Doubling the College Tax Credit: Smart, But Not the Whole Answer

Last week, U.S. Rep. Leonard Boswell (D-Iowa) announced that he had introduced H.R. 5286, the Universal College Credit Act, "to help students and their families better afford tuition and other higher education expenses by providing a new permanent tax credit of up to $5,000 each year for four years of undergraduate studies and six years of graduate courses."

"The Universal College Credit Act will provide our students and their families with guaranteed assistance in paying for college tuition and other expenses," Boswell said in a press release. "As a country, we must continue to provide and enhance access to a quality education at all levels in order to remain competitive in our world community and provide for the highest quality of life for future generations."

Wow. The bill would double the $2,500 per year American Opportunity Tax Credit, and would cover more than 70% of the tuition and fees at the average four-year public college.

It's too early to know what chance the bill has of gaining traction -- critics will point to the high cost of such an expenditure, and certainly they'll have a point. The bill amounts to a government handout of $20,000 over four years to families putting a child through college.

A Good Idea, But Take It a Step Further

I'll say it's a step in the right direction. Until recently, the federal government's response to the rising cost of high education has been to increase the availability of federal loans. With an ever-increasing percentage of recent graduates unable to find work, that's turning out to be a disaster that will cripple many Gen Y-ers financially for the rest of their lives. A bill like this would go a long way toward reducing young people's dependence on student loans -- a method of financing education that Milton Friedman warned way back in 1955 was a bad idea.

Here's an idea: Supplement this proposed education tax credit with a similarly sized reduction in the amount of Federal Stafford Loans that students can take out annually. Otherwise, knowing how most consumers operate, the tax credit will likely finance new furniture for parents during tax refund season and do little to increase educational access or reduce student loan dependence. Worse, adding to the ability of parents to pay cash for college without lowering students' ability to take out loans will likely inspire many colleges to simply jack up tuition. If you don't believe that excess loan availability can inflate prices, Google the phrase "housing bubble."

While there's no doubt that federal finances are tight, we need to dramatically rethink our national education policy and move away from the idea that loans are a good way to finance college. The combination of increasing tax relief for tuition-paying families and decreasing the availability of loans is a better way to do that.