Yes, eliminating a handout for high-income households would cause political problems, but the hundreds of millions of dollars wasted annually on this deduction should be used instead to provide a starter savings account for the four million babies born in America each year.
The money could be rolled into tax-preferred college savings accounts, which are used almost exclusively by wealthier families. How exclusively? The savings of the bottom half of earners make up 1.1 percent of all the savings in these accounts.
Reforming the American Opportunity Tax Credit, which also covers college tuition and fees (as well as books) could also help boost college savings. The majority of the $16.6 billion spent in 2013 on this credit went to upper-income households who could afford to pay college expenses up front and then file for reimbursement at tax time.
Why not allow low- and moderate-income families with C.S.A.s to receive the credit ahead of time? This would increase college savings while making the credit accessible to those who can’t afford to front the full cost of tuition months before tax time. This reform would be politically frictionless because it would have no effect on households who currently benefit from the credit.