July 23, 2021

Wyden Introduces Legislation to Make Pell Grants Tax-Free

The Tax-Free Pell Grant Acts would expand access to higher education and make college more affordable

Washington, D.C. – U.S. Senator Ron Wyden today introduced the Tax-Free Pell Grant Act to help students take full advantage of higher education tax credits and Pell Grants to pursue a college education. 

“Pell grants have allowed millions of first-generation college students to afford higher education and build a better future, but there’s more we can do to ensure students are able to take advantage of federal financial help.  Tax free financial aid is a good place to start,” Wyden said.  “It’s an investment in our young people, and I’m all in on this effort to make college degrees more accessible.”

Currently, the 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, fully excluding Pell Grants from taxable income and ensuring higher education tax credits cover childcare and computer expenses that contribute to education costs.

Established in 1965, the Pell Grant program revolutionized American higher education. These grants have been a critical form of federal aid, helping millions of young people struggling to afford high education by covering college costs, including tuition, living expenses, and other fees. 

In 2009, Congress enacted the American Opportunity Tax Credit (AOTC), which 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 block students from maximizing their benefits.  Right now, students are required to subtract their Pell Grant from the amount of expenses for which they claim the AOTC, leaving some unable to qualify for the tax credit despite substantial college costs remaining.  To maximize their AOTC, some students use their Pell Grant to cover living expenses, but that portion of the Pell Grant is then taxable. 

To address these issues, the Tax-Free Pell Grant Act would create flexibility for students to use the AOTC and Lifetime Learning Credit (LLC) on a broader range of associated expenses, make Pell Grants fully tax-free, and no longer require students to subtract Pell Grants from expenses for which the two higher education credits can be claimed. 

Along with Wyden, the Tax-Free Pell Grant Act introduced with Senators Sheldon Whitehouse, D-R.I., Patty Murray, D-Wash., Michael Bennet, D-Colo., Sherrod Brown, D-Ohio, Tina Smith, D-Minn., and Debbie Stabenow, D-Mich.

The legislation has been endorsed by a broad coalition of groups: American Association of Community Colleges; The Institute for College Access and Success; Advance CTE; 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; National Association of Student Financial Aid Administrators; National Council for Community and Education Partnerships; National Council of State Directors of Community Colleges; Rebuilding America’s Middle Class; and State Higher Education Executive Officers Association.