income must be used to reduce eligible edu-cational expenses (tuitions and fees) prior to determiningeligibility for the tax credit. The report (reflected in columnB of Table 15) indicates that scholarships and grants should bedesignated for all educational expenses. Thus eligibility forthe credit is reduced only by the the proportion of student aidapplied toward tuition and fees. Analyses of the costs anddistribution of benefits are provided for both interpretations ofthe Senate bill in Table 15.

The difference in total benefits and in the distribution ofthese benefits is quite substantial for these two interpreta-tions. Allowing grants and scholarships to be applied to alleducational expenses increases the benefit provided by 55 per-cent. Requiring student assistance to be applied only againsttuition would provide 14 percent of the benefits to families withincomes under $15,000. Approximately 31 percent would accrue tofamilies with incomes between $15,000 and $25,000, and 55 percentof the benefits would go to families with incomes above $25,000.This is in sharp contrast to assuming that student assistance isapplied to all educational expenses. Under this interpretation,32 percent of the benefits would accrue to families earning lessthan $15,000, 29 percent would go to those with incomes between$15,000 and $25,000, and 39 percent would go to families withincomes greater than $25,000.

6_/ The Senate tuition tax credit proposal includes elementary,secondary and postsecondary education. The analysis providedin this paper, however, examines the costs and distributionaleffects associated only with the postsecondary educationportion of the tax credit. Appendix A includes the costs anddistribution of benefits for refundable and nonrefundableportions of the bill. Separate tables are provided for thetotal bill and for the postsecondary portion only.

42

TABLE 15. POSTSECONDARY TUITION TAX CREDIT PROPOSALS—DISTRIBU-TION OF BENEFITS TO FAMILIES IN VARIOUS INCOME CLASSESFOR H.R. 3946, PROPOSED BY THE SENATE FINANCE COM-MITTEE (LANGUAGE OF BOTH THE BILL AND THE REPORT)AND H.R. 12050, PROPOSED BY THE HOUSE WAYS AND MEANSCOMMITTEE, FISCAL YEAR 1980 a/: NUMBER OF FAMILIES INTHOUSANDS, BENEFITS IN MILLIONS OF DOLLARS, AVERAGEFAMILY AWARDS IN DOLLARS

IncomeClass

$0-5,000FamiliesBenefitsAvg. Award

$5-10,000FamiliesBenefitsAvg. Award

$10-15,000FamiliesBenefitsAvg . Award

$15-20,000FamiliesBenefitsAvg. Award

$20-25,000FamiliesBenefitsAvg. Award

$25,000+FamiliesBenefitsAvg. Award

TotalFamiliesBenefitsAvg. Award

ASenateBill

17429167

13022169

22450223

38879204

571143250

1,530394258

3,017717238

BSenateReport

762122160

52889169

660144218

678156230

631167265

1,599433271

4,8581,111229

CHouseBill

147854

6054168

8987988

96899102

892101113

2,195284129

5,705612107

aj Fiscal year 1980 is used rather than fiscal year 1979 for tworeasons. First, tax credits claimed in fiscal year 1980 mostclosely approximate benefits received in academic year1979-1980; and second, 1980 is the first fiscal year whichreflects a full calendar year of eligibility for the taxcredit.

T'T

House. The House Ways and Means proposal (H.R. 12050) wouldallow scholarships and grants to be designated for all educa-tional expenses, similar to the language of the Senate FinanceCommittee report. The House bill would distribute 21 percent ofthe benefits to families with incomes under $15,000, 33 percentto middle-income families with incomes between $15,000 and$25,000, and 46 percent to families with incomes greater than$25,000.

