How Colleges Make Money

Recessions are hard for everyone. But the decisions made by some colleges in the current financial climate have led many to question their financial priorities. Rightly so, indicates a piece in Inside Higher Ed. According to an article by Doug Lederman:

The Congressional Budget Office on Friday released a study… asserting that colleges and universities may inappropriately benefit from federal tax law by issuing tax-exempt bonds to, essentially, subsidize investments in higher-yield assets.

The argument [is that]…the tax exemption that colleges and universities have because of their educational purpose affords them numerous benefits, including the ability to use tax-exempt debt to build facilities and finance other capital expenditures. The latter cost the federal government an estimated $5.5 billion in foregone tax revenues in 2010, the CBO report says.

That’s not a terrible thing. As the CBO report points out, “if the subsidy finances capital projects that would not otherwise have been undertaken and that create a social benefit in addition to the institution, it could improve the nation’s welfare.” That’s probably not what’s going on, however. The CBO indicates that, as currently implemented, schools don’t really seem to use the tax exemption to “ease access to financial markets for schools that would otherwise have difficulty undertaking capital projects.”

Iowa Senator Charles Grassley, a Republican, requested this study in 2007. Grassley has asserted for years that American colleges stockpile huge endowments instead of using that money to bring down tuition.

Read the CBO report here.

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Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer