U.S. GOVERNMENT PRINTING OFFICE

57–910 CC WASHINGTON : 1999

EDUCATION AND TRAINING TAX PROVISIONS OF

THE ADMINISTRATION’S FISCAL YEAR 1998

BUDGET PROPOSAL

HEARING

BEFORE THE

COMMITTEE ON WAYS AND MEANS

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

FIRST SESSION

MARCH 5, 1997

Serial 105–79

Printed for the use of the Committee on Ways and Means

(

ii

COMMITTEE ON WAYS AND MEANS

BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois

BILL THOMAS, California

E. CLAY SHAW, JR., Florida

NANCY L. JOHNSON, Connecticut

JIM BUNNING, Kentucky

AMO HOUGHTON, New York

WALLY HERGER, California

JIM MCCRERY, Louisiana

DAVE CAMP, Michigan

JIM RAMSTAD, Minnesota

JIM NUSSLE, Iowa

SAM JOHNSON, Texas

JENNIFER DUNN, Washington

MAC COLLINS, Georgia

ROB PORTMAN, Ohio

PHILIP S. ENGLISH, Pennsylvania

JOHN ENSIGN, Nevada

JON CHRISTENSEN, Nebraska

WES WATKINS, Oklahoma

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

CHARLES B. RANGEL, New York

FORTNEY PETE STARK, California

ROBERT T. MATSUI, California

BARBARA B. KENNELLY, Connecticut

WILLIAM J. COYNE, Pennsylvania

SANDER M. LEVIN, Michigan

BENJAMIN L. CARDIN, Maryland

JIM MCDERMOTT, Washington

GERALD D. KLECZKA, Wisconsin

JOHN LEWIS, Georgia

RICHARD E. NEAL, Massachusetts

MICHAEL R. MCNULTY, New York

WILLIAM J. JEFFERSON, Louisiana

JOHN S. TANNER, Tennessee

XAVIER BECERRA, California

KAREN L. THURMAN, Florida

A.L. SINGLETON, Chief of Staff

JANICE MAYS, Minority Chief Counsel

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records

of the Committee on Ways and Means are also published in electronic form. The printed

hearing record remains the official version. Because electronic submissions are used to

prepare both printed and electronic versions of the hearing record, the process of converting

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process

is further refined.

iii

C O N T E N T S

Page

Advisory of February 20, 1997, announcing the hearing ..................................... 2

WITNESSES

U.S. Department of the Treasury, Donald C. Lubick, Acting Assistant Secretary, Tax Policy; accompanied by David A. Longanecker, Assistant Secretary, Postsecondary Education, U.S. Department of Education ................... 29

American Association of State Colleges and Universities, James B.

Appleberry ............................................................................................................ 136

American Council on Education, Stanley O. Ikenberry ........................................ 106

Appleberry, James B., American Association of State Colleges and Universities, and National Association of State Universities and Land-Grant Colleges ....................................................................................................................... 136

Breneman, David W., University of Virginia, Curry School of Education .......... 88

Career College Association, Omer E. Waddles ...................................................... 126

College Board, Lawrence E. Gladieux .................................................................... 60

Coverdell, Hon. Paul, a U.S. Senator from the State of Georgia ......................... 11

DeNardis, Hon. Lawrence J., National Association of Independent Colleges

and Universities, and University of New Haven ............................................... 117

Etheridge, Hon. Bob, a Representative in Congress from the State of North

Carolina ................................................................................................................ 21

Gladieux, Lawrence E., College Board ................................................................... 60

Ikenberry, Stanley O., American Council on Education ....................................... 106

Kane, Thomas J., Kennedy School of Government, Harvard University ............ 74

Macalester College, Michael S. McPherson ........................................................... 85

National Association of Independent Colleges and Universities, Hon. Lawrence J. DeNardis ................................................................................................. 117

National Association of State Universities and Land-Grant Colleges, James

B. Appleberry ........................................................................................................ 136

Price, Hon. David E., a Representative in Congress from the State of North

Carolina ................................................................................................................ 18

Rangel, Hon. Charles B., a Representative in Congress from the State of

New York .............................................................................................................. 8

Schapiro, Morton Owen, University of Southern California, College of Letters,

Arts and Sciences ................................................................................................. 84

University of New Haven, Hon. Lawrence J. DeNardis ....................................... 117

University of Southern California, College of Letters, Arts and Sciences, Morton Owen Schapiro ............................................................................................... 84

University of Virginia, Curry School of Education, David W. Breneman ........... 88

Waddles, Omer E., Career College Association ..................................................... 126

