Reforming Higher Ed Tax Breaks Could Help Fill Pell Shortfall

The Pell Grant program has exhausted its reserves and faces a $100 to $150 billion shortfall over the next decade. A recent article by the Committee for a Responsible Federal Budget suggests that reforming the roughly $33 billion in annual federal higher education tax breaks could help offset that gap. These tax breaks—mainly the American Opportunity Tax Credit and Lifetime Learning Credit, plus various deductions and exclusions—are roughly as large as the entire Pell program and about three times the size of the current shortfall. However, Congressional Budget Office data show they are less targeted to low-income households than Pell, with 43% of tax-break benefits going to the top two income quintiles compared to just 10% of Pell spending. CRFB estimates that eliminating all higher education tax breaks could generate $370 billion over a decade, enough to close the Pell shortfall and still direct $240 billion to deficit reduction, while more targeted reforms, such as eliminating just the AOTC and LLC, could raise $115 billion through 2036. CRFB also flags other potential revenue sources tied to university taxation, including repealing the charitable deduction for gifts to colleges, which could raise $85 billion, and suggests that Congress reform higher education subsidies broadly, including tax breaks, rather than let the Pell shortfall disrupt aid or add to the deficit.