Student debt is a huge problem, see here and here, both for the college students and former students who have accumulated it as well as for the U.S. Government which has to carry the debt. I see this as a three-part problem which American society has to deal with:
As illustrated in the first chart, the cost of higher education has been rising very fast in recent years, even faster than the cost of health care, which in turn is increasing faster than the underlying rate of inflation.
Since 1996 outstanding student loans have risen from $200 billion to $1.3 trillion.
The highest default rates on student loans occur at community colleges (23% in 2012) and for profit colleges (18%). Worst hurt are the low-income and minority students who never graduate but still have unpaid debt (see the second chart).
For the federal government to increase subsidized loan limits or to establish a broad-based free tuition program will only encourage educational institutions to keep raising their prices.
A much better approach is needed as follows:
Faster economic growth would help immensely. Our 2% average annual growth rate since the end of the Great Recession in 2009 is simply too slow to create more jobs and higher paying jobs (which makes it easier for students to pay back their debt).
At the federal level the emphasis should be on putting more money into Pell grants for the neediest students, paid for by cutting back on non-need based aid.
At the state level the emphasis should be on making the two-year associate degree free for all students who pursue it. Tennessee started such a program, Tennessee Promise, in 2014, Oregon in 2016. The goal here is for many more students who try postsecondary education to end up with a degree or certificate of some sort.
Conclusion. There are positive and efficient steps which can be taken to alleviate the student debt problem for the hardest hit low-income students without aggravating the overall problem of rapidly increasing college costs.
Education tax credits have grown from a $4.5 billion program for 4.7 million taxpayers in 1998 to a $17.4 billion program claimed by over 7 million taxpayers in 2011.
Education tax credits are not well targeted toward low- and middle-income families; almost 50% of the benefits accrue to taxpayers earning more than $75,000, often much more. A much more sensible way to target low income students would be to increase Pell grants.
The overuse of tax credits by the federal government has turned the IRS into a spending agency, with refundable tax credits projected to double to nearly $200 billion in the next five years.
Trading the elimination of education tax credits for lower marginal tax rates would grow the economy by $19 billion per year and create 121,000 new jobs.
The authors go on to say: “It is likely that instead of helping, tax credits may be contributing to the rising cost of college education. Colleges are what economists call price discriminators because they can maximize the price that each student can pay. Because of the Free Application for Federal Student Aid (FAFSA), the college has intimate knowledge of each student’s (or family’s) income and if they are eligible for tax credits, loans, or other financial aid. This information allows the college to simply adjust its financial aid package in order to capture the maximum value of the tax credit. Instead of being a helping hand for students, tax credits have turned into a windfall for universities.”
There are many, many reasons to reform the tax code. The education tax credit is just one very good example!