Lawmakers Eye Endowment Tax Status

WASHINGTON -- The House Ways and Means Oversight subcommittee hearing Tuesday was nominally about the tax-exempt status of college endowments. But much of the discussion focused on college affordability -- a broader issue clearly on the minds of both Republicans and Democrats on the panel.

It was unclear what that means in terms of a legislative response from the Ways and Means Committee, which deals with taxation issues. But the subcommittee’s Republican members said they were interested in greater transparency from higher ed institutions -- on endowment spending as well as on what they consider wasteful spending on campus amenities, athletic salaries, administrative costs and other noneducation uses. Endowments in particular have come under scrutiny because lawmakers want to know whether colleges are using enough of those funds to defray the cost of students' education.

“When I go home to Illinois, parents tell me all the time about how they are struggling to put their kids through college and how they worry about their children’s future,” said Representative Peter Roskam, an Illinois Republican and chairman of the oversight subcommittee.

Although the universities with the largest endowments were not represented among the hearing’s witnesses, those institutions were clearly on the minds of subcommittee members. Roskam said tax policy benefits those institutions that can receive tax-free donations from alumni and other supporters, who themselves get a tax break from the contributions. Ways and Means isn’t typically one of the congressional committees that dominates higher ed policy, but as the chief tax-writing committee in the House, it could shape policy on university endowments. (It has also played a role in the past in creating college tax credits and other tax breaks.)

A small number of institutions are highly visible for the massive endowments they’ve accumulated, said Sandy Baum, a senior fellow at the Urban Institute and an expert on higher education finance.

“When we talk about endowments, there are a few institutions that have a lot of resources,” she said. “The vast majority of higher education institutions do not have those resources.”

Mark Schneider, vice president at American Institutes for Research, told the committee members that tax exemptions for endowment donations are fueling inequality in the sector.

“The size of the public subsidy increases with the size of the endowment,” he said.

Schneider proposed greater transparency through changes to IRS 990 forms. More transparency about colleges' income through those forms could lead state and local governments to revisit taxation of private colleges' endowments. And the group argues for taxing the largest endowments at elite universities.

The latter proposals would receive stringent objections from organizations that represent private nonprofit universities, including elite Ivy League universities such Harvard and Princeton Universities. And the suggestion that Congress should tax the largest university endowments received few endorsements from subcommittee members.

Berea College, in Eastern Kentucky, boasts an endowment of more than $1 billion, which it uses to help keep the price paid by students at zero. Its vice president for finance, Jeff Amburgey, said that the college focuses on living within its means to manage administrative costs, but that its highly unusual financial model is a fragile one. Instead of using tuition as a funding source, the college uses a mix of endowment income, federal and state aid, and donor contributions. Students are also expected to work at least 10 hours a week on campus.

Where Berea, one of a handful of work colleges in the country, has kept tuition low by cutting costs, Ways and Means members took issue with what they see as lavish spending at larger public universities. Representative Tom Reed, a New York Republican, cited expensive buyouts for fired football coaches. In May, he sponsored the most recent legislation to require colleges with the largest endowments to spend more on student aid or risk penalties.

Representative Jim Renacci, an Ohio Republican, said universities need to do more to make sure students aren’t saddled with debt they can’t pay back upon graduation.

“I’d love to figure out a way to shine a bright line on noneducation uses” of colleges' money, he said.

While such spending is a frequent target for congressional criticism, the hearing also highlighted facts about student debt not always understood by elected officials. Baum told members that those with low student debt loads have the highest default rates on student loans.

“If you’re working at minimum wage and you went to college for a few months, paying back any student loan can be difficult,” she said.

Sheila Bair, president of Washington College and the former chair of the Federal Deposit Insurance Corporation, said most of the college's major gifts last year went to scholarships. She said funding from gifts goes to both student aid and brick-and-mortar purposes, "but we always need more for scholarships."

She warned members that she sees parallels between student loan debt and the subprime mortgage crisis, which she played a prominent role in tackling as FDIC chair.

"I see some things going on in servicing of student loans that makes the hair stand up on my neck," Bair said.

She urged the development of a pilot program for student loan borrowers to opt into income-sharing agreements -- a vehicle resembling federal income-based repayment plans that would not require borrowers to pay back loans if they don't make adequate earnings after graduating.

Steven Bloom, director of government relations at the American Council on Education, said in an interview that he thought the subcommittee came away with a greater appreciation of the complexity of higher ed policy.

“The government has an enormous investment in the higher ed sector, and we can understand why they would want to know more about how it works,” he said.