Exceptional athletes are often called game changers, but the real game changers in sports are the committees that set the rules. Changing the height of the pitcher’s mound changes the game. So too with expenses in higher education. The rules are changing. The House of Representatives has passed a tax reform bill that includes several provisions that the higher education establishment doesn’t like. The Senate is working on its own version, which may include some of the same provisions and some others that are irksome to colleges and universities. The changes will matter.
The House plan reduces federal support for higher education via tax benefits to post-secondary students by $65 billion over the next ten years. To put that into perspective, those tax benefits now amount to about $35 billion per year, so the cut is about 18.5 percent.
The consumer of higher education will definitely feel this. The House bill eliminates a student loan interest deduction of $2,500, which is claimed by 12.4 million people, who will on average pay an additional $272 in taxes.
I’m among those whose eyes glaze over when an author starts sprinkling millions and billions and percentages into his paragraphs, like an overzealous waiter with a peppermill descending on an entrée. The entrée, in this case, is the price of education—the price to parents and to students, but also to the nation as a whole. We are in deep educational trouble, much of which does not appear to be a matter of excessive tuitions or government programs. The erosion of intellectual standards, the rise of shout-downs and student-led censorship, the disappearance of regard for Constitutional rights and responsibilities are conspicuous evidence that something is amiss in our colleges and universities. The price of education doesn’t all by itself explain this descent into the maelstrom, but it is a key factor that is often overlooked. Let’s, for a change, consider it.
Why the Cuts Upset the Colleges
The House bill isn’t entirely about taking things off the table. For example, the American Opportunity Tax Credit (AOTC) will remain. AOTC offers a tax credit of up to $1,000 per year for four years of undergraduate education. The House has apparently decided to reward the students who are too busy pursuing social justice crusades to attend class on a regular basis. The reward is extending AOTC to five years. Of course, the new provision benefits hard-working but off-track students as well.
But mostly the House has aimed to cut and consolidate programs that use the tax code to lighten the burden to consumers of college expenses. The legislation eliminates the Hope Scholarship (a $2,500 tax credit that was pumped up as part of the 2009 Stimulus). And it takes away the Lifetime Learning Credit (which was a tax credit worth 20 percent of the first $10,000 of qualified education expenses.)
Don’t worry if these details don’t stick in your head. You need to know them only in two circumstances: if you are trying to maximize your educational deductions (ideally with the help of an accountant) or if you are a college administrator who is calculating exactly how much you can squeeze out of tuition-paying parents.
Those administrators and the lobbyists they employ are the central opposition to these tax reforms. From the standpoint of the family trying to meet educational expenses, the tax credits themselves are almost entirely smoke and mirrors. The money the consumer supposedly saves has been taken into account already by the colleges and universities, which have set their tuition and fees accordingly. To the families who are struggling to pay the bills, the federal tax credits must feel like relief, but that’s an illusion akin to drinking ocean water to quench your thirst.
Tuitions have soared for the last thirty years primarily because colleges and universities have found ways to trick more and more people into borrowing more and more money to pay for their services. College education hasn’t gotten better as the expenses soared. By most reckonings, the quality of a college education has deteriorated during that time. To sell a worse product at a higher price requires colleges and universities to play some sharp angles.
One of those angles is to convince parents that a “good education” is the key to lifetime success for their children. So, pay up or doom your children to second-rate lives. For sure, the evidence is strong for the existence of a “lifetime premium” in earnings for having a college degree, though the size of the premium is much disputed, and the calculations seldom reckon with the students who go into debt for college and don’t graduate. The lifetime earning conceit, however, is a powerful incentive for families to overspend on college education. Removing some of the tax-credit grease that lubricates this rationale could slow the rate at which some families send their sons and daughters off to expensive colleges that have low “returns on investment.”
The other principal way that colleges and universities entice people to enroll at high prices for questionable academic programs is by dazzling families with “scholarship” (discounted tuition) and flashy explanations of how the costs can be covered by an array of federal loans and tax credits. The House bill certainly won’t bring an end to Las Vegas-style flashing lights and upbeat tempos with jackpots every minute, but it will curtail some of it. Taking $65 billion off the table is a start.
Congress has still more provisions in the works. The House bill eliminates a provision which treats employer-paid tuition assistance of up to $5,250 as non-taxable income to the employee.
And in a blow to the super-wealthy colleges and universities, the House bill puts a 1.4 percent tax on the investment income of private colleges that have more than 500 students and assets of more than $100,000 per students, This would apply to 140 colleges and produce $3 billion in new federal revenue over ten years.
