Republicans Are Right to Reform Higher Ed's Tax Breaks
Republican plans to shake up how the tax code treats higher education have ruffled a great many feathers, with some arguing that Republicans would harm students by taking away needed assistance. On the contrary, the proposed Republican changes would restore much-needed transparency and address a system that benefits a higher-education complex at the expense of students and taxpayers.
Many of the concerns about the GOP tax plan center on the elimination of two tax loopholes. One allows universities to provide tuition waivers to graduate students so long as they either teach or conduct research. In other words, these graduate students are receiving a significant financial benefit (sometimes worth upwards of $50,000) that is contingent on employment. For everyone else, such an arrangement would be considered taxable wage income, but this loophole allows graduate students to face a different set of rules.
The other loophole set for repeal under the tax reform plan is the educational assistance deduction. Currently, the tax code allows employers and employees each to deduct $5,250 of tuition assistance—this deduction can go over this limit if the tuition assistance qualifies as a workplace fringe benefit.
Elimination of fringe benefits has long been a bipartisan goal of policymakers. Another example is the exclusion of employer-sponsored health insurance, a policy with its roots in attempts to escape wage ceilings during World War II. The result is a policy that economists on the left and right agree is costly and distortionary.
Furthermore, some studies have found that corporations receive back more value than the cost of tuition assistance itself. Given the effectiveness and financial logic of employer-provided tuition assistance, there is little need for taxpayers to subsidize programs that make financial sense on their own.
These provisions were instituted for the purposes of helping students pay for higher education expenses, but they have instead had the effect of contributing to a system that distorts the cost of higher education. Tuition costs have spiked, and a study by the Federal Reserve Bank of New York found that increased federal dollars in education and rising tuition costs are directly connected. Federal tax treatment of higher education seems to be a likely culprit as a contributor to this distortion in tuition prices.
Reform would also address imbalances in who receives the benefits of federal tuition assistance programs. While most would agree that low-income undergraduate students are most in need of assistance, most of the benefits of federal policy flow to better-off graduate students.
Graduate-only borrowers, with a median debt approaching $40,000, have a five-year default rate of just five percent and generally go on to earn the highest incomes, but federal education policy tends to favor them disproportionately. Several debt-forgiveness programs such as Income-Based Repayment and Public Service Loan Forgiveness primarily benefit high-debt graduate students. Meanwhile, the highest default rates on federal student loans actually occur among students with relatively small amounts of debt attending public two-year or four-year proprietary colleges.
Reforming the system to be less geared toward students that don’t need federal help makes perfect sense. And the changes are not occurring in a vacuum; rather, they’re part of a broader package that lowers rates and simplifies the code for all taxpayers. The Tax Foundation estimates that the Tax Cuts and Jobs Act would increase after-tax incomes by nearly three percent in tax year 2018.
Untangling federal education policy from its current morass of competing tax credits and deductions will take some time, but the Republican plan is a good beginning. Rather than an attack on higher education, it is an attempt to correct inefficient and distortive measures long protected by an entrenched industry which benefits from them. Republicans are proving that they are serious about pursuing meaningful reform, even as lobbyists come at them from all sides.
Andrew Wilford is an Associate Policy Analyst with the National Taxpayers Union Foundation. Follow him on Twitter @PolicyWilford.