By JAY MILLER | June 23, 2016
Consider this scenario. We have a potential buyer and seller and a beneficent institution. The seller has something of value that the buyer wants to purchase but cannot afford without financial assistance. The beneficent institution is willing to provide such assistance if its guidelines for receiving the assistance are met.
So far so good. Yet, the seller keeps increasing the cost of what it offers, perhaps using the assistance that the beneficent institution provides to the buyer as a cover.
Sounds crazy, right? Now let’s give real names to the parties.
The beneficent institution is the government, the seller is a college or university and the buyer is a student or parent of a student who wants to attend the school. In a nutshell, this scenario describes the crazy-quilt situation facing many students applying to college today and/or their parents.
No one can deny the spiraling cost of a college education. According to U.S. News & World Report, from 1995 to 2015, tuition and fees rose 179% at private national universities and even more at public national universities: 226% for out-of-state students and 296% for in-state students.
That the government offers loan assistance and tax breaks for those pursuing a college education hasn’t appeared to curb the net cost at all. Indeed, a strong argument could be made that these provisions simply enable academic institutions to continue their aggressive spending patterns.
This isn’t a new hypothesis. As far back as 1987, then U.S. Education Secretary William Bennett wrote in a New York Times op-ed: “increases in financial aid have enabled college and universities blithely to raise their tuitions, confident that federal loan subsidies would help them cushion the increases.”
Over the years, academicians have published articles (replete with mathematical formulas) arguing over the issue. Nonetheless, in March 2016, the Federal Reserve Bank of New York observed that colleges “more exposed” to changes in federal student aid programs “increased their tuition disproportionately” around these programs. It concluded that loan expansion to students “could have been to their detriment, on net, because of the sizable and off-setting tuition effect.”
In addition to offering financial aid, the government has loaded up the tax laws with provisions ostensibly intended to defray the cost of a college education. How effective the laws have been is debatable.
One of the most popular college funding vehicles is the so-called 529 plan, named after a section of the Internal Revenue Code. Contributions to 529 plans can grow federal and state income tax free, and withdrawals will similarly not be taxed, provided that the withdrawals are used for qualified higher education expenses.
Yet, here, too, questions have been raised as to whether 529 plans hurt a student’s eligibility for financial aid. The short answer is: Maybe. If the funds inside such plans are held by the student’s parents, they could reduce need-based aid by a maximum of 5.64% of the asset’s value.
If the funds are held by a non-custodial parent or by other relatives — say, grandparents — different, and much harsher, rules apply. Once the funds are withdrawn, up to 50% of such amounts could be counted against the student’s aid package. Given that distinction, it becomes very important as to who owns the 529 plans.
In addition to 529 plans, the tax laws allow: 1) deductions for interest on qualified education loans and for qualified education expenses; and 2) various education credits to offset taxes. If you claim a certain credit, you can’t claim the deduction and vice versa. All the tax benefits phase out for families with income above a certain level.
What has been the effect of these tax breaks? At least one study has concluded that, as with financial aid, tax-based student aid is substantially offset by tuition increases at four-year colleges and universities.
At a minimum, there is ambiguity — and, because tax rules are involved in providing financial assistance to students, complexity — on this issue. And those twin masters of deception may provide cover for educators to continue to increase the cost of a college education whenever they can without being held accountable for it.
Finally, there is still another study finding no evidence that allowing students to deduct their tuition (where allowable) affects whether they decide to attend college at all.
To the extent that is correct, it may be due to several reasons. Among them: 1) Where the government gives with one hand, and colleges take away with the other, prospective students don’t actually see a significant reduction in their net college costs; and 2) The rules for qualifying for federal and/or university aid are so convoluted when overlaid with myriad tax rules that applicants throw up their hands in despair.
Some might say this is all conjecture. What isn’t conjecture, however, is that college tuition continues to rise at a rate that greatly exceeds inflation and student loans are becoming more and more onerous. That suggests that all the government attempts to date to curb the cost of a higher education have failed. And that may be because colleges and universities haven’t done nearly enough to rein in costs at their end.
Of course, the marketplace could eventually take care of the problem. The advent of online courses for credit that costs a fraction of attending a brick-and-mortar college portends a day of reckoning. Online courses may be to colleges and universities what Uber and Lyft are to regulated taxis.
How schools react to these developments remains to be seen. Still, there is no good reason to think that increasing federal financial aid and tax breaks, while college costs continue to rise unabated, is the ultimate answer — either for the students or colleges themselves.
Jay Miller of Whitefish Bay is a tax attorney and an adjunct professor at the University of Wisconsin-Milwaukee’s Lubar School of Business. He writes “The Right Balance” blog at JSOnline.com. This column represents his personal opinion.