WASHINGTON – Senate Finance Committee members Chuck Grassley (R-Iowa), a former chairman of the Committee, and Sheldon Whitehouse (D-R.I.) introduced the Tax-Free Pell Grant Act, bipartisan legislation to iron out the current tax code so qualifying students can reap the full benefits of financial aid. The bill would remove financial barriers to higher education by better coordinating Pell Grants with the American Opportunity Tax Credit (AOTC) and fully excluding Pell Grants from taxable income. 

“The Pell Grant program has revolutionized American higher education by helping millions of qualifying students afford the cost of college. 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,” Grassley said.

“Pell Grants – one of Senator Pell’s greatest legacies – have helped make college more affordable for generations of Rhode Islanders. Our bipartisan legislation will streamline federal student aid programs and ensure students get the maximum possible benefit to achieve their higher education goals,” Whitehouse said.

“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.”

Background:

Since 1965, the Pell Grant program has revolutionized American higher education by helping millions of young people cover college costs, including tuition, living expenses and other fees.

Additionally, the American Opportunity Tax Credit (AOTC), made permanent in 2015 with bipartisan support, provides students up to $2,500 for tuition and course materials, assisting millions with the cost of college. Despite the success of the Pell Grant and AOTC, America’s complex tax code and a lack of coordination between the two programs prevent students from maximizing the programs’ benefits.

This issue primarily impacts students at lower-cost schools like community colleges. 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. 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. 

To fix this 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.

Additional cosponsors include Sens. Ron Wyden (D-Ore.) and Thom Tillis (R-N.C.).

Bill text can be found HERE and a one-page summary HERE.  

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