Elite colleges don’t need such huge tax breaks

If someone you love is heading off to college this fall, you might want to contact a member of Maine’s congressional delegation to pack up some taxpayer dollars to send with him or her.

That is, unless he or she is headed to Princeton, Yale, Stanford or Harvard.

A disturbing report by Nexus Research shows an alarming inequity in what are essentially taxpayer subsidies for private players in the American collegiate system. In some cases, the value of private colleges’ tax-exempt endowments and tax-deductible gifts is greater than the actual subsidies given to public universities.

In 2013, Princeton University’s tax-exempt status generated a whopping $105,000 per student in subsidies, according to the report. Yale’s generated $69,000 per student; Stanford, $63,100; and Harvard, $48,000.

Yet the tax-exempt status of community colleges only generated between $2,000 to $4,000 per student.

An aerial view of Harvard University Campus in 2013. (Andrea Pistolesi | TNS)

An aerial view of Harvard University campus in 2013. (Andrea Pistolesi | TNS)

The authors of the report identify enormous tax-exempt endowments as the heart of the issue.

Victor Fleischer, a law professor at the University of San Diego, and Malcolm Gladwell, an author and New Yorker writer, had already reached the same conclusion.

Prior to the release of the Nexus report, they criticizing Yale for paying $480 million a year to the private equity firms that manage its endowment, while spending only $170 million on financial aid for its students.

Gladwell jokingly tweeted (@gladwell) that he was going to make a donation, “but maybe it makes more sense to send a check directly to a hedge fund of my choice.”

It’s shocking that these schools get such large tax giveaways when you consider the trillions of endowment dollars they’re holding onto.

“Income inequality has left elite endowments heaving with cash,” Fleischer wrote in an Aug. 19 OpEd in The New York Times. He listed a sampling of donations made by leaders in the hedge fund arena, referring to the symbiotic relationship between these private institutions and money managers. Harvard has an endowment of $35 billion; Yale has an endowment of $26 billion.

Fleisher, Gladwell, and the authors of the report refer to the tax-exempt status of these private, high-endowment institutions as a subsidy that enables the huge payouts to money managers, which undermines the intent behind the status.

“We’ve lost sight of the idea that students, not fund managers, should be the primary beneficiary of a university’s endowment. The private equity folks get cash; the students take out loans,” Fleisher wrote in the OpEd.

The authors of the report note that “the majority of taxpayers are poorly served by the tax-exempt status of large college endowments. And providing a public benefit is the purpose of granting tax-exempt status to private not-for-profit institutions.”

The Nexus report is thorough in its research and its recommendations. The authors discuss the pending renewal of the Higher Education Act and President Barack Obama’s proposal to make community colleges tuition-free in his 2016 budget proposal.

Both are opportunities to reform the system, although the Nexus team recommends other improvements to community colleges that are more pressing than lowering costs.

These improvements — things like well-trained guidance counselors and mentors, solutions for students who are unprepared for post-secondary education, and child care — are focused on supporting students who attend in order to raise graduation rates.

The Nexus team recommends financing such improvements through a small tax (0.5 to 2.0 percent) on endowments over $500 million. It recommends the tax be offset by the amount spent on financial aid to encourage these schools to include more middle- and lower-income students. It refers to it as an excise tax that “would be best used solely to help improve the education of the millions of students studying in public regional and community colleges.”

The disparity endowments create is evidenced by the fact that 84 percent of the revenues from the proposed tax “would come from only 20 colleges and universities, which last year educated fewer than 2 percent of all students enrolled in our nation’s two and four year institutions.”

Since more exclusive schools have higher completion rates, it would appear that our nation invests the most in students in affluent schools who are most likely to succeed anyway, while spending the least on the majority of students who are less likely to complete their degree program.

“In many cases average taxpayers are subsidizing the education of students in the better-endowed and more selective schools to a far greater extent than they are supporting the education of their own children, most of whom attend broad-access public institutions,” the authors wrote.

Disparities in funding contribute to disparities in students’ outcomes, and it has been an issue of growing concern for both Republicans and Democrats, the authors assert. Though nothing’s been done to date, they hope Congress addresses the inequity when the Higher Education Act is up for renewal.

I hope members of Congress included the Nexus report in their summer recess reading and have bookmarked the PDF for easy access when the act comes up for debate. The report shows that reforming our post-secondary education system isn’t necessarily that tough an assignment.

You can read it here.

Patricia Callahan

About Patricia Callahan

Trish is a writer who lives in Augusta. She has worked professionally in education and social services.