Most of the provisions in the House bill that I have mentioned primarily affect undergraduate students, but one other provision primarily hits graduate students. It calls for taxing tuition waivers, which comprise a substantial portion of the financial aid that graduate students receive. Some 145,000 graduate students and about 27,000 undergraduates receive such waivers—the undergraduates typically for serving as resident assistants.
Though this provision of the tax reform touches a small fraction of the number of students affected by the other provisions, it has aroused disproportionate fury within the world of higher education. That’s because it potentially disrupts the indentured-labor system through which universities cover a substantial portion of their instructional costs. The graduate students who receive tuition remission are typically expected to serve as teaching assistants or in similar roles for which they receive no direct compensation. It is an interesting arrangement, given that the university with one hand sets the rate of tuition, and with the other hand makes the tuition vanish, and the graduate student in gratitude for this generosity works for free.
Congress can spoil this magic act, however, by declaring that the tuition waivers are actual taxable income to the recipients. That presumably will force universities to pay the graduate students more in the form of actual dollars so that they can pay their taxes. And because this would increase the cost of graduate students to universities, it might well result in shrinking the number of graduate students who are admitted. And that, in turn, would put pressure on the employment of faculty members who primarily teach graduate students.
In other words, taxing graduate tuition remission is a tender spot in the economics of American higher education. The immediate brunt of the change would fall on the graduate students who would see a large increase in their taxes. The Chronicle of Higher Education offered several illustrations, including this:
“At the Stony Brook University, in the SUNY system, teaching assistants earn a little more than $19,000 in stipends and have tuition waivers of nearly $11,000, according to information prepared by the dean of the graduate school. In this case, the student’s taxes would increase from less than $900 to nearly $2,200, the dean calculated. The increase is far greater for nonresident students, whose tuition waivers are worth more than $22,000, making it appear, for tax purposes, that their annual pay more than doubled.”
Of course, the students’ annual pay, in this case, wouldn’t actually double. Rather, the portion sheltered behind the label “tuition remission” would simply be recognized as the income it, in fact, is. I have some sympathy, however, for the graduate students who struggle with small stipends, large academic workloads, demanding advisors, and not much time to earn extra income on the side.
The small number of undergraduate students who benefit from tuition remission may not be quite so sympathetic. “Resident assistants” tend to be frontline enforcers of political correctness on campus. They often serve as snitches for Bias Emergency Response Teams and similar parts of the apparatus that sustains the suppression of intellectual freedom. The University of Oregon, for example, awards tuition remission packaged as “Diversity Excellence Scholarships” for “sharing their varied cultural perspectives” to “enhance the education of all UO students and the excellence of the University.” Congress probably didn’t spend much time thinking this through, but the proposal to tax tuition remission may well cut away one of the many props that colleges and universities use to maintain progressive ideological conformity among students.
Old Man River
All of this comes at a time when American higher education is shouldering some other financial problems. In the last decade, for example, colleges and universities have found a windfall by expanding the number of international students they enroll. Over 1.08 million foreign students enroll, or about five percent of the total enrollment; they bring with them an estimated $39 billion per year in revenue. Generally, these students pay full tuition and are eligible for none of the gimmicks that shield many Americans from the official “price.” By windfall, I refer to the near doubling of foreign students (an 85 percent increase) since 2006. But suddenly the wind has slowed down. In fall 2017, seven percent fewer international students enrolled in U.S. institutions. The decline has hit some universities much harder than others. The University of Central Missouri, for example, has seen a one-year drop in international students from 3,638 to 944.
That’s but one indicator that higher education is at the edge of a financial precipice. Various observers from Kevin Carey, director of the Education Policy Program at the liberal New America Foundation, to Clayton Christensen at Harvard Business School have declared that American higher education is due for a massive “disruption,” brought about partly because of the rapid development of new technology. Christensen now says that half of American colleges will be bankrupt in the next ten to fifteen years.
I am not ready to go all-in on the idea that online education will be the grim reaper of our over-priced and under-performing colleges and universities, but I do think the basic financial model of our higher education sector is profoundly flawed and therefore vulnerable. The symbol of the moment is the giant pool at Louisiana State University, the “Lazy River” that allows students to drift in inner tubes along a 546-foot course that spells out “LSU.” As the Chronicle of Higher Education pointed out, the Lazy River is part of an $85 million renovation to LSU’s recreation center, while the LSU library is literally falling apart.
American higher education, in general, embarked on its own Lazy River a few decades ago. Congress’s decision to start cutting the subsidies is what happens at the end of the river.