Low Cost, High Impact for Pell Grant Recipients

Congressional Democrats’ $3.5 trillion social spending plan is expected to face substantial cuts in the coming weeks, as moderates in the Senate say they don’t support the legislation’s high price tag. Advocates are hoping lawmakers will retain a tax change for Pell Grant recipients in the final package, which they say has the advantage of being low cost and high impact.

Under current law, the low- and moderate-income students receiving federal Pell Grants could be subject to added taxes if they use their grant aid for non-tuition-related costs while they’re in college, such as housing, transportation and food. The budget reconciliation bill includes a provision that would change that, allowing students to use their Pell Grant to cover nontuition expenses without facing an additional tax liability.

The legislation would also eliminate a complicated interaction between Pell Grants and the American Opportunity Tax Credit that prevents hundreds of thousands of students from taking advantage of the tax benefit. The AOTC provides a credit of up to $2,500 for qualified education expenses -- tuition, fees and required materials -- for the first four years of higher education. But under the AOTC, students are required to apply their grant and scholarship aid to those eligible expenses first, which, for lower-cost institutions, means they won’t be able to claim the AOTC.

“If they use their Pell dollars to cover their tuition, fees and books, then they have no out-of-pocket qualified expenses for claiming AOTC,” said Michele Streeter, associate director of policy and advocacy at the Institute for College Access and Success. “But if someone claims the AOTC for tuition, fees and supply costs paid for out of pocket, and they use Pell to cover the other costs that they have, then they face this tax liability.”

Under the Build Back Better Act, students wouldn’t be required to use their Pell Grant first to cover those eligible expenses -- they could use their other resources for those expenses and claim the AOTC while still using Pell Grants as they normally would, said Steven Bloom, assistant vice president for government relations at the American Council on Education. ACE estimates that around 730,000 students would be able to receive at least an extra $1,000 with the change.

The budget reconciliation bill is the closest advocates have come to seeing a repeal of Pell Grant taxability, which is championed in the House of Representatives by Lloyd Doggett, a Democrat from Texas, and in the Senate by Senator Sheldon Whitehouse, a Democrat from Rhode Island. Doggett has been urging his colleagues to keep the provision in the final draft of the legislation.

“This bill removes another financial barrier to higher education,” Doggett said in a statement. “Making Pell Grants entirely tax-free expands opportunity. As education builds individual success, tax-free Pell truly helps us Build Back Better.”

The provision is especially important in the context of other parts of the Build Back Better Act, such as the America’s College Promise program, which would provide universal tuition-free community college and a $500 increase to the maximum Pell Grant. If students use all of their Pell Grant on indirect costs because their tuition costs are already covered, then their entire grant would be taxable. And if the maximum award is increased, more students will have money from their Pell Grant left over to spend on nontuition expenses, said Carrie Warick, director of policy and advocacy for the National College Attainment Network.

“Students could use these remaining funds toward other expenses, such as books, food, housing, transportation or childcare without fear of tax liability,” Warick said.

However, the repeal, like most other provisions in the budget reconciliation bill, has an uncertain future, with Democratic senators Joe Manchin of West Virginia and Kyrsten Sinema of Arizona demanding cuts to the $3.5 trillion package before they’ll vote to support it. Congressional Progressive Caucus chair Pramila Jayapal, a Democratic representative from Washington, said on Sunday that the White House is working on a proposal with a top line somewhere between $1.5 trillion and $3.5 trillion.

Nineteen organizations, including ACE, have sent letters to House leadership and Senate Finance Committee leadership, urging them to keep the repeal in the Build Back Better Act.

Estimates put the cost of the provision at $1.9 billion over 10 years, which is relatively inexpensive compared to other parts of the bill. That could create both an advantage and a disadvantage as lawmakers decide what to cut, said Bloom.

“It’s small, so does that mean it’s easy to cut?” Bloom said. “Except, it’s small, so you don’t get very much from cutting it, whereas you get more by helping these low-income students by retaining this provision.”

David Baime, senior vice president for government relations at the American Association of Community Colleges, said the repeal would be the most important tax change for community college students since the AOTC was created more than a decade ago, while costing a tiny amount in the context of the reconciliation legislation. Streeter also called the repeal a cheap fix for a policy that “serves very little purpose.”

“If we’re looking at the universe of students who qualify for Pell, these are lower-income students, and we’re hitting them for no reason,” Streeter said. “It will just make the Pell process a lot easier for students.”