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Senate Hearing Examines Education Tax Benefits

December 5, 2006

The December 5 hearing of the Senate Finance Committee explored options for simplification of existing federal tax benefits and financial aid to enhance access to higher education for low-income students. Convened by Chairman Chuck Grassley (R-IA), the hearing was entitled:  Report Card and Tax Exemptions and Incentives for Higher Education:  Pass, Fail, or Need Improvement?

Senator Grassley's introductory remarks touched on the rapid growth of tuition in recent years, despite some institutions' billion dollar endowments.  He questioned whether the many tax incentives benefiting colleges and universities (education tax credits, tuition remission for children of faculty and staff) had a role in tuition hikes. He asked the panel of witnesses to consider potential incentives for institutions to control tuition.  He challenged them to consider reform and simplification of the federal education tax benefits (Hope and Lifetime Learning credits and the above-the-line tuition deduction).

Cautioning against sweeping reforms aimed at a relatively few elite institutions, Patricia McGuire, president of Trinity University, a small, independent university serving a largely urban, minority population, stated that "Harvard would barely feel the pin prick of a regulatory policy which could put us out of business."

Most of the hearing focused on possible tax benefits to help increase the neediest students' access to higher education.  In addition to the discussion of existing higher education tax deduction, credits, and savings plan programs--all geared toward middle class taxpayers--attention was paid to the confusion around and lack of uniformity of the various federal tax benefits. The complexity of the federal student aid application forms, which serve as another barrier to access for low income students, was also noted. 

Dr. Susan M. Dynarski of the Kennedy School of Government at Harvard University proposed combining the Pell Grant with the various federal education tax benefits into a single, refundable, "super credit."  Dr. Bridget Terry Long, associate professor of education and economics at Harvard, and McGuire noted that such a streamlined simplification would be a positive change, but emphasized that the timing of the available funds would need to coincide with due dates of tuition payments, as is the case with disbursement of Title IV aid.  Dr. Dynarski suggested that, while IRS would be best positioned to determine eligibility, it made sense for the Department of Education to deliver the funds. 

Explaining the difference between "list price" and "net tuition" amounts, Dr. Long stated that, along with tuition increases, institutional aid has grown in recent years.  According to Long, there is no data to indicate institutions have increased tuition in response to the emergence of federal tax breaks for families.  She noted that some community colleges may have in fact reduced tuition rates in response to the Hope and Lifetime Learning credits.   Long's testimony focused on the abundance of research highlighting the large unmet needs of lower income and minority students in terms of access to college.

Continuing to emphasize access, Dr. James J. Duderstadt, president emeritus and professsor of science and engineering at the University of Michigan, reiterated the findings of the Spellings Commission that federal financial aid programs fail to adequately address the needs of lower income families and students.   

McGuire pointed out that among small, independent colleges, institutional aid rates average around 40 percent of net tuition price.  In response to concerns about bloated endowments, McGuire noted the exceedingly small proportion of institutions with the largest endowments (two or three percent of all institutions), and emphasized that more than half of all private institution endowments fall below the $17 million mark.  She also explained how the strength of schools' endowments is critical to credit ratings that enable them to borrow money at favorable rates.  

Ranking Committee member Senator Max Baucus (D-MT), who will chair the Finance Committee in the new Congress, concluded the hearing by asking the witnesses for further analysis and comment on a simplified single education tax credit.   

Full video coverage of the hearing is available from the Senate Finance Committee Web site.