The House Ways and Means Oversight Subcommittee held a hearing Wednesday examining the rising costs of higher education and tax policy, including how tax breaks could be a contributing factor behind spiraling tuition costs.

“Today we’re here to look at what’s behind the rising cost of college, and to consider whether this nation’s tax policies are partly to blame,” said House Ways and Means Oversight Subcommittee Chairman Peter Roskam, R-Ill., in his opening statement.

The hearing considered tax breaks for college administrator salaries and endowments, along with other factors such as how increases in federal financial aid and tax credits for students may be encouraging schools to raise tuition. The high salaries of some university presidents and sports coaches also raised eyebrows.

“For nonprofit institutions, it seems like a lot of university presidents are making very good money,” said Roskam. “In 2013, 42 private college presidents made more than $1 million. One way schools can justify their compensation as ‘reasonable’ to the IRS for the purpose of favorable tax consideration is to show that similarly situated institutions pay comparable salaries to their executives. That method points in only one direction: up. It allows schools to increase their compensation year after year because others are doing it too. I’m not against people succeeding, by any means, but this is another area that’s important for our subcommittee to consider—are the highest paid college and university presidents the ones providing the best education for students? And if not, why not? How does tax policy fit into that math?”

The hearing also probed tax breaks for college endowments. “Endowments and their investment earnings are exempt from taxes,” said Roskam. “Congress provides that exemption to further a charitable purpose: better educating our nation’s students, preparing them for successful careers, and increasing the store of human knowledge through research. We understand that endowments can help assure financial stability to schools. But about 90 schools have endowments of more than $1 billion. Some of those schools have made great strides in providing exceptional financial aid to their students. Others have not.”

State Cutbacks
Rep. John Lewis, D-Ga., the ranking Democrat on the committee, pointed out that federal tax breaks are necessary as many states continue to cut back on their funding for colleges. “Every year, higher education becomes more important to our nation’s economic needs,” said Lewis. “Federal student aid programs—like Pell grants and student loans—are critical tools to ensure that a college education is affordable and accessible for all who aspire. In light of decreasing state support for higher education, it is more important than ever for the federal government to do our part.”

Terry Hartle, senior vice president of the American Council on Education, backed up Lewis’s contention. “The biggest factor driving price increases for most American families is the steep cuts by states in operating support for public higher education,” said Hartle in his prepared testimony. “In the last 25 years, states have systematically reduced spending on higher education, resulting in increased tuition at public institutions to offset the reduced state revenue.”

He quoted figures from the State Higher Education Executive Officers Association, showing that since 1998, state support on a per-student basis has fallen by 29 percent, after taking inflation into account.

“Indeed, there is a clear, direct and inverse relationship between state appropriations and tuition increases,” said Hartle. “When state support goes down, tuition almost always goes up.”

Hartle also disputed the impact of tax breaks for the salaries of university presidents. “While we often focus on the few college and university presidents who earn seven-figure salaries, the median base pay for public college presidents in 2014 was $400,000, according to The Chronicle of Higher Education, which surveyed the 238 CEOs from the largest public institutions and systems,” he said.

The median base pay for private college presidents in 2012, according to The Chronicle of Higher Education, was about $313,000, he added, and the American Association of Community Colleges reports that the median pay for two-year college presidents is about $184,000.

“It is important to remember that these are the CEOs of institutions with thousands and sometimes tens of thousands of staff, faculty and students and responsibility for every aspect of campus life 24/7,” said Hartle. “It also is worth noting that college presidents are more likely to be paid less than $55,000 a year than they are to make $1 million or more.”

He did acknowledge that the salaries of some Division I football coaches can be “eye-popping,” pointing out that the median salary for a D-1 football head coach is about $1.5 million, according to a USA Today database. But Hartle noted that much of their salaries typically come from sources outside the university operating budget, such as booster funds and television revenue, sports camps, endorsements and apparel and TV/radio show deals. In addition, out of the 4,700 institutions in the U.S., only a little over 100 have major D-1 football programs.

Hartle also responded to Roskam’s criticism of high-priced amenities, after the congressman claimed that over the last 30 years, schools have increased their administrative staff and engaged in an “arms race” with each other to build movie theatres and luxury gyms.

Hartle acknowledged there was some truth to this. “On the topic of campus amenities, much has been made about the costs attached to things such as climbing walls, lazy rivers and allegedly luxurious dormitories,” he said. “Not very many campuses have these types of amenities, and the campuses that do often have them because the students want them. For instance, Louisiana State University at Baton Rouge embarked on an $85 million upgrade to its student recreational facilities, including a climbing wall and a lazy river in the shape of the school’s initials. The student government voted to fund the project by quadrupling student fees, meaning students voluntarily paid $1,080 more over four years than they would have under the old fee structure.”

He pointed out that many educational institutions add such amenities because they help with student recruitment and he said such projects are a tiny piece of overall college costs.

