The New Tax Attack On Overly Elite College Endowments Has Potential Merit

But the legislation would hurt students, too.
This post was published on the now-closed HuffPost Contributor platform. Contributors control their own work and posted freely to our site. If you need to flag this entry as abusive, send us an email.
janniswerner via Getty Images

It is already clear that many supporters of President Trump and the Republican Congressional majority have a dim view of higher education in America. To some degree, this animus is warranted, especially with respect to the nation’s most elite colleges and universities. When schools of this type routinely admit as many undergraduate applicants from the top 1 percent of family income as from the entire bottom 60 percent, there is bound to be resentment at the kind of class top colleges are waging on middle- and lower-income Americans.

Public and private universities enjoy enormous tax advantages equivalent to public charities based on their stated commitment to the public good; but the facts are that the most elite and “selective” among them (at least according to the dubious findings of the annual US News College Rankings) have embraced business plans that are dependent on skewing their admissions decisions to favor rich applicants.

Rigged for the Rich

They have invented “high affluence lanes” that most such schools admit give special consideration in one form or another (flagged application files, test score bonus points, or lowered GPA minimums) for certain categories of applicants likely to come from wealthy families. This favoritism starts with special relationships elite college admissions departments have long established with elite private prep schools as well as some public “high performance “high schools that enjoy extra parental (tax-deductible) financial support from their wealthy neighborhoods. First in the specific admissions line come the “legacies” – children or even grandchildren of their own previous graduates (likely to be doing well financially because of graduating from such prestigious prep schools and colleges schools in the first place). See the provocative new book on this subject, Dream Hoarders, by Richard V. Reeves of the Brookings Institute, which addresses (according to its subtitle) “How the American Upper Middle Class Is Leaving Everyone in the Dust, Why That Is a Problem, and What to Do About It.”

If There’s Quid Pro Quo, the IRS Should Say No

Add to these the children of “high-potential” donors whose applicants are tracked through the admissions process by many elite-college “development offices. Such donors can strain the logical and legal limits of tax-deductible contributions by providing a quid of cash for a quo of admission for their progeny. (See the case of Jared Kushner admission after his dad’s multimillion-dollar contribution to Harvard.) The cases of prominent celebrities and politicians whose kids gain favored admission treatment are not dissimilar.

Both public and private elite universities also have made no secret of their attempt to woo full-tuition paying foreign students who are not eligible for federal or state government tuition assistance ― and with respect to big state universities, out-of-state students whose families are wealthy enough to fund the travel and pay the much higher tuition rates that locals pay.

Paving the Road to the Admissions Office

Other devices (less blatant, but more insidious) to pave the path for applicants from wealthier families include the “early decision” scam and the recent related emphasis in admission decisions on applicants’ previously “demonstrated interest” ― best exemplified by the flights and “road trips” to visit selective campuses far from home (and meet personally with key admissions personnel) during junior and senior high school years before applications are submitted.

It’s All About the Business Plan

How many families in the bottom 60 percent of incomes can afford that today? Yet just such visitations are the best way for any prospective student to make the advance, absolute commitment to accept an admissions offer – the student can only apply to one school ― the “early decision” admission process. These offers typically come in December, before most other applicants have even submitted theirs for “regular” consideration! Realistically, only the rich can take this kind of risk, because the family will be basically stuck with a full tuition bill unless the college has a policy to meet any funding need because of the successful applicant’s family income – a one-way, “trust us” advance bet.

The early decision option gives elite schools what they want to underwrite their business models for ever-increasing endowments and expansion (mostly in terms of physical facilities and faculty pay, rarely in terms of broadened enrollment) – and what they want is mostly full-tuition-paying acceptances, often up to 40 percent or more of an entering class, plus a guaranteed high “yield” (the ratio of acceptances to admissions offers). This allows these schools to be very tough on the remaining applicants and thereby increase the impact of their “selectivity” stats that the rankers like US News eat up. Small wonder that early decision applicants can get in above a somewhat lower bar as to their test scores and GPAs.