In both the Senate and the House proposals, the averagefamily tax credit would be greater for higher-income familiesthan for lower-income families. This occurs because studentsfrom higher-income families are more Ikely to attend higher-costinstitutions, are less likely to receive other forms of studentassistance that would be discounted from the tax credit, and aremore likely to have more than one student in college at the sametime. In 1975, over 20 percent of the higher-income families(over $25,000) with children in college had two or more in schoolat the same time, while only 3 percent of the lower-incomefamilies (under $6,000) with children in college had two ormore students attending at the same time. ]_/

Average family tax credit figures, however, may be mis-leading. In most cases the family unit is the nuclear family inwhich the student is the dependent member. Independent students,however, are reflected as families in these figures. Mostindependent students have incomes under $15,000; thus, many ofthe family units in the lower-income categories actually includeindependent students. 8_/

l_l U.S. Bureau of the Census, 1975 Survey of Income and Edu-cation.

8/ It is difficult to estimate how many independent studentsattend college or what the demographic characteristics ofindependent students are because there is not uniform agree-ment on who constitutes an independent student. For taxpurposes, a student would be independent if he claimedhimself as an exemption. But the Basic Grants program hasmore rigorous standards, requiring that a student be fi-nancially independent for at least one full year before beingclassified as independent. In addition to this definitionalproblem, it is difficult to determine much about independentstudents. Some data are available, however, (continued)

44

One significant difference between the bills Is that theSenate bill would provide for a refundable credit, whereas theHouse version is nonrefundable. The Senate bill would assure afamily the total amount of credit for which it qualifies—if thefamily's total taxes were less than the credit, the family wouldreceive a refund from the government. The House version, on theother hand, would allow a credit only up to the level of afamily's total tax liability. For this reason, the Ways andMeans bill would provide very little benefit to families withincomes under $10,000 because their tax liabilities are typicallyquite low.

In general, tax credits provide some benefit to individualsin all income ranges, but they tend to provide a greater amountof benefits to higher-income families. Because of the distribu-tional impact, a tuition tax credit, like all existing taxexpenditures related to education, would address most directlythe federal goal of reducing the burden of college costs.

A COMPARISON OF THE PROPOSED BASIC GRANT PROGRAM CHANGES AND THETUITION TAX CREDIT PROPOSALS

Students from families with incomes between $15,000 and$25,000 would receive appreciably more benefits from any of thedirect assistance proposals than from the proposed tax credits.Obviously, higher-income families benefit most directly from atuition tax credit.

Lower-income families would benefit most from either theAdministration Basic Grants plan or the House Basic Grantsplan. Much of this benefit, however, would be directed toindependent students and not to students who are dependentmembers of a family unit. Lower-income families also would

from the Basic Grants program. In 1977, 1.3 million in-dependent students applied for assistance, an increase of 8percent over 1976. The majority of these students, wereatypical undergraduates in that they were older than anormally progressing undergraduate. A large proportion, 61percent, were either married or single parents. Only 17percent were typical single undergraduates under the age of23.

45

benefit quite substantially from a tax credit if the credit wererefundable and did not require that all other forms of financialaid be deducted solely from tuition in determining eligibilityfor the tax credit. The Senate Human Resources Committee BasicGrants proposal would provide less benefit to low-income fam-ilies, primarily because it does not include the special pro-visions for increasing benefits for independent students, most ofwhom have low incomes.

In sum, all of the proposals would shift the emphasis offederal funding toward achieving the goal of reducing the burdenof college costs for middle-income families and students. Noneof the proposals, however, would reduce the level of commitmentto the goal of achieving equality of educational opportunity. Infact, most of the proposals would include at least a modestincrease in benefits for lower-income families. The directspending proposals would focus the new emphasis on middle-incomefamilies. Tax credits would help middle-income families some-what, but would also channel considerable assistance to higher-income families.

