The Importance of Refundability


To provide some context related to Third Way’s proposal for a college tuition tax credit it’s worth looking at Barack Obama’s proposals in this regard:

According to Obama’s Web site, the Democratic presidential candidate wants to eliminate federal subsidized private loans and instate a $4,000 student tax credit to make college more affordable to students. […] Obama’s other solution to the college affordability issue is a $4,000 tax credit. The fully refundable credit would be available to students who complete 100 hours of community service. Castellblanch sees the tax credit as Obama picking up the students’ tab. But Kevin Carey, a policy director for Washington D.C.-based think tank Education Sector, said he’d rather see the money come in the form of a grant.

Carey said the problem with Obama’s tax credit is that the money won’t be available when tuition is due. Carey’s observation raises the question: Will students be forced to swallow tuition costs while they wait for their tax refund?

That’s an okay idea. It would help some people. Back in 2006, the DLC had a somewhat similar proposal:

To make college as universal as high school, college aid needs to be simpler and more generous. We should simplify the tax code by replacing the HOPE tax credit, the Lifetime Learning Tax Credit, and the higher education deduction with a single, refundable $3,000 college tuition tax credit to help offset undergraduate and graduate costs for all families. This new credit will cover up to 4 years of college, graduate school, and training. Net cost: $70-80 billion over 10 years.

Third Way’s new proposal, by contrast, is a repackaging of this old idea from their outfit:

Families earning up to $200,000 should receive a generous new college tuition tax cut in the form of a $5,000 credit toward the costs of college tuition, fees and books.

Compared to proposals from Obama and from the DLC, this is more generous to relatively prosperous families, but does nothing for more economically struggling families. The political rationale for the switch I understand—Third Way does more for people who are more likely to be swing voters. The policy rationale escapes me. It seems to me that the marginal dollar of tuition assistance should be directed at at poorer people rather than richer people. But that’s just my shrill left-wing blogger perspective. And the DLC’s.

UPDATE: NB, a higher ed buddy writes it to warn against conflating the student loan issue and the tax credit issue the way that first article I linked to does. These are separate proposals that don’t need to go together. The point about refundability versus non-refundability stands.