SUBMISSIONS FOR THE RECORD

U.S. Department of Education, Hon. David A. Longanecker, Assistant Secretary, Postsecondary Education, statement ..................................................... 153

American Association of University Professors, statement .................................. 157

American Student Association of Community Colleges, Annandale, VA, Willie

C. Brown, Jr., statement ..................................................................................... 159

Computing Technology Industry Association, Lombard, IL, statement .............. 161

Section 127 Coalition, et al., statement ................................................................. 162

(1)

EDUCATION AND TRAINING TAX PROVISIONS

OF THE ADMINISTRATION’S FISCAL YEAR

1998 BUDGET PROPOSAL

WEDNESDAY, MARCH 5, 1997

HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS, Washington, DC.

The Committee met, pursuant to notice, at 9:30 a.m., in room

1100 Longworth House Office Building, Hon. Bill Archer (Chairman of the Committee) presiding.

[The advisory announcing the hearing follows:]

2

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1721

February 20, 1997

No. FC–3

Archer Announces Hearing on

the Education and Training Tax

Provisions of the Administration’s

Fiscal Year 1998 Budget Proposal

Congressman Bill Archer (R–TX), Chairman of the Committee on Ways and

Means, today announced that the Committee will hold a hearing on the Administration’s tax-related education and training proposals, along with other proposals to

promote postsecondary education. The hearing will take place on Wednesday, March

5, 1997, in the main Committee hearing room, 1100 Longworth House Office Building, beginning at 9:30 a.m.

Oral testimony at this hearing will be heard from invited witnesses only. Witnesses will include Members of Congress, representatives of the Administration, and

education and vocational training representatives. However, any individual or organization not scheduled for an oral appearance may submit a written statement for

consideration by the Committee and for inclusion in the printed record of the hearing.

BACKGROUND

The Clinton Administration’s recently released budget for fiscal year 1998 contains several provisions regarding education and job training. Among these provisions are the Hope scholarship tuition tax credit, a tax deduction for secondary education tuition and for job training, tax incentives for the expansion of student loan

forgiveness, an extension of the tax exclusion for employer-provided educational assistance, and a small business tax credit for employer-provided educational assistance.

In announcing the hearing, Chairman Archer stated: ‘‘I applaud President Clinton

for his focus on how to make college and other education expenses more affordable

for Americans. This hearing will help the Members of the Committee on Ways and

Means determine the best and most efficient way for American families to cope with

these ever-rising costs.’’

FOCUS OF THE HEARING

The hearing will examine the education and training tax provisions contained in

the Administration’s fiscal year 1998 budget proposal.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS

Any person or organization wishing to submit a written statement for the printed

record of the hearing should submit at least six (6) copies of their statement and

a 3.5-inch diskette in WordPerfect or ASCII format, with their address and date of

hearing noted, by the close of business, Wednesday, March 19, 1997, to A.L. Singleton, Chief of Staff, Committee on Ways and Means, U.S. House of Representatives,

1102 Longworth House Office Building, Washington, D.C. 20515. If those filing written statements wish to have their statements distributed to the press and interested

3

public at the hearing, they may deliver 200 additional copies for this purpose to the

Committee office, room 1102 Longworth House Office Building, at least one hour before the hearing begins.

FORMATTING REQUIREMENTS

Each statement presented for printing to the Committee by a witness, any written statement

or exhibit submitted for the printed record or any written comments in response to a request

for written comments must conform to the guidelines listed below. Any statement or exhibit not

in compliance with these guidelines will not be printed, but will be maintained in the Committee

files for review and use by the Committee.

1. All statements and any accompanying exhibits for printing must be typed in single space

on legal-size paper and may not exceed a total of 10 pages including attachments. At the same

time written statements are submitted to the Committee, witnesses are now requested to submit

their statements on a 3.5-inch diskette in WordPerfect or ASCII format.

2. Copies of whole documents submitted as exhibit material will not be accepted for printing.

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material

not meeting these specifications will be maintained in the Committee files for review and use

by the Committee.

3. A witness appearing at a public hearing, or submitting a statement for the record of a public hearing, or submitting written comments in response to a published request for comments

by the Committee, must include on his statement or submission a list of all clients, persons,

or organizations on whose behalf the witness appears.

4. A supplemental sheet must accompany each statement listing the name, full address, a

telephone number where the witness or the designated representative may be reached and a

topical outline or summary of the comments and recommendations in the full statement. This

supplemental sheet will not be included in the printed record.

The above restrictions and limitations apply only to material being submitted for printing.

Statements and exhibits or supplementary material submitted solely for distribution to the

Members, the press and the public during the course of a public hearing may be submitted in

other forms.

