Lawmakers are eyeing the huge endowments of universities such as Harvard, Yale and Stanford as a resource to be tapped to pay for students’ college costs.
Republicans are working on legislation, meant to be bipartisan, that would force the richest colleges to spend more of their investment income on student aid or face higher taxes.
Threatening new taxes is not a typical GOP move, but the policy would provide a way to address the politically urgent problem of rising college costs without new government spending.
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“It’s just a matter of making sure that those charitable dollars … go to the real crisis,” said Rep. Tom Reed, a New York Republican who is finishing the legislation. “And the crisis upon us is allowing working families in particular to send their kids to colleges and universities, because today the costs are just so exorbitant.”
Reed said he was close to finishing the legislation and that he was confident of bipartisan support.
The idea of curbing the tax benefits for endowment investment income or donations to rich schools is not entirely new.
In the tax reform draft he submitted early last year, former House Ways and Means Chairman Dave Camp included a 1 percent excise tax on large endowments.
Sen. Chuck Grassley, R-Iowa, the former chairman of the Senate Finance Committee, also has suggested that colleges might be required to spend more of their endowment money on lowering costs for students.
The current push, however, comes as college endowments are bigger and more unequally distributed than ever after the financial crisis, and as student loan debt has topped $1.2 trillion amid rising defaults.
About 90 schools have endowments exceeding $1 billion, the House Ways and Means Committee noted at a recent hearing on college costs.
Meanwhile, the average private school spends less than 5 percent of its net investment assets each year, according to the National Association of College & University Business Officers.
Given those statistics, it is no surprise that lawmakers are taking a look at endowments such as Harvard’s, which totaled more than $36 billion at the end of the 2014 fiscal year, as reported by U.S. News and World Report.
Reed said that, while Harvard charges roughly $270 million in total tuition each year, it has averaged more than $3 billion in investment income annually in recent years. The lawmaker then questioned why donations to the endowment are getting a tax preference when the benefits are not going to tuition.
He said he has received “a tremendous amount of feedback” from schools, much of it negative. “I understand their concerns. I understand how this changes how they use their endowment dollars,” he said, “but the bottom line is, I’m about getting kids into school.”
Steven Bloom, director of federal relations at the American Council of Education, a group representing higher education institutions, said the move to change the tax treatment of schools “misunderstands the way in which higher education endowments work” and flows from the “flawed belief that they work like a savings account or a checking account.”
Most large endowments, he noted, are made up of thousands of funds, many of which are tied to specific goals required by donors. Universities also are bound to maximize their financial capabilities and balance current needs against the potential needs of the future.
Bloom also pointed to the example of Harvard: In terms of actual prices paid, Harvard is among the cheapest schools to attend, and is free for students whose families earn less than $65,000 annually. That is possible because of the school’s large endowment, he said. “Those schools are already doing an enormous amount with their endowments.”
Although schools with massive endowments will resist legislation aimed at their resources, there will be support for such measures in parts of the higher education system.
For-profit schools would welcome new rules forcing payouts from endowments, said Noah Smith, a representative for the trade group Association of Private Sector College and Universities.
Students at community colleges and for-profit schools need aid to finish school and get a degree that will help them, he said, while “anybody that gets into Harvard or Stanford or Michigan is going to do well in life, it’s just a question of how well they’re going to do.”
Bolstering his case is a recent study that compared the subsidies received by public schools to the implicit tax subsidies private schools with big endowments receive.
The study, conducted by the Nexus Research & Policy Center in April, found that, for example, Harvard receives the equivalent of $48,000 in subsidies per full-time student, when tax preferences its endowments receive are taken into account. By comparison, the University of Massachusetts, Amherst receives $9,900 in subsidies, while nearby Massasoit Community College receives $4,100.
“So much of the money is really being paid for by the taxpayer,” said one of the study’s authors, Mark Schneider, referring to the tax preferences for donations and investment income. “It should be put back into circulation and redirected toward other students.”
Brian Galle, a Georgetown law professor and expert on taxation and nonprofits, suggested that college presidents might even privately favor a rule that limited tax preferences for donations that came with specific strings attached.
Galle, however, downplayed the significance of new tax rules for endowments in addressing spiking college costs. “We shouldn’t think it is a panacea,” he said. “It’s a pretty small piece of affordability.”
