WASHINGTON – Sens. Chuck Grassley (R-Iowa), a senior member and former chairman of the Senate Finance Committee, and Sheldon Whitehouse (D-R.I.) today introduced the Tax-Free Pell Grant Act, bipartisan legislation to iron out the current tax code to allow qualifying students to 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 legislation is cosponsored by Finance Committee Chairman Ron Wyden (D-Ore.).

“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.”

“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,” Whitehouse said.  “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.”

“The Tax-Free Pell Grant Act is a commonsense approach to help students earn a certification or degree without the additional financial burden so many of our students experience. 80 percent of the students Iowa Central serves have financial need, with 30 percent of them being first generation students. It doesn't make sense to penalize students who are trying to gain a better life for themselves and their family by choosing an affordable community college to attend,” Dr. Jesse Ulrich, President of Iowa Central Community College, said.

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, 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, resulting in many students leaving benefits on the table or forgoing the AOTC altogether.

The Tax-Free Pell Grant Act would fix this problem by making Pell Grants fully tax-free and no longer requiring students to subtract Pell Grants from expenses for which the AOTC can be claimed.

The bill has 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 and the State Higher Education Executive Officers Association.

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

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