September 14, 2016

Congressional Hearing on Nonprofit College and University Endowments

6 min


On September 13, 2016, the Oversight Subcommittee of the U.S. House of Representative Committee on Ways and Means held a hearing on "Tax-Exempt College and University Endowments." Although the title mentions only endowments, the hearing covered a broad range of related issues, all of which are summarized below. The discussion covered the rising cost of college, the burden of student debt, and ways to simplify the federal tax code to incentivize students and families to make the right financial decisions about their education.

Hearing Summary

Opening Statements

Chairman Roskam (R-IL)

Chairman Roskam pointed out that tax policy is designed to benefit donors and schools with massive endowments in numerous ways, while parents who want to send their children to college are facing increasingly prohibitive cost burdens. Noting that donors can write off their donations and that schools' investment earnings are tax-free but tuition continues to rise each year, he argued that it is important to examine how schools are fulfilling their charitable purpose as educators and to learn more about what's driving tuition increases. Chairman Roskam argued that schools should reduce administrative overhead, develop alternative funding arrangements, and look into methods that reward middle class families for saving for college.

Ranking Member Lewis (D-GA)

In his opening statement, Ranking Member Lewis put his support behind federal aid for higher education, stating that education is the fastest path to the middle class and that, in light of the recent decrease in state support for higher education, it is more important than ever that federal student aid be fully funded.

Witness Testimony

Neal McCluskey, Director of the Center for Educational Freedom, Cato Institute

Jeff Amburgey, Vice President for Finance, Berea College, Berea, Kentucky

Sheila Bair, President, Washington College, Chestertown, Maryland (former chair of the Federal Deposit Insurance Corporation)

Mark Schneider, Vice President and Institute Fellow, American Institutes for Research (formerly Commissioner of the National Center for Education Statistics)

Dr. Sandy Baum, minority witness, Senior Fellow, Income and Benefits Policy Center, Urban Institute


Student Debt Issues

How to address the student debt and rising costs of education was the driving topic throughout the hearing. Many legislators asked about how to alter the current student aid and debt repayment structure, and many seemed open to policies that would fundamentally change the way that individuals pay for higher education. Rep. Meehan (R-PA) voiced concerns about the possibility of a "debt bubble" for college tuition and likened the current debtor landscape to the subprime mortgage crisis. Ms. Bair agreed, noting that students' ability to freely borrow has allowed schools to raise tuition massively. She drew a parallel between the current system and the dynamic that led to the financial crisis and added that the proportion of distressed student loans currently in the market is significantly higher than was the proportion of distressed loans in the mortgage market leading up to the financial crisis.

Rep. Lewis (D-GA) continued the conversation on containing student debt by asking the witnesses for suggestions on how to keep students from accumulating high levels of debt. Ms. Bair advocated for a transition to an income-sharing agreement system that would be facilitated through the federal government. She also called for sensible caps to be applied to how much debt students could take on, arguing that there is no "underwriting" of student loans in the current system, and no thought is given to whether the student will be able to repay it. Under an income-sharing system, students would pay a small percentage of what they earn over a long period of time. Ms. Bair offered that the income-sharing repayment program could be built into the tax system in a manner similar to the payroll tax, so that students could make payments more easily, and it would eliminate the issues that arise around the servicing of student loans. Ms. Baum agreed that payment amounts should be based on income, but added that it is important to provide funds to those students to whom the private market "would not be kind."

Mr. Schneider argued that the problem is not that students are taking on large amounts of debt, but that the debt they are taking on is not commensurate with their future earnings. He noted that states like Texas are taking proactive measures to educate students about the amount of debt they should be taking on in order to support themselves and the cost of their education moving forward in their careers.

Rep. Renacci asked whether universities have any responsibility to help students avoid taking on too much debt. Ms. Bair responded that debt at Washington College is capped at $2,500 per year for each student, but that colleges and universities are under no obligation to monitor the amount of debt a student is saddled with.

Transparency in Spending at Colleges and Universities

The perceived excesses of expenditures at colleges and universities were covered extensively throughout the hearing. Lawmakers viewed the million-dollar salaries of terminated football coaches and the construction of lavish student unions and recreational centers as factors contributing to the tuition increases that universities and colleges impose on students each year. Reps. Meehan, Reed, and Rice (R-SC) all voiced their displeasure with the fact that it is too difficult for individuals to ascertain exactly how higher education institutions are spending their tuition and endowment money. Form 990 in particular was singled out as being far too complex to allow an ordinary individual to understand where a college allocates its money, which makes it difficult for students to make a good decision about where to invest their money in their education. Mr. Schneider agreed, stating that the form needs to be simplified. He added that there needs to be a public education campaign to inform interested students about what they need to be looking at when selecting an institution. Rep. Reed noted that he is open to hearing any suggestions about how to contain costs for higher education and that he does not believe that endowments are the main culprit, as they can be helpful to students if they are used correctly.

Tax Code Changes

Reps. Davis (D-IL) and Black (R-TN) touted their bill, the Student and Family Tax Simplification Act, which would streamline education tax provisions by consolidating the Hope Credit, the American Opportunity Tax Credit (AOTC), the Lifetime Learning Credit, and the tuition deduction into one larger credit. Rep. Davis stated that he does not think the tax code is the best way to incentivize institutional investments in low-income students and that institutions deserve tax exemptions on their endowments. Mr. Schneider, on the other hand, argued that schools with extremely high endowments should be subject to a 0%–2% tax rate on their endowments, with deductions for spending on scholarships or student aid funding. Lawmakers did not seem to back the taxation of endowments, but were more open to adding incentives for donors to funnel resources directly into scholarships as opposed to buildings or other initiatives.

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Arthur Norman, a paralegal in the Tax & Wealth Planning Group, assisted in writing this alert.