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The Case for Free Higher Education in America

Free Public Higher Education

To determine the cost of making all public higher education free in America, we first need to look at how much we are currently spending.  In 2008–9, there were 6.4 million full-time-equivalent undergraduate students enrolled in public universities and 4.3 million enrolled in community colleges.1 The following year, the average cost of tuition, room, and board for undergraduates at public four-year institutions was $14,870; at two-year public colleges, it was $7,629.2 If we multiply the number of students in each segment of public higher education by the average total cost, we discover that the cost of making all public universities free would have been $95 billion in 2009–10, with an annual cost of $33 billion for all community colleges—or a total of $128 billion.

While $128 billion seems like a large figure, we need to remember that in 2010, the federal government spent $35 billion on Pell grants and $104 billion on student loans, while the states spent at least $10 billion on financial aid for universities and colleges and another $76 billion for direct support of higher education.3 Furthermore, looking at various state and federal tax breaks and deductions for tuition, it might be possible to make all public higher education free by just using current resources in a more effective manner. And as I have argued throughout this book, the cost for free public higher education could be greatly reduced by lower­ing the spending on administration, athletics, housing, dining, amenities, research, and graduate education.4

It is important to stress that the current tuition rates are inflated because schools increase their sticker price in order to subsidize institu­tional financial aid for low-income students and to provide merit aid for wealthy, high-scoring students. If we eliminated the current aid system and each school instead received a set amount of money for each student from the state and federal governments, we could significantly reduce the cost of making public higher education free in America. Also, by elimi­nating the need for student loans, the government would save billions of dollars by avoiding the current cost of nonpayment of loans, servicing and subsidizing them, and borrowers’ defaults.

Rather than directly funding public higher education institutions, state and federal governments have often relied on tax deductions and credits to support individual students. The tax code has been used to fund higher education because it is easier for Congress to pass a tax break than it is to get funding for a particular program, but what this system has achieved is a tremendous subsidy for upper-middle-class and wealthy families, while lower-income students are forced to take out huge loans to pay for their education. According to a recent study: “From 1999 to 2009, the govern­ment spent $70 billion on tax breaks aimed at subsidizing higher educa­tion for families . . . about 13 percent, or $9.4 billion, of that total went to families making more than $100,000 a year. At the same time, only 11 per­cent went to the neediest families, those making less than $25,000. Fami­lies in the middle—those making between $25,000 and $99,999—received the lion’s share of the aid, taking in slightly more than three-quarters of the benefits.”5

Later the report indicates that more of the funding now goes to the wealthiest Americans: “Nearly 83 percent of the higher education tax benefits distributed from 1999 to 2001 went to families earning less than $75,000 per year. No benefits went to those earning more than $100,000. By contrast, in the last three tax years alone, families making between $100,000 and $180,000 received nearly a quarter of the benefits. The share going to middle-income families sharply declined.”6 This tax system for higher education is a great example of how so many of our governmen­tal policies end up subsidizing the wealthy while poor and middle-class citizens pay more and get less.

In 2010–11, the federal government provided the following tax sub­sidies, breaks, and credits for higher education: student interest rate exemption ($1.4 billion); exclusion from taxation of employer-provided educational assistance ($1.1 billion); exclusion of interest on student-loan bonds ($0.6 billion); exclusion of scholarship and fellowship income ($3.0 billion); exclusion of earnings of qualified tuition programs—savings account programs ($0.6 billion): the HOPE tax credit ($5.4 billion);

Lifetime Learning tax credit ($5.5 billion); parental personal exemption for students age nineteen or over ($3.4 billion); and state prepaid tuition plans ($1.8 billion).7 There’s also the stimulus package’s American Oppor­tunity Tax Credit ($14.4 billion) and the part of the deductibility of chari­table contributions for gifts to educational institutions ($4.9 billion). In total, the federal government lost over $40 billion in tax revenue due to higher education in 2010.

If we made all public higher education free, not only could we do away with this unjust tax system, but we could also stop the movement of public funds to expensive private and for-profit universities and colleges. What most people do not realize is that the use of financial aid and tax subsidies for individual students has resulted in a system where much of the govern­mental support for higher education ends up going to private institutions that cater to the super-rich or to low-achieving for-profit schools. In fact, during a 2012 congressional investigation of for-profit colleges, it was dis­covered that up to a quarter of all federal Pell grant money is now going to these corporate schools, which charge a high tuition and graduate very few students.8 What this investigation did not uncover, however, was the total amount of state and federal tax breaks that go to support for-profit institutions.

There has been recent research on how much the federal government has spent on tax deductions and credits for higher education, but as far as I can tell, no one has examined how much states are spending on these tax breaks for colleges and universities. However, it is safe to estimate that the total subsidy by the states is at least the same as the total federal level of support. This is because many of the states have tax deductions that exceed the national tax breaks for tuition, and most states have tax-advantaged 529 college savings plans.9 For example, in New York State, the tuition tax credit goes up to $5,000 per year per student, and the tuition tax deduction is $10,000 for each eligible student.10 It is important to note that tax deductions favor the wealthy because many low-income families pay little if any federal income taxes.

