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House Ways and Means Subcommittee Holds Hearing on Higher Ed Costs and Tax Policy

On October 7, the U.S. House of Representatives Committee on Ways and Means Subcommittee on Oversight held a hearing on the role of federal tax policy in controlling or exacerbating the cost of higher education. The purpose of the hearing, as Rep. Peter Roskam (R-IL) stated in his opening remarks, was to “examine whether federal tax policies for colleges and universities are best serving students and families” and how changes to these policies may increase college affordability. The subcommittee focused on four factors possibly impacting tuition: federal student aid; the manner in which schools spend their money; executive compensation; and endowments.

Five witnesses testified: Dr. David Lucca, a research officer at the Federal Reserve Bank of New York; Dr. Richard Vedder, a distinguished professor of economics at Ohio University and director of the Center for College Affordability; Brian Galle, a Georgetown Law School professor; MaryFrances McCourt, senior vice president and chief financial officer at Indiana University; and Terry Hartle, senior vice president at the American Council on Education.

The subcommittee’s discussion began and centered on whether increases in federal student financial aid causes increases in tuition prices. The theory — commonly referred to as the Bennett Hypothesis — is that by providing students with additional economic purchasing power, federal financial aid allows colleges and universities to charge higher tuition. Lucca discussed his findings in a report he coauthored, which supported the hypothesis and demonstrated a causal link between tuition increases and federal financial aid. He cautioned, however, that the study is “not a comprehensive explanation of tuition trends over longer periods of time and [is] not informative about other, possibly more important factors in the rise of tuition.” Two of these “important factors” were elaborated on by Hartle and McCourt, who cited the dramatic drop in state support for higher education and the nature of higher education as a labor intensive industry as the main drivers of recent tuition spikes.

Another large part of the discussion focused on how colleges and universities utilize their endowments and the salaries their top administrators and coaches earn. Many members of the subcommittee questioned whether endowments should be taxed and whether certain types of donations should remain tax deductible. Vedder shared findings of his research and stated that “there is no statistically significant relationship between endowment size and tuition fees” and that “less than 20 cents out of every dollar of endowment income” goes towards lowering college costs for students — one of the reasons Galle, in his testimony, called for Congress to reconsider the tax rules governing college endowments. Defending college endowments, McCourt, who has overseen an actual decrease in student debt at Indiana University over the past three years, credited philanthropy as a “major factor in IU’s ability to increase accessibility … over the past decade.”

Roskam concluded the hearing stating that there is “a lot of work to do” given the complexity of the issues at stake and the variety of the testimonies presented.

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