Tax-Exempt Borrowing at Postsecondary Institutions: How Reforming Tax-Exempt Bonds Can Improve Student Outcomes and Save the Government Money

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and Save the Government Money

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NEW REPORT: Young Invincibles Finds that Tax-Exempt Bonds Issued by Postsecondary Institutions Result in Excess Government Spending, Calls on Congress to Support Cost-efficient Alternative and Reinvest Savings in Pell Grants

For far too long, the federal government has done the right thing in the wrong way. The federal government spends billions of dollars in forgone revenue each year to support the construction and renovation of dormitories, athletic facilities, and other capital projects that many colleges and universities fund using tax-exempt bonds. Unfortunately, this practice is inefficient, costing the government more than the amount postsecondary institutions save by using tax-exempt bonds. The design of tax-exempt bonds also makes it difficult to ensure that one hundred percent of the federal subsidy goes to support students and schools meeting basic quality standards. We propose the policy solutions below as a way to make bonds work better for schools, students, and the federal government. Please contact Jennifer Wang, our Policy and Advocacy Manger, at jennifer.wang@younginvincibles.org as we would love to discuss our findings with you in more detail.

Our findings …

  • Tax-exempt bonds issued by postsecondary institutions could cost the federal government nearly $18.2 billion between 2013 and 2017.
  • Tax-exempt borrowing is poorly targeted. Only about 80% of the federal government’s expenditure on tax-exempt bonds benefits state and local governments. High marginal-tax rate investors capture the remaining 20%.
  • Under current policy, postsecondary institutions can issue tax-exempt bonds regardless of how well they are preparing their students for academic and professional success.
  • Redesigned tax credit bonds could deliver the same benefit to schools at a lower cost to the federal government than using tax-exempt bonds.

Our Recommendations…

Redesign and improve the way the government helps schools borrow. The federal government should replace tax-exempt bonds for postsecondary institutions with redesigned direct pay tax credit bonds. These redesigned bonds will allow the government greater control over who benefits from federally subsidized borrowing. Tax-credit bonds will make the government’s cost equal to, but not greater than, the savings enjoyed by schools. This change will save the government and taxpayers money.

Eliminate subsidies entirely to extremely low performing institutions.

Schools that do not meet basic quality assurance standards in the areas of Pell freshmen enrollment, graduation rates, and student loan default rates should not have access to federally subsidized borrowing until they do the work to get better.

Invest Savings into the Federal Pell Grant Program.

Studies show that grants increase a student’s likelihood of completing college more than loans. A student’s level of unmet financial need also impacts college completion rates. As a program that addresses both of these issues, the Pell Grant Program is an ideal destination for government savings and a strong driver of educational advancement.

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One thought on “Tax-Exempt Borrowing at Postsecondary Institutions: How Reforming Tax-Exempt Bonds Can Improve Student Outcomes and Save the Government Money

  1. Pingback: End Tax-Exempt Bonds for Colleges, Says Youth Advocacy Group – The Ticker - Blogs - The Chronicle of Higher Education

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