TABLE 16. DISTRIBUTION OF INCREMENTAL INCREASES OVER CURRENT LAWOF MAJOR STUDENT ASSISTANCE PROPOSALS BY INCOME CLASS:BENEFITS IN MILLIONS OF DOLLARS, FISCAL YEAR 1979 FORDIRECT SPENDING PROGRAMS AND FISCAL YEAR 1980 FOR TAXEXPENDITURE PROGRAMS

Admin. Senate House Senate Senate HouseIncome BEOG BEOG BEOG Finance Finance Ways andClass Proposal Proposal Proposal Bill Report Means Bill

$0-15,000BenefitsPercent

43846

28625

41832

10114

35532

12821

$15-25,000BenefitsPercent

$25,000+BenefitsPercent

50954

00

75064

12511

74958

12510

22231

39455

32329

43339

20033

28446

TotalBenefits 947 1,161 1,292 717 1,111 612Percent 100 100 100 100 100 100

46

CHAPTER IV. OTHER BUDGET OPTIONS FOR FISCAL YEAR 1979

The Congress can choose between making major changes orincremental alterations in federal funding patterns for post-secondary education. The major changes, discussed in ChapterIII, would redirect the emphasis of federal programs to reducingthe burden of postsecondary education for middle-income families.This chapter examines several other budget options to illustratethe impact that relatively small but targeted incremental changescould have on achieving specific objectives. The options analyz-ed include:

o options that alter funding for direct higher educationstudent assistance programs, and

o options that change funding for institutional aid.

OPTIONS THAT ALTER FUNDING FOR DIRECT HIGHER EDUCATION STUDENTASSISTANCE

Changing the Basic Grants Program

The primary role of the Basic Grants program has been toenhance equality of educational opportunity by providing thenecessary financial resources for the most needy students toobtain postsecondary education. Reducing the burden of collegecosts, however, always has been a secondary goal of the BasicGrants program. Various incremental changes to the Basic Grantsprogram would have different effects on who benefits and by howmuch.

If the Congress wished to continue to focus on the goalof enhancing equality of educational opportunity, one effectivechange would be to increase the amount of money considerednecessary to sustain a family (and thus exempted from considera-tion in determining the family contribution to college expenses).One approach of this type, which has received attention in thepast, would be to use the Bureau of Labor Statistics (BLS)lower-living standard budget rather than the so-called Orshanskypoverty guideline that is used currently. Shifting to the BLS

index would increase the number of recipients of Basic Grants by19 percent (see Table 17). Students from families with incomesunder $15,000 would receive 29 percent more benefits. Theaverage award in this income group would rise by $140, or 14percent.

As with most incremental options, however, changing thefamily living allowance affects more than just the population towhich aid is being targeted., In this case, increased benefitswould also be provided to students from middle-income families.Benefits would increase more than 2.5 times current levels forstudents from families with incomes over $15,000, and averageawards for this group would increase 17 percent. Thus, incre-mentally increasing the level of income considered necessaryto sustain a family (nondiscretionary income) would not onlyreinforce the federal commitment to equality of educationalopportunity, but also would help reduce the burden of collegecosts for middle-income families. As might be expected, though,this single incremental change drives up appreciably the costs ofthe Basic Grants program. It alone would add an additional $809million to the program in fiscal year 1979, an increase ofapproximately 40 percent.

On the other hand, if the Congress desired to focus moredirectly on reducing the burden for middle-income studentswithout providing additional assistance to students from lower-income families, there are a number of incremental changes tothe Basic Grants program that could be made. One particularlyeffective alteration for focusing new aid solely on middle-incomestudents involves reducing the assessment rate on income abovethe family living allowance. At present, 20 percent of the first$5,000 of discretionary income and 30 percent of any amount over$5,000 is added to the expected family contribution to a stu-dent's college costs. Reducing this rate to a 15 percent assess-ment of all discretionary income would increase the number ofbeneficiaries by 33 percent. Virtually all of the increases inawards would go to students from families with incomes greaterthan $10,000, and the increased benefit actually would grow asincomes go up; thus, students from families with incomes between$20,000 and $30,000 would benefit much more from this change thanthey would from most other incremental changes. This alterationwould increase the costs of the program $528 million in fiscalyear 1979.

48

TABLE 17. DISTRIBUTION OF RECIPIENTS AND BENEFITS RESULTINGFROM INCREMENTAL BASIC GRANTS ALTERATIONS, BY INCOMECLASS, FISCAL YEAR 1979: RECIPIENTS IN THOUSANDS,BENEFITS IN MILLIONS OF DOLLARS

IncomeClass

$1,800 MaximumAward, $25,000Asset Exclusion a/

UsingBLS Lower-LivingIndex

Using 15%Assessmentof Discretion-ary Income

$0-5,000Recipients 437 446 438Benefits 467 561 467

$5-10,000Recipients 777 818 779Benefits 855 976 873

$10-15,000Recipients 691 884 800Benefits 565 888 718

$15-20,000Recipients 269 537 559Benefits 154 378 361

$20-25,000Recipients 35 148 321Benefits 13 60 147

$25-30,000Recipients 0 0 44Benefits 0 0 15

TotalRecipientsBenefits

2,2092,054

2,8422,863

2,9412,582

This Base Plan assumes the program is funded at the fullauthorization level with a maximum award of $1,800 andan increase in the asset exclusion from $17,000 to $25,000.These are the only two differences between this Base Planand current policy. It assumes the Orshansky poverty indexand a current assessment of 20 percent on the first $5,000 ofdiscretionary income and 30 percent on all discretionaryincome above $5,000.

49

"T

Changes in Funding of Other Student Assistance Programs

Support of other student assistance programs could bechanged incrementally to alter the emphasis of federal programson achieving the current mix of goals. The two student loanprograms—guaranteed loans (discussed in Chapter III) and directloans—are an important source of student assistance funding thatrecently have received considerable attention. In addition,changes have been proposed to the State Student Incentive Grantprogram.

National Direct Student Loan Program (NDSL). The FordAdministration requested no funds for this program in the fiscalyear 1977 budget; funding, however, was restored by the Congress.President Carter has requested no increase in funding for thisprogram for fiscal year 1979. The major argument against thisprogram is that it is an expensive duplication of an effortbetter accomplished by the GSL program, and it has been suggestedthat the programs be merged. Proponents of the NDSL program,however, point out that it provides assurance of a loan programfor the most needy students—an assurance that cannot be in-corporated into the present GSL program that relies on the goodfaith and willingness of banks and other lending institutions toprovide loans to low-income, high-risk student borrowers.

Despite the fact that NDSLs are based on need, they have notbeen particularly effective in providing assistance to the mostneedy students. In fiscal year 1978, it is anticipated that 65percent of the NDSL recipients will come from families withincomes under $15,000. This is only marginally higher than the63 percent provided in the GSL program to students in thislow-income category. So it appears that, though the NDSL programwas designed primarily to enhance equality of opportunity, it isnot much more effective in channelling aid to the most needy thanthe GSL program, which was designed primarily to help middle-income families.

If federal funding for the National Direct Student Loanprogram were diminished, it is unclear how severe the overalleffect would be. Any reduction in the number of loans would beconcentrated among students from lower-income families, sincethey comprise 65 percent of the recipients of direct loans. Butparticipation in the program might not be curtailed sharply by areduction in federal funding. Direct loans are made from re-volving loan funds maintained by colleges and universities.

50

Currently, of the more than 3,400 revolving funds at educationalinstitutions, over 700 are totally self-sustaining, requiring nocontinued federal capital contribution. Thus, a reduction infederal funding would not alter the lending patterns of the 700self-sustaining funds at all. Many of the other 2,700 institu-tions have sizable revolving funds so any reduction in federalcapital contributions would not significantly alter the avail-ability of direct loans at these institions either.

State Student Incentive Grants (SSIG). These grants offer amechanism through which the federal government could provideincentives to states that would increase the amount of availablestudent aid for relatively little additional federal investment.As with the GSL program, the SSIG program is dependent uponcooperation from other entities—in this case the states—sosimply increasing the level of federal funding would not ensureprogram expansion.

OPTIONS THAT ALTER INSTITUTIONAL AID PROGRAMS

Incremental changes could also be made that would addressdirectly the federal goal of assuring a strong system of highereducation. Approximately 10 percent of the funding for post-secondary education is designed to help educational institu-tions. Among the programs of this type are those authorized byTitle VII of the Higher Education Act of 1965, which, as amendedin 1976, authorizes the appropriation of "such sums as may benecessary" to help institutions with the costs of campus renova-tion and reconstruction undertaken (1) to conserve energy, (2) tomeet environmental protection standards and health and safetyrequirements, or (3) to remove architectural barriers to thehandicapped. Under this Title, $4 million was appropriated forinstitutional loans in fiscal year 1978. But there is mountingpressure from colleges and universities to increase this fundingbecause unanticipated increases in energy costs are forcinginstitutions to renovate their facilities on a faster timetablethan originally planned, and because institutions are expendingconsiderable amounts of money to accommodate handicapped persons.

Compared to the $4 million that has been appropriated forconstruction loans, the American Council on Education (ACE)projects that approximately $10 billion is needed for the typesof construction and renovation covered by Title VII. The ACEfurther suggests that $380 million be authorized in grants and

51

an additional $200 million be authorized in loan subsidies. _!_/

The President originally requested $50 million in loan fundsfor fiscal year 1979 to begin a federal effort in this area.Subsequently this request was changed to $50 million in grants.This change was made because the Administration believes thatsufficient incentives are not available to entice institu-tions to borrow money to retrofit buildings to accommodate thehandicapped.

Either loans or grants would cost the federal governmentabout the same in the short run, though a loan program costs lessover time because loans are repaid. In addition, it is notclear that insufficient incentives are available to make loansattractive. The retrofitting of physical facilities to accommo-date the handicapped is mandated by law and must be undertaken ifinstitutions are to retain federal funding. It seems as thoughthis mandate does provide the incentive for institutions topursue such projects, and low-interest loans would providesubstantive relief.

Another form of institutional aid is delivered through theSpecial Programs for the Disadvantaged. These programs have beenappropriated $115 million in fiscal year 1978. A recent evalua-tion of one of these programs, Upward Bound, with an annualappropriation of $4 million,, shows that it has been effective inpreparing and encouraging students from disadvantaged backgroundsto enter and remain in college. 2j Thus, incremental changes inthese programs may represent an effective approach to enhancingequality of educational opportunity.

Also, $120 million has been appropriated for developinginstitutions in fiscal year 1978. These funds traditionallyhave been channelled to a select group of institutions, many ofwhich serve predominantly disadvantaged minority students and

\J Higher Education Expenditure Targets for FY79, a memorandumfrom the American Council on Education to staff members ofHouse and Senate Budget Committees and Congressional BudgetOffice.

21 U.S. Department of Health, Education, and Welfare, Office ofEducation, Office of Planning, Budgeting, and Evaluation,Evaluation of the Upward Bound Program; A First Follow-Up,1977.

52

that face more acute financial problems because of their uniquemissions. These funds help preserve a strong and diverse systemof higher education. Because these funds are designated fordeveloping institutions, it has been suggested that a more broaddefinition of what constitutes a developing institution beadopted so that other non-traditional educational institutionsthat serve other disenfranchised segments of society could beincluded. Incorporating such a change, however, could confoundthe assessment of what segments of the population are beingassisted. The long-range impact could be to dilute the focus forassisting these unique types of institutions.

The array of alternative budget options presented in thischapter illustrates the extent to which incremental changes canbe used to effect change. Obviousljr, major program alterations,such as those discussed in Chapter III, are most appropriate forredirecting the major emphasis of federal programs. Incrementalchanges are effective for channelling funds to specific areas orin making marginal changes in the emphasis on various goals.

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APPENDIXES

APPENDIX A. THE COSTS AND DISTRIBUTIONAL IMPACT OF H.R. 3946,THE TUITION TAX RELIEF ACT OF 1978, REPORTED BYTHE SENATE FINANCE COMMITTEE

The estimates in this appendix are based on H.R. 3946, whichprovides for a refundable tuition tax credit that would provideup to 50 percent of tuition paid by a family in any year up tothe following maximum credits:

o From August, 1978 to July 31, 1980: $250 to full-timeundergraduate collegiate and postsecondary vocationaleducation tuition expenses and fees.

o From August, 1980 through July, 1981: $500 to full-timeundergraduate collegiate and postsecondary vocationaleducation tuition expenses and fees, and to elementary andsecondary tuition expenses and fees.

o From August, 1981: $500 to all elementary, secondary, andpostsecondary students for tuition expenses and fees.

As reported from the Senate Finance Committee, there is adiscrepency between the language of the bill and the language ofthe accompanying report on how other forms of student financialassistance (grants and scholarships) should be considered indetermining how much tuition a family has to pay in any year.Two complete sets of data are provided to reflect the costs anddistributions associated with each interpretation. Tables A-land A-2 reflect the language of the bill, which states that allother forms of financial assistance must be deducted directlyfrom qualifying expenses (tuition and fees). Tables A-3 andA—4 are based on the language of the report, which states thatall other forms of financial assistance can be distributed at thediscretion of donor to all educational expenses. To approximatethe effect of this provision, other forms of student assistancehave been distributed to all educational expenses, based on theproportion that each type of expense represents of the totalstudent budget. The estimate has been adjusted to account forthe flow of students into and out of school.

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TABLE A-l. TOTAL COSTS OF H.R. 3946, BY REFUNDED AND NONREFUNDEDCOMPONENTS IN MILLIONS OF DOLLARS, AND PERCENT DIS-TRIBUTION OF BENEFITS BY INCOME CLASS, ASSUMING THATALL STUDENT AID GRANTS MUST BE USED TO REDUCE ELIGI-BLE EXPENSES (TUITION AND FEES) PRIOR TO DETERMININGELIGIBILITY FOR THE TAX CREDIT

FiscalYear

197819791980198119821983

Total Cost

19505837

2,2834,0194,790

RefundedComponent

„

76114255476552

NonrefundedComponent

19429723

2,0283,5434,238

Income Class Percent of Total Benefits for Tuition Expensesin Calendar Years

Family Income

$0-5,000$5-10,000$10-15,000$15-20,000$20-25,000$25-30,000$30-40,000$40-50,000$50,000+

1978

437

11191620

911

1979

437

112017208

11

1980

338

141916198

10

1981

549

1518151789

1982

559

1418151789

1983

559

14181717

89

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TABLE A-2. COSTS OF THE POSTSECONDARY COMPONENT OF H.R. 3946, BYREFUNDED AND NONREFUNDED COMPONENTS (IN MILLIONS OFDOLLARS), AND PERCENT DISTRIBUTION OF BENEFITS BY IN-COME CLASS, ASSUMING THAT ALL STUDENT AID GRANTS MUSTBE USED TO REDUCE ELIGIBLE EXPENSES (TUITION AND FEES)PRIOR TO DETERMINING ELIGIBILITY FOR THE TAX CREDIT

FiscalYear

197819791980198119821983

Total Cost

19505717

1,3012,2262,914

RefundedComponent

._

76114202352442

NonrefundedComponent

19429603

1,0991,8742,472

Percent of Total Benefits for Tuition Expensesin Calendar Years

Income Class

$0-5,000$5-10,000$10-15,000$15-20,000$20-25,000$25-30,000$30-40,000$40-50,000$50,000+

1978

437

11191620911

1979

43711201720810

1980

43710191620912

1981

75811181518810

1982

75912181417810

1983

75912171418810

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TABLE A-3. TOTAL COSTS OF H.R. 3946, BY REFUNDED AND NONREFUNDEDCOMPONENTS (IN MILLIONS OF DOLLARS), AND PERCENT DIS-TRIBUTION OF BENEFITS BY INCOME CLASS, ASSUMING THATOTHER FORMS OF STUDENT AID (GRANTS AND SCHOLARSHIPS)CAN BE APPLIED TO ALL EDUCATIONAL EXPENSES, THUS RE-DUCING ELIGIBILITY FOR THE CREDIT ONLY BY THE PROPOR-TION OF STUDENT AID APPLIED TOWARD QUALIFYING EXPEN-SES