College Endowments
Hartle also defended the management of college endowments. “Some suggest that one way for colleges and universities to manage these rising costs and resulting tuition increases is by spending more of their endowment resources,” he said. “To some extent, this suggestion is based on a limited understanding of endowments. First, the vast majority of the nation’s 4,700 colleges and universities do not have significant endowments.”

According to the U.S. Department of Education, he noted, in 2012–13 the median endowment for private, four-year colleges was $26.2 million and for public, four-year colleges was $25.3 million.

According to the National Association of College and University Business Officers, in 2014, only about 600 institutions, or about 13 percent, had endowments over $50 million. Two percent of all colleges and universities—89 institutions—hold approximately three quarters of all endowment assets.

“It is important to note that the few colleges and universities with large endowments already use their endowment resources to provide substantial student financial aid to enhance access, particularly for low- and middle-income students,” said Hartle. “Moreover, relying on endowment spending and other private resources, a number of colleges and universities are replacing loans with grants as part of their student financial aid packages. These institutions have successfully managed their endowments to provide resources for the benefit of current students and society, while also protecting the needs of future students.”

Richard Vedder, an economics professor at Ohio University and director of the university’s Center for College Affordability, also testified about tax breaks for endowments. “It is widely agreed that the American federal tax system violates most of the basic principles of taxation relating to simplicity, efficiency, and fairness, and that tax reform should lead to lower marginal rates, and an expanded tax base with fewer exemptions, credits, and special interest loopholes,” he said. “Higher education tax policies contribute somewhat to this problem. People can lower their tax liability by making gifts to non-academic aspects of university life, such as building fancy stadium sky boxes or luxurious resort-like housing facilities. Tax treatment of some collegiate compensation arrangements deserves scrutiny.

“But today I want to focus on university endowments,” Vedder added. “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. There are several schools with over $1 million in funds for every student, enough to provide $50,000 per student in annual investment income using a 5 percent payout rate. The vast majority of institutions, however, have well under $100,000 of endowment per student. While endowments are particularly critical to private institutions, four of the 15 largest ones are held by state universities.”

His research found that college endowments are generally not used to lower the state tuition fees of colleges. 

“There is no statistically significant relationship between endowment size and tuition fees,” said Vedder. “There are exceptions. Berea College in Kentucky, the College of the Ozarks in Missouri, and, historically, Cooper Union in New York City have used investments to essentially eliminate student fees. But that is rare. Second, endowments are used some to provide scholarships, effectively lowering the actual or net tuition fee paid by students. However, assuming a 4 or 5 percent payout rate, the evidence suggests typically that less than 20 cents out of every dollar of endowment income goes for this purpose. Making college more affordable is not the dominant use of endowed resources.”

Brian Galle, a law professor at Georgetown University, also discussed the relationship between federal tax law and the spending and endowment policies of colleges and universities. “Federal 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,” he said. “The federal government and most states allow taxpayers to reduce their taxable income by the amount of any donation to an eligible charity. Similarly, decedents’ estates can deduct the amount of any money left to charity from the amount subject to federal tax. Donors receive these deductions at the time of the donation, regardless of when the donee charity actually expends the funds (and regardless of any restrictions on sale the donor may impose on the gifted assets). Charitable organizations, including most colleges and universities, are also exempt from the federal corporate income tax. This allows for tax-free growth of endowments.”

New Normal
MaryFrances McCourt, senior vice president and chief financial officer at Indiana University, testified on behalf of the National Association of College and University Business Officers. She defended how universities like hers set tuition and use their endowments.” “The single most challenging financial constraint we’ve faced in recent years at Indiana University is the fact that the state has not been able to appropriate adequate funds to keep up with inflation and enrollment growth,” she said. “Revenue from tuition and fees now makes up more of our budget than state appropriations as a percentage of our operating revenue. The proportion of our budget from state appropriation and from tuition and fees has flipped since the mid‐1980s.”

However, she contended that historically low tuition increases have become the “new normal” at IU. “We have invested heavily in student success and affordability, with the reduction of student debt as a key focus,” said McCourt. “As chief financial officer, I have also been driving the business division to find operational efficiencies, with much success over the past several fiscal years. But the last several years have been a demanding and uneasy time for us as well as the entire public and nonprofit higher education sector. The economic situation has improved somewhat, but it has not yet stabilized—leading to uncertainty about short‐ and long‐term funding, and how to manage costs. Institutions, like IU, have taken action with a wide array of initiatives, from more internal consolidation to increased external collaboration.” 

David Lucca, a research officer at the Federal Reserve Bank of New York, researched whether federal aid was linked to tuition increases and found a connection. “Our main empirical finding is that changes in subsidized loan amounts have been associated with sizable increases in posted tuition,” he said. “Our estimates suggest that an additional dollar of per-student credit led to a 70-cent increase in posted tuition. We find smaller effects on tuition for additional Pell Grants and unsubsidized loans of about 55 cents and 30 cents on the dollar, respectively. Overall, these results are consistent with the so-called Bennett Hypothesis, according to which an increase in student aid can result in a higher cost of education.”

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