Business Ethos Blog

The Mielke Way: The Right Thing to Do – Is High Ed Next?

Dr. David Mielke, Retired Dean of the College of Business at Eastern Michigan University

Congress is considering and hopes to pass the first major tax reform in 30 years.  There is already discussion that the next major reform will be welfare.  But is Higher Ed really the next target for reform?  The House is already considering a bill to update the Higher Education Act of 1965 by overhauling student loan programs, mandating more transparency on graduates’ earnings and jettisoning much of the regulatory framework on profit colleges.  The Senate is expected to have an initial version in 2018.  The tax reform bill already has provisions that would affect higher ed benefits by boosting a popular tax break, eliminating 2 others, repealing a deduction for student loan interest and tuition and taxing large endowments of private universities.  Is it time to reform the Higher Ed Act passed over 50 years ago?  Should tax reform change or eliminate some of the tax subsidies for higher ed?  Have all these subsidies slowed colleges and universities from increasing expenses and tuition?  Should private college endowments be taxed?  What is the “Right Thing to do?”  Let’s look at some issues:

  1. The House bill, Promoting Real Opportunity, Success and Prosperity Through Education Reform Act, aims to fundamentally reorient the college marketplace by focusing on student outcomes and to ensure students don’t just enroll in school, but actually graduate with skills that the labor market is seeking.
  2. One provision would require the publication of graduates’ salaries 5 and 10 years after school, breaking down data to the academic program level rather than just for an entire college.
  3. The bill would limit borrowing through Grad Plus Loans to $28,500 from an unlimited amount right now.  Caps would also be placed on undergraduate loans.
  4. The loan forgiveness program for individuals who take public service jobs would be eliminated and the income based repayment offerings would be overhauled.  Currently, these individuals make payments for 10 years and then have the loan balances forgiven.
  5. It would preserve the income driven repayment option, which ties borrowers’ monthly bills to their earnings, but would eliminate the ability of borrowers’ to have balances forgiven after 20 or 25 years.  Borrowers’ would pay 15% of their discretionary income for as long as it took to pay off their balances.
  6. The bill also proposes that colleges and universities have some skin in the game.  That is, schools would have to pay back some portion of federal loans if the student didn’t.
  7. The bill would also expand apprenticeships and competency based education, along with more learn and earn opportunities which will benefit community colleges.  Community colleges would also get more funding to team with the private sector and create apprenticeships.
  8. The IRS Code, currently, contains about a dozen individual tax subsidies for higher education.  In addition, there are low interest federal loans available at 4.45% for undergrads and similar rates for graduate students.  Overall, the tax reform bill would provide about $65 billion less in tax benefits for post-secondary students and borrowers over the next decade, according to the Joint Committee on Taxation.
  9. The bill would increase aid available under the American Opportunity Tax Credit.  Currently, students can collect a credit of up to $2,500, or an annual tax refund of $1,000 for a maximum of 4 years while enrolled in a certificate or degree program.  The bill would add a fifth year credit up to $1,250.
  10. The Hope Scholarship Credit and Lifetime Learning Credit would be eliminated.  The Lifetime Credit provides up to $2,000 a year for graduate students with no limit on the number of years.
  11. The bill would eliminate the tax deduction for interest on student loans, currently up to $2,500 a year for individuals earning up to $65,000.
  12. The plan will also not restore a recently expired provision that allowed taxpayers to deduct up to $4,000 a year in tuition and related expenses, if they earned less than $65,000.
  13. The bill would also kill tuition waivers that colleges often use to pay grad students in kind.
  14. The House bill also slaps a 1.4% excise tax on investment income of private college endowments that exceed $250,000 a student and have a minimum of 500 students.

 

Have all of the subsidies and tax breaks made college more affordable?  Over the past decade, tuition has risen at an annual inflation adjusted 2.4% at private and 3.5% at public 4 year colleges.  Have the rising college costs been the main reason student debt has doubled since 2009 to $1.3 trillion?  Have graduation rates improved?  Have students taken longer to finish programs, in part because taxpayers are footing much of the tab?  Is one of the reasons for the labor participation rate among Americans age 16-24 dropping 5.4 percentage points over the past decade because they are taking longer to graduate?  Is it long overdo to reform Higher Ed?  Is it time to reform the tax subsidies benefiting Higher Ed?  What is the “Right Thing to do?”  In general, I think many people are concerned about the rising expense of higher education and many increasingly question its value.  Others cite that despite a steady rise in the share of high school graduates enrolling in college a skills gap has left more than 6 million jobs unfilled, a significant drag of the economy, according to the Labor Department.  Others question the overall poor graduation rates and the long time it takes to complete a program—for most a 4 year degree stretches out to 6 years.  The student loan debt is unacceptable at $1.3 trillion with default rates increasing and lack of accountability for those who do borrow accelerating due to a variety of loan forgiveness programs.  It is long overdo to reform Higher Ed.  Federal loans should be capped and loan forgiveness programs curtailed.  If you borrow, plan to repay.  More transparency is needed to provide students with information to make better choices about programs that provide the salaries sufficient to repay those loans.  The tax reform bill should eliminate the interest deduction for student loans and the deduction for college expenses–other than the mortgage interest deduction, what other borrowing or personal expenditures receive a tax break?  If people are concerned that this will drive up the cost of a college education, maybe there will be an incentive for students to avoid 2 years of expenses by actually graduating in 4 years–not to mention the additional wages for those 2 years that they could use to pay off those loans.  The American economy and a variety of industries have gone through changes and continue to change.  It seems the only 2 industries that haven’t changed are government and higher education.  It is not really a question, “Higher Ed is next!”