One of the great secrets in higher education funding is the role played by 529 college savings plans: “In 2000 a total of $2.6 billion was invested in 529 plans. This grew to $14 billion in 2001 and more than $92 billion in mid-2006. The student aid resource Finaid.org projects that total investment

in 529 plans will reach $175 billion to $250 billion by 2010, with a total of 10 million to 15 million accounts opened.”11 Not only do state governments lose billions of dollars in tax revenue each year due to these 529 plans, but the wealthy have figured out how to use these plans as all-purpose tax shelters. For example, if a couple puts $26,000 a year for each child into an account and decides later to use the money to buy a yacht instead, only the invest­ment gains will be assessed a 10 percent penalty and taxed as income. Also, contributions made to a 529 are removed from a family’s estate, and 529 plan owners can name a successor to the account when they die, which enables the plans to shelter money for multiple generations.

One way that wealthy people use these accounts to avoid paying taxes is by giving each other gifts. Gift taxes can be avoided if contributions into the plans over a five-year period do not exceed $65,000 for single tax­payers and $130,000 for married couples. Clearly, it is only the wealthiest Americans who are able to profit from this type of plan. In fact, according to a Department of the Treasury report, “Currently there are effectively no limits on Section 529 account balances. Because 43 states offer plans open to residents in other states, a beneficiary can have accounts in as many as 44 states, each state with a limit exceeding $224,465.”12 It is obvious that only wealthy people can afford to save and invest this type of money. More­over, the same study of 529 plans details how the richest families are using these plans for tax shelters:

Data from the 2007 Survey of Consumer Finance found that among households in the top five percent of income—average income, $548,000 per year—those with education savings plans held an average balance of $106,250. That’s more than triple the average for households in the 90th–95th percentile, more than ten times the balance for the 50th–75th percentile, etc. Second, among house­holds in Kansas who took a state income tax deduction for 529 contributions, the average deduction for households making over $250,000 per year was $10,323. For those in the $100K–$250K range it was less than $5,000, for everyone else, less than $3,000. As this federal government report indicates, 529 plans have now become an effective way to subsidize wealthy people; meanwhile, states are being forced to cut their higher education budgets due to their lack of tax revenue.

If we took all of the state and federal money that is lost each year due to these tax credits, deductions, and shelters, we could make public higher education free for millions of Americans. However, the tax code is rigged to provide aid to wealthy people, and one side effect of this system is that private universities are able to charge higher tuition because they know that the parents of many of the incoming students will pay only a fraction of the full price thanks to merit aid, institutional aid, and tax breaks. Fur­thermore, once the private universities increase their tuition, they raise the bar for everyone else, making tuition increases at public universities appear more tolerable. And since the top public universities compete with the top private universities for star faculty and administrators, the more the private institutions are able to increase their tuition, the more the public ones have to pay their star faculty.

To contain rising tuition at private universities and the subsidization of high-cost, low-value for-profit schools, the government needs to move away from the current emphasis on tax breaks and tax shelters, which can be accomplished in part by making all public higher education free. Replacing the current mix of financial aid, institutional aid, tax subsidies, and grants with direct funding for public institutions would give the gov­ernment a way to control costs at both public and private universities and colleges. The federal government could also require states to maintain their funding for public institutions in return for increased federal sup­port, and once we stabilize funding and make higher education free, there will be no need for so many students and institutions to go into debt.

Notes

1. National Center for Education Statistics, “Integrated Postsecondary Education Data System (IPEDS),” 2008, 2009, 2008–09 Winter 2009–10, Spring 2009, and Fall 2009 (http://nces.ed.gov/pubs2011/2011015_3a.pdf).

2. National Center for Education Statistics, “Digest of Education Statistics,” Table 345 (http://nces.ed.gov/fastfacts/display.asp?id=76).

3. For statistics on Pell grants, see Baum and McPherson,“Pell Grants vs. Tuition Tax Credits.” For state spending on higher education, see Lederman, “State Sup­port Slumps Again.” For financial aid for universities and colleges, see “State Support for Student Aid 2009–10.” For federal support for student loans, see US Department of Education. “Student Loans Overview.”

4. In the case of funding graduate students, I propose that we stop the current model of forcing graduate students to teach undergraduate courses and sec­tions and that each graduate student be fully supported by a mixture of state and federal funds. This would require reducing the number of graduate stu­dents, but it would increase the number who graduate in a timely fashion. Due to their need to teach while they are pursing their degrees, many graduate stu­dents in the humanities and the social sciences never get their degrees, and many of the ones who do take ten years to earn their doctorates. Moreover, after receiving their PhDs, the majority of the students in the humanities and the social sciences end up either unemployed or underemployed. If we used current federal research funds and state support and limited enrollments, we could make all public graduate education free.

5. Burd “Moving on Up.”

6. Ibid.

7. The federal tax breaks for higher education are itemized at Subsidy Scope, “Tax Expenditures in the Education Sector.”

8. For statistics on how many Pell grants for-profits colleges are using, see Fuller, “For-Profits Hit Hardest by End of Year-Round Pell Grant Program.”

9. For a list of many of the tax breaks for higher education in individual states, see FinAid, “State Tax Deductions for 529 Contributions.”

10. For the New York tuition tax deduction information, see New York State Higher Education Services Corporation, “NYS College Tuition Tax Credit/Deduction.”

11. Wikinvest, “529 Plan.” For more on 529 plans, see FinAid[0], “Section 529 Plans.”

12. US Department of the Treasury. “An Analysis of Section 529 College Savings and Prepaid Tuition Plans.”