GOP bills target college endowments, aim to lower cost

New legislation in Washington seeks to levy higher taxes on university endowments, an effort sponsoring lawmakers say could lower the cost of tuition and student debt. But the national association representing college investment and finance professionals says the measures could backfire, and end up reducing dollars available for student aid.

"The real issue with student debt today is that the cost of college tuition has skyrocketed, yet the value of a college diploma has plummeted," said Sen. Tom Cotton, R-Ark., in a statement Sept. 20 introducing the Student Loan Reform Act of 2022, one of two bills he has introduced that take aim at university endowments in the form of higher taxes.

The first bill, the American Workforce Act, introduced Sept. 8, would provide high school graduates $9,000 in vouchers to be used for employer-led workforce training, according to Mr. Cotton's website. The cost of the vouchers would be covered by levying a 1% tax on the fair market value of assets held by private college endowments at the end of each fiscal year.

The Student Loan Reform Act, which levies a similar tax, would require private endowments to put forward at least 5% of their investment income toward their educational mission and penalize higher education institutions when student-borrowers default on their loans.

"It strikes me that that is a place to go where there are well-to-do foundations who are making significant amounts of money (and) are engaged in the same sort of transactions that are taxed at a private level," said Henry Olsen, senior fellow at the Washington-based Ethics & Public Policy Center, a think tank that has publicly supported the legislation.

There are conditions for both pieces of legislation: In order for the tax to be levied, the college must enroll more than 500 full-time students and have an endowment worth more than $2.5 billion, or $500,000 per full-time enrolled student. The college also cannot have a religious mission, according to Mr. Cotton's website.

Net investment income from college endowments funds scholarships, academic programs and school facilities, and are taxed at an annual rate of 1.4%, a rate established in 2017 as part of the Tax Cuts and Jobs Act.

New data from the Internal Revenue Service show that 33 schools could fall under the proposed tax, according to the Wall Street Journal.

Last year, $68 million in tax revenue was collected based on the schools' endowment income, the story noted, saying that original estimates projected $200 million when the Tax Cuts and Jobs Act was being debated.

"It's a step in the right direction, but it's still dramatically too low," Mr. Olsen said.

"If you're talking about trading securities, private sector, you would be taxed depending on your income, 10% to 20% capital gains plus an additional net investment tax."

While both pieces of Mr. Cotton's legislation would generate tax revenue, the National Association of College and University Business Officers said the measures would not be an effective transfer of wealth to needier students.

"The tax on college and university net investment income does the reverse (of charitable giving)," said Liz Clark, vice president of policy and research at NACUBO. "And results in fewer dollars available for students, research, and mission-related pursuits."

The Student Loan Reform Act of 2022 also seeks to lower university tuition and hold higher education responsible for loans that students take out. It requires that colleges become guarantors of up to 50% of future federal student loans and would fine colleges 25% of the value of future defaulted loans, according to Mr. Cotton's website. The bill would also require the most endowed private colleges to distribute at least 5% of their endowment to support their educational mission per year, or else face a penalty.

"It would make college endowments have identical obligations as foundations, which have to spend 5% of their endowment value each year on its charitable mission," Mr. Olsen said.

Mr. Cotton's office did not respond to requests for comment.

A third bill, introduced in August by Sen. Rick Scott, R-Fla., called the Changing Our Learning, Loans, Endowments, and Graduation Expectations or COLLEGE Act, has a similar goal, broadly aiming to put institutions on the hook for more spending on financial aid.

The COLLEGE Act "requires any university with an endowment to report to the Secretary of Education the size and growth of its endowment, and provide a cost-match for federal financial student aid," according to Mr. Scott's website.

Endowments larger than $1 billion would be responsible for cost-matches of students' total tuition under Mr. Scott's legislation.

Mr. Scott did not return requests for comment.

The NACUBO official disputed the efficacy of the bill.

"Endowment investment and spending policies are largely designed to provide a steady and reliable income stream over the very long term. Investment committees regularly review investment and spending policies," Ms. Clark said. "If sweeping new taxes or requirements were to be enacted they would certainly be factors taken into consideration by fiduciaries."

Neither Mr. Cotton nor Mr. Scott's bills have made any progress beyond introduction. The latest action: Mr. Scott's bill was read twice on August 4 and referred to the Committee on Health, Education, Labor, and Pensions, according to congress.gov.

Mr. Cotton's American Workforce Act was also read twice and referred to the Senate Finance Committee.