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Why Don't Taxpayers Maximize their Tax-Based Student Aid? Salience and Inertia in Program Selection

Nicholas Turner, Office of Tax Analysis, US Treasury

Abstract

Tax-based federal student aid is designed to increase postsecondary attendance and ease the financial burden of higher education enrollment by offering students and their families a menu of tax incentives. However, many taxpayers who are eligible for more than one tax-based aid program, and who are limited to one program per student each year, fail to select the single program that offers the largest reduction in taxes. Analyzing a panel dataset of individual income tax returns, I find that in roughly one out of four returns taxpayers and paid preparers fail to select the tax-minimizing tax-based aid program. I find evidence that greater salience of federal tax effects, and inertia in program selection, leads some taxpayers and paid preparers to make non-tax-minimizing selections. Streamlining the set of tax-based aid programs into a single tax incentive is likely to be a more effective way of lowering the costs of postsecondary attendance for students and their families.

Suggested Citation

Nicholas Turner. "Why Don't Taxpayers Maximize their Tax-Based Student Aid? Salience and Inertia in Program Selection" The B.E. Journal of Economic Analysis & Policy 11.1 (2012).

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