Who benefits from tax-exempt colleges?

William L. Spence with the Lewiston Tribune does a great job breaking down the problem of skyrocketing higher-education costs. 

Remember: you get more of what you subsidize and less of what you tax. If you subsidize rising higher-ed costs, you’ll get more of it. 

You want to fix the education loan problem? Only make loans available to degree programs with a payback: STEM degrees. If you want an underwater basketweaving degree, pay for it yourself. 

Given the unremitting increase in higher education costs over the past 30 years, some members of Congress are beginning to question whether the tax-exempt status of colleges and universities really benefits the public.

During a House Ways and Means subcommittee hearing this week in Washington, D.C., several representatives said their constituents are fed up with rising college costs.

“Whole generations of parents are taking their retirement (savings) and turning it over to universities,” said Rep. Pat Meehan, R-Pa. “And their children are borrowing and taking out student loans at a rate that dramatically exceeds their ability to pay it back.”

Witnesses at the hearing noted tuition costs have nearly tripled since 1980, to an average of nearly $12,000 per year. That’s more than the rate of inflation, and a faster increase than the price of food, health care or the growth in household income.

Neal McCluskey with the free-market Cato Institute said one consequence – “or perhaps cause” – of this is that student loan debt surpassed the $1 trillion mark in 2012 and now exceeds the country’s total credit card debt.

He and others suggested the easy availability of student loans and federal student aid may be unintentionally driving tuition increases by allowing colleges and universities to raise prices without causing an unacceptable drop in demand.

“A major problem in higher education is that much of the price schools charge is paid with other people’s money, which reduces the incentives to demand only what is essential,” McCluskey said. “The ultimate solution is to phase out federal (student) aid and let students pay tuition and fees with their own money. But there doesn’t seem to be much appetite for this.”

Mark Schneider, vice president of the American Institutes for Research, offered a different, but equally contentious alternative: eliminate the tax-exempt status of large, private university endowments.

Nonprofit educational institutions enjoy a variety of public tax benefits, Schneider said, including property tax exemptions, write-offs for donations and tax-exempt endowment earnings.

Moreover, the richest schools often derive the greatest benefit from these exemptions. For example, a 2015 study he conducted with Jorge Klor de Alva with the Nexus Research and Policy Center found that the 10 largest private universities in the country received average taxpayer subsidies of nearly $26,000 per full-time equivalent student – nearly double the average for public flagship institutions and five times the subsidy for community colleges.

“Private universities aren’t necessarily private,” the authors noted. “In many cases, taxpayers subsidize the education of students in the well-endowed and more selective schools to a far greater extent than they do the educations of their own children, most of whom attend broad-access public institutions.”

Schneider suggested a small excise tax on the 100 largest private university endowments – equal to the rate non-educational endowments already pay – could provide needed funding for low-income student support services and provide a broader public benefit to these higher education tax benefits.

One other alternative discussed during the hearing was shifting from the current “debt model” of student loan financing to an income-sharing model in which monthly loan payments are tied to the individual’s annual income.

“If you want to make financing available to everyone, this is a better model,” said Sheila Bair, president of Washington College in Maryland and former chairwoman of the Federal Deposit Insurance Corporation. “Have an automatic repayment system that’s built into the tax system. The would eliminate defaults, make it easier on students and get rid of bank service fees. If someone didn’t get a job or had a low income, they’d be guaranteed a low payment; if they get a job at a hedge fund, they’ll pay it back faster. Everyone would have protection against the kind of student loan distress we have now.”

The committee took no action during the hearing, but members suggested this is an issue Congress will continue to examine in search of a solution.

 Via the LMT