FiscalYear

197819791980198119821983

Total Cost

25751

1,2312,8834,7895,751

RefundedComponent

«VIIH

153241452727853

NonrefundedComponent

25598990

2,4314,0624,898

Income Class

Percent of Total Benefits for Tuition Expensesin Calendar Years

1978 1979 1980 1981 1982 1983

$0-5,000$5-10,000$10-15,000$15-20,000$20-25,000$25-30,000$30-40,000$40-50,000$50,000+

118121414121568

118131415121467

76111516131679

87111516131578

87111616131578

87111516131578

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TABLE A-4. COSTS OF THE POSTSECONDARY COMPONENT OF H.R. 3946, BYREFUNDED AND NONREFUNDED COMPONENTS (IN MILLIONS OFDOLLARS), AND PERCENT DISTRIBUTION OF BENEFITS BY IN-COME CLASS, ASSUMING THAT OTHER FORMS OF STUDENT AID(GRANTS AND SCHOLARSHIPS) CAN BE APPLIED TO ALL EDU-CATIONAL EXPENSES, THUS REDUCING ELIGIBILITY FOR THECREDIT ONLY BY THE PROPORTION OF STUDENT AID APPLIEDTOWARD QUALIFYING EXPENSES

FiscalYear

197819791980198119821983

Total Cost

25751

1,1111,9002,9983,886

RefundedComponent

mm^

153241398602749

NonrefundedComponent

25598870

1,5022,3963,137

Percent of Total Benefits for Tuition Expensesin Calendar Years

Income Class

$0-5,000$5-10,000$10-15,000$15-20,000$20-25,000$25-30,000$30-40,000$40-50,000$50,000+

1978

118121414121568

1979

118131415121467

1980

108121314121579

1981

118121414121568

1982

118121414121568

1983

118121414121568

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APPENDIX B. THE COSTS AND DISTRIBUTIONAL IMPACT OF H.R. 12050, ATUITION TAX CREDIT, REPORTED BY THE HOUSE WAYS ANDMEANS COMMITTEE

The estimates in this appendix are based on H.R. 12050,which provides for a nonrefundable tuition tax credit thatwould cover up to 25 percent of tuition paid by a family in anyyear for undergraduate students or postsecondary vocationaleducation students. The credit could be claimed only for stu-dents enrolled full-time during at least four months of a quali-fying calendar year or enrolled part-time, but at least half-time, during at least eight months of a calendar year. Thecredit would apply to tuition and course fees in calendar years1978 through 1980, but not thereafter, with the following maximumcredit levels: $100 for calendar year 1978, $150 for calendaryear 1979, and $250 for calendar year 1980.

Under this bill, other student grants and .scholarships wouldbe distributed to all educational costs in determining how muchtuition a family has paid in the year. To approximate this pro-vision, the CBO estimate assumes that all grants and scholar-ships are distributed proportionally to qualifying expenses(tuition) and other expenses (room and board, etc.).

The bill would provide a new tax expenditure in the follow-ing amounts:

o $15 million in fiscal year 1978,

o $374 million in fiscal year 1979,

o $612 million in fiscal year 1980,

o $657 million in fiscal year 1981, and

o $0 in fiscal year 1982.

These estimates were derived from the Congressional BudgetOffice's tuition tax credit simulation model. Adjustmentshave been made to account for the proportion of part-time under-graduate students who attend at least half-time and the propor-tion of these students who are in school for at least eightmonths of a calendar year. Another adjustment has been madefor the flow of students into and out of school.

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APPENDIX C. A TECHNICAL DISCUSSION OF THE BASISFOR THE TAX CREDIT ESTIMATES

To estimate the costs and distributional effects of varioustuition tax credit proposals, the Human Resources and CommunityDevelopment (HRCD) Division of the Congressional Budget Officehas developed a computer simulation model.

