A well-designed tax system can do more than just raise money. It can be used to improve economic efficiency and reduce inequality. These are also goals and outcomes of our higher education system: a model of mixed private-public funding, market based, and the outright envy of the world.
We spend 2.7 percent of our GDP on higher education. Our colleges and universities provide instruction for 12 million students, enrolled in 3,000 colleges and universities, and produce a startling number of inventions, including: polio vaccines, heart pacemakers, municipal water purification systems, space-based weather forecasting, advanced cancer therapies, jet airliners, the digital revolution, and many more. In addition to public funding, universities also added private equity incomes in the form of endowments (primarily gifts), to safeguard against any unforeseen budget shortfalls, and expand their operating budgets. It’s a record of great success.
But it’s a nervous time to be a university. The new tax plan calls for $65 billion savings from public and private universities and their students, over the next 10 years. The powerful higher-education lobbies appear to have lost the “tax higher education” showdown. Included are cuts of $3.9 billion in funding for the Pell Grant Program (that helps low income students pay for college), elimination of the Public Service Loan Forgiveness Program and employer tuition reimbursement (as income), the Hope Scholarship Credit and Lifetime Earning credit, and repeal of employer paid tuition assistance (the benefit isn’t taxable to the employee but is deductible for the employer). Changes to Tax Credits will provide about $18 billion of the $65 billion in revenue over 10 years. The GOP bill also taxes “tuition waivers” that colleges often use to pay graduate students in-kind. Graduate assistants will pay more for their education.
A growing number of skeptics see our universities as businesses trying to increase profits at public expense, hoarding money, too expensive (rising tuition costs and fees) and too wealthy. They see more than 75 percent of universities actively trading in high-risk funds (securities, hedge funds and private equity funds) that earn up to 15 to 16 percent annual rate of return, while spending only 5 to 7 percent of their endowments per year (as a “safeguard for future generations”), resulting in untaxed endowments of more than $600 billion. Critics point to university-owned patents from research discoveries, funded from government grants (often public funds), that provide faculty and universities huge royalties from their developed technologies. And there is a perception that far too many college and universities focus too little on teaching, learning and graduation.
Yes, there is an image problem, perhaps more.
During the election campaign, Trump’s college “affordability” proposal encouraged Congress to review student borrowing. The $1.41 trillion total student debt is out of control, with a loan default rate of 11 percent, and the majority of borrowers repaid nothing in the three years after finishing school. It is an urgent and growing problem. Trump considered an income-driven repayment plan for student loans, where federal loan payments are capped at a percentage (12.5 percent) of one’s income for 15 years, and then “we’ll let them get on with their lives (Trump).” The plan equated to repayments of one-half the total debt, affecting 44 million people. But, there is no enhanced repayment plan, no forgiveness. Navient Corporation was selected to collect all student debts, making it considerably more difficult to refinance student loan debt. The new Tax Plan provides no federal assistance for any further student financial aid, starting in 2018. This is, however, an opportunity for banks to experience a resurgent loan growth.
During the campaign, Trump supported the idea that university endowments (valued at $600 billion), should provide greater financial support to students. The endowments are currently untaxed, considered part of the nonprofit mission of universities. But the new House and Senate tax plan calls for a new 1.4 percent excise tax on the net investment income from university endowments. The tax applies to the annual investment earnings of universities with private-equity endowments that equate to more than $250,000 per student (150 schools). The measure would increase tax revenue by $3 billion over 10 years. This does not apply to public universities.
Still, attending a university is not necessarily a bad investment for a student, if they can pay for it. A bachelor’s degree yields, on average, a 15 percent return, although that percentage will likely decrease. And, if graduates earn more than non-graduates because their studies have made them more productive, then university education will boost economic growth. More data is required, and this information becomes important as we move forward.
The government still sponsors university research. But negotiated indirect cost rates may become more problematic for universities. Students will continue to look for a degree from an institution that will impress employers; employers are primarily interested in the selectivity of the institution a candidate has attended. Since the value of a degree from a highly selective institution depends on its scarcity, “top” universities have little incentive to produce more graduates. And in the absence of a clear measure of educational output, price becomes a proxy for quality. By charging more, universities gain both revenue and prestige. Expect tuition to continue to rise.
What will all this mean to the existing student debt crisis? If we want to help poor kids go to college, we should pay their tuition. During 2016/2017, CPI rose 2.7 percent, tuition and fees rose 9 percent at four-year state institutions and 13 percent at private colleges and universities. States may find it more difficult to maintain support for their universities. Expect student debt to increase.
The consequences of no federal financial aid for students, taxing university endowments and likely placing more emphasis on graduation rates will alter the existing structure of universities, and the savings strategies for millions of people. Does the tax plan increase economic efficiency and reduce inequality? We can hope; but, universities and their students must adjust to losing $65 billion over the next 10 years from the new tax plan.
First, we need to solve the student debt problem, and soon.
Carl Evensen is a resident of Ferguson Township. Now retired, he formerly was an executive for the Pennsylvania State System of Higher Education and George Washington University.