Senators Sheldon Whitehouse (D-RI) and Chuck Grassley (R-IA) have introduced the Tax-Free Pell Grant Act, bipartisan legislation to simplify higher education assistance by better coordinating Pell Grants with higher education tax incentives. The current tax code prevents many qualifying students from reaping the full benefits of the American Opportunity Tax Credit (AOTC) and the Pell Grant program. This legislation 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 have helped make college more affordable for generations of Rhode Islanders, and I am working to ensure students get the maximum possible benefit,” said Whitehouse. “Our bipartisan legislation will streamline federal student aid programs to minimize the loans and other assistance students need to piece together to go to college.”
“We expect students to work hard in order to maximize their academic success while in school. Likewise, we ought to ensure our tax code is set up to maximize students’ financial success as they pursue higher education,” Grassley said. “This bipartisan proposal would cut through confusing tax rules and permit young Iowans to take full advantage of available financial aid.”
“This bill will provide assistance to thousands of Rhode Islanders who receive federal support toward their postsecondary education,” said Shannon Gilkey, Ed.D., Commissioner of Postsecondary Education. “Making a college degree more affordable and accessible is a universal goal, and I thank Senator Whitehouse for creating the Tax-Free Pell Act legislation as a practical solution for students who need to fully maximize their Pell Grants.”
“By simplifying the Pell Grant process and fully excluding it from taxable income, this legislation empowers economically disadvantaged families to pursue higher education without the burden of financial constraints. The removal of these barriers is paramount in safeguarding accessible education for every Rhode Islander,” said Dr. Rosemary A. Costigan, interim president of the Community College of Rhode Island. “We greatly appreciate Senator Whitehouse’s commitment to making higher education more accessible, and we are proud to work alongside him to benefit of our students.”
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.
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 Finance Committee Chairman Ron Wyden (D-OR).
These reforms have been endorsed by the American Association of Community Colleges, The Institute for College Access and Success, American Association of Collegiate Registrars and Admissions Officers, American Council on Education, Association of American Universities, Association for Career and Technical Education, American Association of Community College Trustees, Association of Governing Boards of Universities and Colleges, Association of Jesuit Colleges and Universities, Association of Public and Land-grant Universities, College and University Professional Association for Human Resources, Council for Christian Colleges & Universities, Council for Higher Education Accreditation, Council for Opportunity in Education, EDUCAUSE, National Association of College Stores, National Association of College and University Business officers, National Association of Independent Colleges and Universities, Advance CTE, National Association of Student Financial Aid Administrators, National Council for Community and Education Partnerships, National Council of State Directors of Community Colleges, The Hope Center at Temple University, Rebuilding America’s Middle Class, State Higher Education Executive Officers Association.
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