Recent Refinements. The modeling technique used for thiscost estimate includes the following three refinements overprevious preliminary CBO efforts to estimate the impact oftuition tax credits:

o Improving the way in which the veterans' subpopulationof students is approximated. The effect of this re-vision is to diminish the number of low-income studentsand slightly increase the benefits to families fromhigher-income classes.

o Incorporating the 1977 tax law into the tax credit costsimulation. This revision reduces slightly the averagefamily tax liability and thus reduces slightly the costsof the nonrefundable portion of a tax credit plan. Inthe case of H.R. 12050, this has an appreciable effectbecause the credit is nonrefundable.

o Previous CBO estimates of tuition tax credits calculatedthe credit on a family unit basis. This somewhat over-estimated the cost of nonrefundable tax credits becausetax returns may be filed by more than one member of afamily. The new data base permits the credit to becalculated on a tax filing unit basis. Thus, the incomesand subsequent tax liabilities of the economic units(family units with one or more filing units) are smallerin the new data base than in previous estimates.

Data Sources. The Survey of Income and Education (SIE), alarge sample survey of the population taken in the spring of 1976by the Census Bureau, is used as the core data base for themodel. The SIE includes a distribution of students and familyunits in various income classes by the type and level of school-ing (private/public, postsecondary/elementary-secondary, etc.).

65

The federal tax module of the Math model (developed byMathematica Incorporated) was modified to simulate 1977 tax law

on the SIE data. This model calculates the earned income taxcredits, the personal credits, and the tax liabilities of theindividual tax filing units in the data base. The child care tax

credit and the proposed education tax credits have been simulatedusing data in the CBO model,.

Since the SIE does not report the educational expensesincurred by students, it was necessary to merge expenses andbenefit data from other sources with the SIE. These sources

include:

o The National Center for Education Statistics—data onpostsecondary and elementary-secondary enrollments,tuition and total cost in postsecondary education, public/private distribution of students, and nonfederal levels ofstudent assistance.

o The Office of Education—a model for estimating BasicGrants costs which provides the number and size of BasicGrants awards by income class and data on the size anddistribution of Supplemental Grants.

o The American Council on Education (Cooperative Institu-tional Research Program)—data on the overlap betweenfederal and nonfederal student assistance.

o The Ninth Annual Survey of the National Association ofState Scholarship and Grant Programs—data on the numberof awards and amount of funding provided for statescholarships.

o The Council of Graduate Schools and the National ScienceFoundation—data on the number and size of awards tograduate students.

All variables were adjusted for projected annual changes.

Limits of the Cost Estimating Procedure. Computer-basedsimulation models only approximate the actual conditions thatwill affect the costs and effects of proposed changes. Limita-tions of the model CBO has developed include the following:

66

) The model assumes a static student population. It doesnot include entries to or exits from schools during theacademic year. Thus, the model assumes there are fourundergraduate classes eligibile for the credit; whereas,in fact, there are slightly more than four. Students whoonly attend during the spring semester of a. calendaryear would be eligible for a full credit, depending upontheir tuition costs, and entering students for the fallsemester also would be eligible for the full credit iftheir fall tuition costs were high enough. In effect,

therefore, five undergraduate classes a year wouldgenerate tax credits, rather than the four incorporatedinto the model. The effect of this phenomenon is to

underestimate costs from 8 to 15 percent.

3 Fall enrollment figures are used to represent the studentpopulation. This, however, does not reflect the attri-tion that occurs throughout the academic year. To theextent that attrition is not captured in the CBO model,the cost estimate will be too high.

o The CBO estimate is based on the assumption that otherstudent assistance programs remain at current levels. Iffederal aid increases appreciably, as currently proposedby committees of both the House and the Senate, the costof tax credits would decline. The new recipients ofother forms of federal assistance would be contributingless toward their tuition costs, and, therefore, theywould qualify for less tax credit.

U.S. GOVERNMENT PRINTING OFFICE : 1978 O—26-995

67