Note: All Committee advisories and news releases are available on the World

Wide Web at ‘HTTP://WWW.HOUSE.GOV/WAYSlMEANS/’.

The Committee seeks to make its facilities accessible to persons with disabilities.

If you are in need of special accommodations, please call 202–225–1721 or 202–225–

1904 TTD/TTY in advance of the event (four business days notice is requested).

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above.

marks the first of several hearings on the revenue proposals in the

Chairman ARCHER. The Committee will come to order. Today

f President’s fiscal year 1998 budget. This morning, we will be examining the educational tax incentives in the President’s budget, as

well as other proposals designed to make higher education more affordable for taxpayers and their families.

Last January, I wrote Secretary Rubin expressing my strong interest in exploring ways to use the Tax Code to put higher education more within the reach of American families. This interest

takes root in a landscape that has changed considerably since I financed the college costs of my five children. And I must say that

I am happy that they are all out of college today because at one

time all five of them were in college the same year, and that would

be a significant hurdle with today’s costs.

Although the importance of higher education remains

undiminished, tuition costs over the past 15 years have well outVerDate 11-SEP-98 10:34 Oct 05, 1999 Jkt 057910 PO 00000 Frm 00006 Fmt 6633 Sfmt 6602 D:57910 W&M3 PsN: W&M3
4

paced inflation. In fact—and I am amazed at this—but the fact is

that they have increased at double the rate of medical inflation.

This translates into mind-numbing costs at 4-year institutions, particularly for average families whose incomes are already burdened

by Federal, State and local taxes.

We must also be sensitive to the educational needs of young

adults whose families are unwilling or unable to provide them with

assistance and who missed earlier opportunities to attend college.

This past week, we met with students representing the Minnesota Community College Student Association. We learned that

the average profile of a community college student is a person aged

26, with one dependent. For these adults who are working so hard

to get an education, the prospects of significant educational debt

are not particularly attractive.

Of course, the goals of access and affordability of higher education are not new to the Republican Congress. The Balanced

Budget Act of 1995, vetoed by the President, contained important

educational incentives. Most notable were tax-free IRA withdrawals for postsecondary education and an above-the-line deduction of

$2,500 for student loan interest.

Senator Paul Coverdell, Chairman of the Senate Task Force On

Education, will testify before us shortly on the Senate Republican

education package, the bill S. 1. The administration has proposed

more than $35 billion of temporary tax education incentives over

the next 4 years. According to the statutory language provided to

us by the administration, the President’s education provisions will

terminate on December 31 in the year 2000.

Nonetheless, these initiatives represent the potential for a historic expansion by the Federal Government in the area of higher

education. They also represent an increase in the role and the

power of the IRS in enforcing the B-minus average provision contained in the President’s tax credit proposal.

It is important, therefore, that we examine these proposals very

closely to ensure that our shared objectives will be met. This means

evaluating the details of the President’s initiatives as they relate

to administration and what impact they might have on tuition

costs and educational quality.

Finally, any package of educational benefits needs to reflect the

reality that pursuing a college education is not the only path to

success. Less than 25 percent of our population between the ages

of 25 and 35 have a bachelor’s degree. Bill Gates of Microsoft chose

a different path as did many individuals who have pursued careers

as plumbers and electricians. Thus, we should not ignore the financial needs of those who forego ‘‘higher education’’ for other forms

of vocational education and training.

[The opening statement follows:]

5

Opening Statement of Hon. Bill Archer, a Representative in Congress from

the State of Texas

f6

Chairman ARCHER. So, I look forward to hearing today from our

invited witnesses and I see that where I would normally yield to

the Ranking Democrat, Mr. Rangel, for an opening statement, he

is going to be our first witness.

So, would you like to testify both as a witness and make an opening statement, Mr. Rangel, or what is your preference?

Mr. RANGEL. Mr. Chairman, Mr. Stark will make our opening

statement.

Mrs. JOHNSON of Connecticut [presiding]. I see now that we are

going to recognize Mr. Stark to give the Democrats opening statement. We are going to reserve Mr. Rangel as our first witness.

Mr. Stark.

Mr. STARK. Thank you, Madam Chair.

Thank you for calling these hearings. I, in addition to our distinguished Ranking Member and other Members who may testify, I

wanted to welcome Secretary Lubick to this hearing on education

work incentives. I have known you, Mr. Secretary, for a long time

and you know I am not much for holding back when I have concerns about legislative proposals.

And I do have reservations about the merits of the proposals before us today. My concern with the welfare-to-work proposal is that

I know of no evidence that tax credits actually create any new jobs.

