Panel Paper: To Choose or Not to Choose: Federal Tax Credits and College Choice Decisions

Friday, November 9, 2012 : 9:00 AM
Jefferson (Sheraton Baltimore City Center Hotel)

*Names in bold indicate Presenter

Tatyana Guzman, Indiana University

This paper examines how eligibility and actual usage of federal education tax credits and tuition and fees deductions affect university choice and college pricing.

Education-related tax preferences studied in this paper (Hope credit, Lifetime Learning credit, and tuition and fees deductions) are a form of federal aid available for qualifying students who are currently enrolled in postsecondary institutions and paying certain college-related expenses. Such tax-based aid simply reduces personal federal income tax liabilities. The effect of tax preferences on college choice has hardly been addressed before. Long (2003) studied how eligibility for federal education tax credits affects a selection of two-year versus four-year college and college pricing.

The issue of college choice, however, is very important because tax preferences may not only promote college going, but may also encourage people to acquire more education and more expensive education (Long, 2003). The proposed paper provides much needed evidence on such issues as whether the eligibility and actual usage of tax preferences make students choose more expensive colleges, out-of-state institutions, make students pursue on-line education, shorten the delay of postsecondary education, chose specific majors, and, whether the institutions charge higher prices in response to tax preference availability for many students.

I use a National Postsecondary Student Aid study (NPSAS):96, NPSAS:00, NPSAS:04, and NPSAS:08 restricted-use data files to study the posed research questions. NPSAS includes a large nationally representative sample of institutions and students enrolled in these institutions (for example, NPSAS:04 includes information about approximately 79,900 respondents representing almost 1,400 U.S. institutions). The NPSAS offers rich data about students’ demographics, enrollment patterns, employment, school choice, and most impotently, student finances, including extensive financial aid information. NPSAS dataset combines student interviews with institutional records and government databases.

In this paper the effect of the most noticeable change in tax code related to educational tax expenditures, the Tax Relief Act of 1997, is treated as a natural experiment. I am employing a difference-in-differences estimator, where 1995-96 school year, two years before the major changes in tax preferences’ legislature occurred, is treated as a reference year. The other three waves of data are considered post years (two, six, and ten years after the policy implementation). The models are estimated using either standard OLS, binomial, or multinomial logit (for models with continuous or discrete dependent variables).

Disclaimer: This research is supported by a grant from the American Educational Research Association which receives funds for its "AERA Grants Program" from the National Science Foundation under Grant #DRL-0941014. Opinions reflect those of the author and do not necessarily reflect those of the granting agencies.