Legislation would simplify access to higher education assistance and increase opportunities for students
Washington, D.C. – U.S. Senators Sheldon Whitehouse (D-RI) and Chuck Grassley (R-IA) introduced bipartisan legislation to simplify higher education assistance by better coordinating Pell Grants with higher education tax incentives. Complexity in the current tax code prevents many qualifying students – particularly those attending community colleges – from reaping the full benefits of the American Opportunity Tax Credit (AOTC) and the Pell Grant program. The Tax-Free Pell Grant Act would remove financial barriers to higher education by better coordinating Pell Grants with the AOTC and fully excluding Pell Grants from taxable income.
“Pell Grants – one of Senator Pell’s greatest legacies – have helped make college more affordable for generations of Rhode Islanders,” said Whitehouse. “Our bipartisan legislation will streamline federal student aid programs and ensure students get the maximum possible benefit to achieve their higher education goals.”
“The Pell Grant program has revolutionized American higher education by helping millions of qualifying people afford the cost of college,” said Grassley. “Our bipartisan Tax-Free Pell Grant Act would cut through confusing tax rules and allow Iowans to take full advantage of this financial student aid program.”
“North Carolina students shouldn’t miss out on financial aid because of a confusing tax code,” said Tillis. “The Tax-Free Pell Grant Act streamlines student aid and ensures hardworking students can take full advantage of Pell Grants and the American Opportunity Tax Credit—making higher education more attainable and affordable.”
“Students seeking a higher education should never be denied opportunities because they can’t afford it,”said Wyden. “For decades, Pell Grants have been supporting Oregonians who are pursuing a higher education in hopes of achieving a better and brighter future. This bipartisan legislation will help students worry less about the tax consequences of their financial aid and more about the educational tools they need to succeed.”
Established in 1965, the Pell Grant program revolutionized American higher education. It is named for the late Rhode Island Senator Claiborne Pell, who was the chief sponsor of the program. Pell grants have been a critical form of federal aid, helping millions of young people by covering college costs, including tuition, living expenses, and other fees.
“Community college students face enough challenges without worrying that the financial aid intended to help them will instead trigger a tax bill,” said Dr. Rosemary A. Costigan, Interim President of the Community College of Rhode Island. “By fully excluding Pell Grants from taxable income and ensuring they work hand-in-hand with the American Opportunity Tax Credit, the Tax-Free Pell Grant Act will remove a major barrier to degree completion for many of our learners. This bipartisan legislation means more of our students’ grant dollars go directly toward textbooks, tuition, and living expenses—empowering them to stay enrolled, graduate on time, and enter Rhode Island’s workforce ready to lead and innovate.”
“The American Association of Community Colleges, which represents the nation’s 1,024 community colleges and their more than 10 million students, enthusiastically endorses the Tax-Free Pell Grant Act,”said Dr. Walter G. Bumphus, President and CEO of the American Association of Community Colleges. “This critical legislation will help to ensure that the Pell Grant program has maximum impact on student success. It simplifies the tax code, while making it easier for low-income community college students to qualify for the American Opportunity Tax Credit. The legislation is of particular benefit to students attending low-tuition, locally-focused institutions that help individuals learn the skills needed to earn family sustaining wages—in other words, America’s community colleges. We urge the enactment of this critical legislation.”
The American Opportunity Tax Credit (AOTC), which was made permanent in 2015 with bipartisan support, provides up to $2,500 for tuition and course materials to students, assisting millions with the cost of college. Despite the success of the Pell Grant and AOTC, America’s complex tax code and the lack of coordination between the two programs prevent students from maximizing their benefits. While Pell Grants used for tuition and fees are tax-free, any portion used to cover other education costs like living expenses is taxed. In addition, students are required to subtract their Pell Grant from the amount of expenses for which they claim the AOTC. To maximize their AOTC, students can use a portion of their Pell Grant to cover living expenses even though that portion is taxed. But calculating the optimal amount of the Pell Grant to include in taxable income is complicated for those without access to sophisticated tax advice, so many students leave benefits on the table or forgo claiming the AOTC altogether. This issue primarily impacts students at lower-cost schools like community colleges.
To fix the problem, the Tax-Free Pell Grant Act would make Pell Grants fully tax-free and no longer require students to subtract Pell Grants from expenses for which the AOTC can be claimed.
The legislation is cosponsored by Senators Thom Tillis (R-NC) and Ron Wyden (D-OR).
The full bill text is available here.
