Tax Bill Affects Higher Education

Every New Year there is speculation, both good and bad, about the changes to come. This year the new tax bill, the Tax Cuts and Jobs Act, is one of the great topics for debate. There has been a lot of discussion about how its provisions will affect individuals, business and higher education. Some provisions are causing concern for higher education officials, and others have protected the interests of nontraditional students.

One provision for a new tax on endowments is creating concern among some colleges and universities. A 1.4 percent tax on endowments over $500,000 at schools with more than 500 students, will affect 25-30 schools that have large endowments and investments, reducing the value of their funds. MIT is one example of this. The tax on MIT’s investment income could cost the school about $10 million a year. Provost Marty Schmidt and Executive Vice President and Treasurer Israel Ruiz say this can impact the university’s ability to offer extensive financial aid to low income students and limit opportunities for innovative education and research.

Another provision that could have long-term effects on higher education and school endowments is the change in the standard deduction. The new tax bill almost doubles the standard deduction for individuals and families. With the larger standard deduction many people will not itemize taxes. Some analysts believe this will make people less likely to donate to charitable organizations, including colleges and universities. This could have a large impact, long term. The American Council on Education analyzed the impact this way: “Charitable donations are the primary source of endowment funds. Colleges and universities use their endowment resources for student financial aid and to support faculty, libraries, laboratories, student services and other critical education-related activities.”

The impact of these tax bill provisions on university funds may be felt across US society on a long-term basis. The ability to offer financial aid to low income students can help increase equity in education in the United States and diversity at major schools. Many of these schools are the sites for major medical and scientific research that is funded by endowments and keeps the United States competitive and in a global leadership position.

The new tax bill includes a limit on the deduction for state and local taxes. This could pressure states to limit their own spending in areas such as higher education says Moody’s Investors Service. Some states have laws that require their tax codes to conform to federal changes. The new tax bill could mean tax cuts for people in these states, and that could result in lower state revenue. This could lead to less funding for public colleges and student aid.

One positive provision for nontraditional students is that the new tax bill maintains the tax exempt yearly $5,250 employer contribution for higher education through tuition assistance programs. “This was a huge win for employees who are trying to advance their education, improve their wage growth and their upward mobility in the work force, as many young people are,” says Kathleen Coulombe, senior advisor for government relations at the Society of Human Resource Management.

Other provisions that support higher education involve student loan interest and graduate student tuition. Those who have student debt will be able to continue to deduct up to $2,500 interest per year on their student loan. This will help ease the burden of student loans for traditional and nontraditional graduates as they add student loan expenses to their financial obligations. The new tax bill will also allow graduate students to continue to receive tax-free tuition waivers in exchange for teaching or conducting research at their universities.

These provisions reinforce the importance of higher education. Tuition assistance plans are vital to the businesses that need high trained employees and to the employees who need competitive skills. These create major contributions to the strength and growth of the economy. Allowing whatever tax relief is possible to make graduate education affordable is a major contribution to the students, universities and society that benefit from their research and teaching. There will continue to be speculation about the effects of the tax bill, but provisions that protect higher education are important to everyone.