Higher Education

Policies That Could Impact US Higher Education: Part 1

How future public policies could impact higher education affordability and access.

US higher education institutions are distinct communities unto themselves, with diverse operations, workforces, student bodies and goals. As such, beyond the direct effect of federal funding and financial aid policies, there are a myriad of indirect effects that changing federal policies can have on US colleges and universities. This two-part series examines the key issues and policy areas for higher education institutions to watch in the coming year, with this first part focusing on issues of affordability and access.


Affordability, Financial Aid and the Cost of Higher Education

The affordability of higher education is an issue that remains top-of-mind for many US citizens, particularly millennials and their families. During his campaign, President Trump said that he would help decrease college costs by “reducing the unnecessary costs of compliance with federal regulations so that colleges can pass on the savings to students in the form of lower tuition.” While the costs of regulatory compliance for higher education institutions have not been robustly studied, the idea of reducing those costs could help slow the rate of tuition increase. That said, higher education institutions’ costs are heavily influenced by other factors—particularly the expense of maintaining extensive facilities, salaries and benefits—which may more than offset any relief provided by deregulation.

The federal Perkins loan program, which provides low-interest loans for undergraduate and graduate students with "exceptional financial need," expires on September 30, unless it is extended. The Federal Supplemental Educational Opportunity Grant provides need-based grants to low-income undergraduate students. Preserving funding for both programs could be a challenge as the White House and Congress seek to reduce federal spending. What’s more, the White House proposed significant cuts to the federal work-study program, though such a proposal likely will not garner much support in Congress. Indeed, the recent congressional omnibus spending agreement, which funds government through the rest of the fiscal year, restored Pell Grant funding and offered some increases to college readiness programs. In the short term, standing financial aid packages have already been prepared, and Congress would face a backlash if work-study or loans were denied for incoming students.

Some conservative groups, such as the American Enterprise Institute and the Heritage Foundation, are proposing to end parental and graduate student loans, which would have a significant impact on a student’s ability to pursue a graduate degree. Yet, eliminating these loans would run counter to statistics showing an inverse relationship between default rates and the size of a loan. The New York Federal Reserve found that early delinquencies and default rates were more frequent among lower-balance borrowers. The greatest default rates (34 percent) were seen with borrowers owing less than $5,000, while borrowers owing more than $100,000 showed only an 18 percent default rate. What this likely indicates is that students who take out larger loans to pursue a graduate degree capture higher-paid jobs in their profession, while those who borrow substantially less likely did not complete a degree.

Concerns about affordability and rising student debt aside, higher education remains in demand. Analysis from the New York Federal Reserve shows that those with a bachelor’s degree earn, on average, 56 percent more per year than those with only a high school diploma and earn more than $1 million more over a lifetime than those with only a high school education.

Should future public policies support economic expansion and continued strengthening of the workforce, this will likely further benefit higher education as potential students more clearly see the value of investing in a degree to increase their earning potential. In addition, community colleges, which often offer flexible programming tailored to the needs of local business communities, may see an enrollment benefit if federal policy and/or funding shifts to support job training and retraining programs.

Tax Reform, Endowments and Bonds

The administration's tax relief plan provides for reducing the federal corporate tax rate and using three personal income tax brackets (rather than the current seven brackets). As a part of this, the plan proposes cutting all tax loopholes, with the exception of the mortgage interest and charitable giving deductions. The latter encourages taxpayers to apply personal wealth to advance the public good. Preserving this tax deduction is good news for higher education institutions, which received a record $41 billion in charitable contributions in 2016, a modest uptick from $40.3 billion in 2015.

With the proposed smaller number of tax brackets, the administration's plan may provide some reduction in personal income tax, though the actual impact will not be possible to measure until the general plan is more specifically detailed in congressional legislation. Lower income tax could possibly give more families increased capacity to pay college tuition, which may in turn affect demand. However, one side effect of tax reform could be on the tax-exempt debt market, which is widely used by the higher education industry to finance capital projects. Lower individual and corporate tax rates could reduce investor demand for tax-exempt debt instruments, which in turn could increase borrowing costs for higher education borrowers. Additionally, tax reform could have implications for charitable giving, which could impact universities that rely on donations to supplement budgets, provide scholarships and fund capital projects.

Implications for Immigration and Visas

The national discussion over immigration policies has intensified since the election, particularly given the executive orders that suspend the US refugee program and admission for travelers from several Muslim-majority countries and that prompt a review of how H-1B visas are granted. A survey from the Institute of International Education found that some 39 percent of US institutions reported a decrease in applications from international students, particularly those from the Middle East, though also from China and India. At the same time, the survey found that 35 percent of US institutions had an increase in international applications. Importantly, the application deadlines for many schools preceded the inauguration, which suggests the contentious public debate over US immigration policies may not be the only factor in international application trends.

Indeed, this year was the 10th consecutive year of growth in the number of international students enrolled in US colleges and universities, with more than 1 million foreign citizens studying in the United States. Many higher education institutions have aggressively pursued international applicants, both to diversify their enrollment base and to augment tuition revenue. US higher education institutions remain premier destinations for international applicants, and this fundamental quality will likely continue to bolster demand.

The second half of this series will cover the higher education implications of a stronger dollar and potential policy reforms to healthcare, accreditation and research funding.

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