Outstanding college student debt has continued to rise and, at $1.2 trillion, it is now the largest form of nonmortgage debt for households. The high cost of a college education prompted the House Ways and Means Oversight Subcommittee on October 7 to examine whether federal tax policy has an impact on the rising costs of higher education.
Subcommittee Chairman Peter Roskam, R-Ill., pointed out in his opening statement that data shows that, when the federal government makes more loan money available, schools generally respond by raising tuition. Lawmakers on the panel were also concerned that endowments may be used to pay out high salaries for college presidents and for the construction of state-of-the-art sports facilities.
David Lucca, a research officer at the Federal Reserve Bank of New York, told lawmakers that one should expect an increase in student credit to lead to a rise in tuition. He testified that, in the short run, a reduction in nontuition revenue, or an increase in the demand for higher education, could be boosting tuition cost and resulting in additional student borrowing, rather than the other way around.
In a recent study on college costs undertaken by Lucca, results suggested that this effect exists, especially for loans made under the federal subsidized loan program. “The results are evidence of a causal link between student loan availability and tuition,” said Lucca. “We find evidence in our paper that, over long periods of time, school enrollments have increased more at institutions where students are more dependent on student aid.” In addition, the study suggests that tuition price rises may be lowering the efficacy of some federal student aid.
The testimony of Brian Galle, a Georgetown University professor of law, focused on the relationship between federal tax law and the spending and endowment policies of U.S. colleges and universities, the compensation of top college and university administrators, and both of those and the costs of higher education. “Federal tax policies intended to underwrite charitable activity have had the inadvertent effect of encouraging donors and the institutions they support to postpone the expenditure of donated dollars,” said Galle.
Charitable organizations, including most colleges and universities, are also exempt from the federal corporate income tax. “This allows for tax-free growth of endowments,” said Galle. By contributing their investment assets to a foundation earlier than they want the funds spent, donors can allow those investments to grow tax-free. In contrast, if they held the investment themselves, they would often have to pay tax on any appreciation, he explained.
“Congress should reconsider the tax rules governing endowments,” said Galle, “as current tax law distorts the decisions of educational institutions and their supporters, to no apparent good policy goal.” He added that gifts held perpetually in an endowment are not a cost effective way to subsidize charity. “The tax cost to the government of a perpetually restricted gift, in present-value terms, can be as much as double the cost of an unrestricted gift.” Galle said. Congress has several alternatives for mitigating existing tax incentives for endowment build up.
Galle recommended emphasizing options that focus on reducing the value of charitable contribution deductions tied to gifts that will be spent over long periods. He testified that “a simpler but otherwise less appealing policy would be to impose a tax on “excess” endowment balances.” He warned, however, that taxes on endowments have several potentially serious economic side effects.
Accordingly, an endowment tax, if imposed without any additional exceptions, could actually reduce current spending levels, Galle pointed out. “To the extent that endowment taxes may tend to depress spending out of endowment, a mandatory payout could reduce the degree to which taxes displace endowment spending,” he said. Under Code Sec. 4942, he noted that the regulation creates a so-called “intermediate sanctions” regime. “These are the rules that say a private school can pay a penalty for overpaying its top administrators.” He pointed out that public universities have argued that they would be able to obtain tax-exempt status as an arm of their respective states, rather than under Code Sec. 501(c)(3). “Congress should clarify that, whatever the source of an organization’s tax exemption,” he said.
Institutions of higher education in the United States have also been impacted by extensive federal compliance requirements, testified MaryFrances McCourt, senior vice president and chief financial officer, Indiana University. “There has been significant additional investment in compliance related to research, tax, employees, students, private use and Build America Bonds.” She added that Indiana University has also put student financial literacy “front and center” with targeted investment, programming and enhanced business processes to educate students on debt optimization and loan default aversion.
According to Richard K. Vedder, professor of economics, Ohio University, and director, Center for College Affordability, about one-half trillion dollars is invested in university endowment funds. “The distribution is extremely unequal—the top 1 percent of measured endowments has nearly 30 percent of all funds.” He said that endowments are not generally used to lower the stated tuition fees of colleges. Vedder pointed out that there is no statistically significant relationship between endowment size and tuition fees; “making college more affordable is not the dominant use of endowed resources,” he said.
By Jeff Carlson, Wolters Kluwer News Staff
Ways and Means Press Release: Roskam Opening Statement: Examining the Rising Costs of Higher Education
Ways and Means Press Release: Lewis Opening Statement at Oversight Subcommittee Hearing on Rising Costs of Higher Education & Tax Policy
JCT Background and Present Law Related to Tax Benefits for Education, JCX-133-15
Testimony of David Lucca, Ph.D., Research Officer, Federal Reserve Bank of New York
Testimony of Richard K. Vedder, Distinguished Professor of Economics, Ohio University; Director, Center for College Affordability
Written Testimony of Brian Galle, Professor of Law, Georgetown University Law Center