Given the degree to which elite private and public colleges have moved away from a focus on advancing social and economic mobility toward a process that actually retards such mobility, it could be understandable that Congress is moving to a apply even a modest (less than 2 percent) annual tax on unrelated business income accruing to their endowments. The apparent motivation for this new tax included in the House of Representatives’ Tax Cut and Jobs Act, passed before the Thanksgiving recess, is not, however, to create an incentive to change admissions behavior toward a more egalitarian, social equity posture. Rather, the sole purpose seems to be merely a convenient source of needed ‘pay-fors’ for extensive corporate and modest individual tax cuts – to keep the resultant deficit within a preset boundary of $1.5 trillion over ten years.

As Ross Douthat, a conservative columnist for The New York Times (who called this part of the GOP tax plan “more of a targeted a culture-war jab”) put it, “as long as the best-endowed universities are running billion-dollar tax-free hedge funds while facilitating privilege, elite conformity and self-segregation, a small tax is entirely reasonable; a larger one would be just.”

Republican Representative Tom Reed of upstate New York, however, would prefer that the tax proposal be framed to “force schools with large endowments to spend more of them on tuition assistance” in the face of what he called the “runaway” tuition price issue.

The End of Grad School as We Know It?

Endowments, however, are not the only or even most serious targets of the GOP tax change proposals. Probably the most consequential change would eliminate the exemption from taxation of tuition waivers for graduate students who also teach or perform research for their university while pursuing their advanced degrees. This change (which is in the House-passed bill but not the proposal and passed the Senate Finance Committee) can only be explained as a “culture war” sucker punch on behalf of the GOP’s base of higher education skeptics.

A simple example suffices: a grad student making say $25,000 would be forced into the tax bracket applicable to $75,000 in taxable income rather than one covering $25,000 ― a result that would require that grad student to pay nearly half of cash income as an income tax. Clearly this proposal is designed to put graduate schools at risk of going out of business and graduate students into forced bankruptcy. The bill also eliminates the Lifetime Learning tax credit, which assists many non-traditional college students. Imagine how Silicon Valley employees would feel about having all those famous “in-office” perks and “get-to-office” bus rides taxed as additions to their ordinary income!

(I would cut of course you already have in any event as a clause) In any event, the graduate assistants might have fewer students to teach going forward, because the House tax bill proposes to do away with deductions for low- and middle-income students (earning not more than $80,000 per year) on up to $2500 of interest payments on student loan debt.

The hope of colleges and their grad students rests on the Senate draft legislation, which contains only a more limited form of the endowment tax, and not the elimination of the exemption of tuition waivers and deductions of interest payments on student debt.

Affirmative Action for Preppies

The political purpose of the Republican attack on college economics is brought into sharpest relief by their companion proposal that would allow families (the most upper class financially) that accumulate college expense savings ― with contributions to so-called “Section 529” plans that grow tax-free ― to use those funds for private secondary school tuition. This would be the first time Congress would allow such use to pay tuition at prep schools! Another win for the rich, of course, allowing them to keep their “legacies” warm for the next step up. Of course, the Trump Administration’s new Education Secretary, Betsy DeVos, is a well-known advocate of private alternatives to public education at all levels.

Better to Promote Admissions Equity Than Just Please “The Base”

What it comes down to is this: Elite colleges talk a good game about embracing “need blind” admissions, but the statistics tell a different story. Namely, “wealth blind” is not in their vocabulary! And the Republican Congress is about to become a willing abettor of this institutional favoritism for the wealthy unless it uses its plan to tax endowments to promote a more fair system for assessing applications based on true merit, not on enhancing the value of those very same endowments. Congress must also drop their attack on the core financial structure of graduate education and their proposed new tax subsidies for private high school tuition, which will only tilt admissions more toward the fortunate few who can even begin to afford such bespoke college prep.

The stunning economic parallel of elite college admissions classes with the rise in income inequality in the U.S. at large is wrong for America. Instead of leaning against the decline in social and economic mobility that has long served an essential growth engine for our economy, elite colleges have abandoned their public purpose in favor of their own self-interest. What better way to pursue the oft-stated “pro-growth “agenda of the proposed GOP tax changes than to use such legislative leverage to lead elite colleges to reconsider their values and go back to work for economic and social progress for all Americans.

Terry Connelly is an economic expert and Dean Emeritus of the Edward S. Ageno School of Business at Golden Gate University.

Before You Go

Popular in the Community