TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, May 29, 2014

Rising College Costs, Politics, and Tax Reform

Wall Street Journal, Efforts to Curb College Costs Face Resistance:

WSJObama administration initiatives intended to help restrain soaring college costs are facing resistance from schools and from a bipartisan bloc of lawmakers looking to protect institutions in their districts.

Groups representing colleges and universities this week formally opposed the administration's plan to more tightly oversee programs that officials say leave students in steep debt but with weak job prospects. The new rules cover for-profit schools along with career-training programs—those that lead to certificates, but not degrees, in a given field, such as mechanics or cosmetology—at public schools and nonprofits. A bipartisan group in Congress is seeking ways to kill the plan, which the administration wants to have in place by November.

At the same time, the administration is planning to delay the rollout of its signature higher-education initiative: a college-rating system that would score institutions based on their affordability and quality. Education Department officials, hoping to have that proposal in place by late 2015, said they need more time to draft the rules after criticism from school officials unnerved by the prospect of federal officials' making value judgments on a school's worth.

Center for American Progress, Harnessing the Tax Code to Promote College Affordability: Options for Reform:

ChartThe United States tax code is full of provisions designed to encourage or reward specific behaviors, such as owning a home or saving for retirement. Tax benefits for higher education are no exception: Contributions to some college savings accounts grow tax-free, college tuition is often tax deductible, and some student-loan borrowers are able to deduct the interest paid on their student loans just as they would the interest paid on their mortgage.

These higher education tax provisions have implications for access, affordability, and equity. Higher-income families benefit from tax-free savings toward future college costs through Section 529 college savings plans. The tax code, however, rewards middle-class families for savings less, because tax benefits are much smaller for those in lower tax brackets, and these families largely do not participate.

While in school, parents and students face several competing tax incentives—such as the American Opportunity Tax Credit, Lifetime Learning Credit, and tuition and fees deduction—and an estimated 1.7 million tax filers each year do not make the optimal choices. In addition, the tax benefits available on student-loan interest help some struggling borrowers, but not others, because some earn too little to truly benefit.

Given that the federal budget contains more than $1 trillion in annual tax expenditures—government spending delivered through tax breaks or exceptions—it is no surprise that these expenditures face increased scrutiny. As tuition costs and student-loan debt have both increased dramatically, tax provisions should change to ensure the best possible outcomes for parents, students, and graduates.

Several recent proposals have argued for major changes to the tax code for higher education, including House Ways and Means Committee Chairman Dave Camp (R-MI)’s vision of tax reform released in February. Rep. Camp’s proposal would preserve and slightly expand the American Opportunity Tax Credit, which provides a refundable credit to low-income college students. It would also limit the use of retirement funds to pay for higher education, and tax the growth of large university endowments, among other provisions.

Unlike these broad proposals, this brief does not propose a comprehensive reform of the higher education tax system. Such an effort would overlap with many provisions and principles that exist throughout the tax code, such as retirement savings that can also be used for education, the tax advantages of charitable contributions, and the deduction of interest. Instead, this brief presents a menu of potential ideas for making each stage—before enrollment, during enrollment, and post-enrollment—more effective and equitable in terms of directing tax incentives to those who would benefit most from them.

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The universities' position is roughly equivalent to that of the First Estate in revolutionary France--"we do good things and should therefore be exempt from taxation and public scrutiny"--and has about the same chance of survival

Posted by: michael livingston | May 30, 2014 4:55:52 AM

Michael Livingston is correct. Universities have burned through so much goodwill that even liberal Obama does not trust them.

Posted by: JM | May 30, 2014 7:32:49 AM

"The universities' position is roughly equivalent to that of the First Estate in revolutionary France--"we do good things and should therefore be exempt from taxation and public scrutiny"--and has about the same chance of survival"

I'd argue that the so-called promise of higher ed is too strongly ingrained in the American public for politicians to *punish* them with taxation, or in the current vernacular, Commie wealth redistribution!!! Anyways, our current president has conflated "the normative return of college" with "the superlative returns of Columbia and HLS," so don't expect him to do much. At times, he rather seems to merely repeat the canned mission statements of some of our more venal, student lender-funded higher education think tanks.

Posted by: Unemployed Northeastern | May 30, 2014 10:05:27 AM