The recent college admissions scandal, in which several celebrities were caught bribing college officials to guarantee their children’s acceptance, has heightened the debate about economic opportunity in America. Because while what Lori Loughlin, Felicity Huffman, and others did is illegal, massive donations to enhance a child’s admission prospects is perfectly legal.
In response to concerns about the role of college admissions in social stratification, Senator Ron Wyden (D-Oregon) proposed removing the deductibility of charitable contributions to colleges before or during a taxpayer’s child attendance at an institution. While that particular approach has problems, it’s worth considering some policies to reduce inequities in higher education.
Sen. Wyden’s proposal sounds good, in theory. There’s a strong debate about the charitable deduction broadly, and whether or not it incentivizes charitable donations. However, when taxpayers make donations to colleges in order to increase their kids’ chances of getting in, that’s not motivated by a desire to take advantage of the deduction. As such, stopping the deductibility of those donations would not stop the practice of currying favor through donations to colleges. That said, the administration of this change (how would the IRS know whether or not a donation was made in anticipation of a child attending a specific college before the child matriculated?) would be challenging at best.
A bolder approach would be to get rid of the deductibility of all donations to institutions of higher education. A lot of donations to colleges, whether to create a scholarship, fund research, or build a new building or dormitory with one’s name on it, are legacy projects, designed to leave a positive, lasting personal mark on an institution. Those donations do fund good work, but are not likely to be that responsive to taxation. As such, taxing them would be an efficient way to raise revenue without leading to a decline in donations that fund education. This would raise $61.6 billion over the next decade.
An alternative path would be taxing college endowments. The Tax Cuts and Jobs Act included a provision that placed a new 1.4 percent tax on income earned on endowments larger than $500,000 per student. Many large endowments, such as Harvard University’s, have become extremely large, and have started chasing more risky investments. As a result, they have started to behave like hedge funds with universities attached, spending more on investment advisors than on tuition assistance, all the while taking advantage of their tax-free status. As such, putting a tax on the investment income of these endowments, albeit one still lower than the tax on most investment income, would help curb that behavior, make the tax code more fair, and encourage the universities to refocus on education. Some have suggested building an incentive into the endowments tax for universities to use their resources to lower tuition.
Tax changes aren’t the only way to approach making college more accessible. It would be worthwhile to take a look at government spending on colleges as well. In 1987, Secretary of Education William Bennett made what is known as the Bennett hypothesis: that subsidized student loan rates would lead to higher college tuition, and not more affordable higher education. Bennett’s hypothesis has been largely vindicated: a comprehensive study from the New York Fed found that the 60 percent of the benefits of student loan subsidies go to universities in the form of higher tuition and only 40 percent of the benefits go to students.
There are some better, smarter approaches to higher education policy that would make learning more accessible and help the federal budget’s health. One would be to focus aid on programs like Pell Grants, for those who would otherwise be priced out of higher education. Another would be to encourage technical and community college education, along with quicker paths to graduation, which would help tamp down the inflated demand for four-year college degrees. Lastly, following the example of Mitch Daniels at Purdue University and curbing growth in administrative spending would help ameliorate the affordability crisis.