The Tuition Spiral

The New York Times reports that “College Costs Outpace Inflation Rate.” Of course they have. The Chronicle offers a more telling headline: “Student Aid Has Gained, but College Costs Have Risen Faster.”

The Times reports “in recent years, consumer prices have risen less than 3 percent a year, while net tuition at public colleges has risen by 8.8 percent and at private ones, 6.7 percent.” This was the largest increase in six years.

What is to be done? Senator Clinton has proposed a $3,500 tax credit for students, and an increased Pell grant. Bill Richardson proposes two years of free schooling at public universities in return for a year’s pledge of public service. Mitt Romney has offered a similar plan, tying student aid to the type of jobs students intend to take after college. All of these plans would necessarily involve a significant increase in direct government spending on higher education. Most frankly acknowledge that government aid will never catch up to tuition increases. Few are willing to consider whether government aid might underpin the rise of tuition. Whatever the case, it’s impossible to trace any consistent benefit from mere aid increases.

Richard Vedder has, as to be expected, proposed a plan of far greater substance:

Colleges and universities that increase their tuition fees in any given year by more than the three year moving average growth in median family income (maybe median household income), will start losing their federal tax exemption. When I say “lose their exemption” I mean: some endowment income including capital gains would be subject to taxation; annual gifts to universities would lose some tax deductibility to the donor; bequests upon death would be taxable and, possibly, even, universities would become subject to corporate income taxes.
Here is how it would work. Suppose the 3 year moving average of median family income is rising 4 percent a year. Colleges could raise their fees 4 percent or less without penalty. They would pay penalties for bigger increases. Say they lose 2.5 percent of their exemption for each 0.1 percentage point tuition increases exceed the family income threshold (4 percent in this example). If a school raises tuition 5 percent, it loses 25 percent of its exemption; 7 percent, it loses 75 percent; 8 percent it loses the entire exemption.
Are there some problems with this approach? There are literally dozens of them. Are they resolvable? I think the answer is yes. Universities seeking privileged tax status would have to play by the rules. A school wanting to raise tuition fees 15 percent could do so – but only at a high price.

It’s doubtful that we’ll hear anything even half that interesting from a Presidential candidate.


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