We do have some history there. The new jobs tax credit in the late

seventies, which the Chair and I were here for, was little used because it was too complicated.

Its successor, the targeted jobs tax credit, like a cat with nine

lives, survived a brutal report by the Department of Labor in 1993

and with a change in name called the work opportunities tax credit

and a change in certification process. But the critical issue in all

versions of the job credit has been whether the credits created any

new jobs? The answer has been, at best, inconclusive. Mr. Katz, the

chief economist at the Labor Department in 1993 and 1994, after

reviewing the literature on jobs credit, raised the issue that the

targeted credits stigmatized workers.

Stand alone subsidies that are highly targeted on very specific

socioeconomic groups appear to be somewhat less effective than

more broadly targeted subsidies and may stigmatize the group, he

wrote.

The 1993 Department of Labor study on the effectiveness of jobs

credits showed that employers would have hired 95 percent of the

participants regardless of the tax subsidy. The jobs turned out to

be part-time, low-skilled, low-paying, high-turnover, and offered no

career path. The pay of the participants was usually similar to the

pay earned before and after participating in the program, and that

participating employers who used the targeted jobs tax credit are

often corporations which require a steady stream of workers to fill

large numbers of high turn-over jobs.

So, I hope you will address in your testimony, Mr. Secretary,

what research the administration can point to that targeted tax

credits create any new jobs, not just an increase in jobs for the targeted groups at the expense of jobs for other workers.

7

This Committee needs to have a better understanding of how you

can spend a half a billion dollars on one more program when the

history indicates it will not create jobs and will not help improve

a lot of workers.

Second, the Chairman discussed the education provisions in the

budget and I am not very enamored with those either. The nonrefundable tax credit, $1,500 a year for 2 years, and the deduction

do not help the low-income students who are most in need of the

Federal boost to ensure they become educated members of our society.

Neither you nor I, Mr. Secretary, can guarantee that increased

spending through the Pell grants will survive the budget process.

Likewise, I am troubled by the changes to the employer-provided

education assistance provision. Why we should want to expand this

benefit for the use of graduate level training baffles me. It is not

enough to be college educated, have a good job and receive supplement to your pay for further studies, we want to add more and

make it tax-free to boot.

We provide a tax incentive to a group of taxpayers who really

need no further incentive or subsidy to upgrade their skills. I am

taking up more than my share of time, Mr. Chairman, but I felt

compelled to express these concerns.

Mrs. JOHNSON of Connecticut. The gentleman is making some

very cogent points and the Chair would not want to seem limited.

Mr. STARK. If we must have tax incentives, then I think they

have got to clearly be targeted to meet the need and they must be

effective in meeting that need.

And I think we cannot ignore the poorest in this country and

those most often denied even the basic skills to survive in higher

technology jobs as well as high-skilled vocational training which is

absent in the program. So, I look forward to the Secretary’s testimony and I hope you will address these concerns, Mr. Secretary,

and I think you will find today that other Members will have an

interest in your program.

Thank you very much, Madam Chair.

Chairman ARCHER [presiding]. Thank you, Mr. Stark.

[The opening statement of Mr. Ramstad follows:]

8

Ranking Democrat on the Committee. We are happy to have you

Chairman ARCHER. Our first witness is Hon. Charles Rangel, the

f as our lead-off witness, Charlie, and as I look to my left here I see

that your cup of coffee is cooling, so I am sure you will not take

too long. You may proceed.

STATEMENT OF HON. CHARLES B. RANGEL, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW YORK

Mr. RANGEL. Thank you, Mr. Chairman.

My dear friend and colleague, Mr. Stark, continues to refer to me

as the secretary and I know the color-blindness of this Committee.

9

I just did not know how bipartisan it is. I am your buddy, Charlie

Rangel. [Laughter.]

Mr. Chairman, I think that designing an education initiative

could be the most exciting thing that has happened to me since I

have been in Washington. I am not talking about the tax cuts or

the Gingrich plan or the Clinton plan, I am saying that we have

reached this point in our society that economic growth is dependent

on our ability to be more competitive internationally. It is abundantly clear that we have moved out of an era of easy leadership.

While we have provided the leadership and still do, there is a serious problem as to whether we Americans can continue to maintain

our leadership and competitive lead without the training that other

competitive nations are offering to their people.

Whether we are dealing in State capitals or our national capital,

when we talk about our present educational system there is no excitement there. Teachers and training institutions find it harder

than when waves of immigrants came here without money but with

a lot of hope, knowing that access to education would allow them

to exploit their potential and become successful in this great land

of opportunity.

That is now gone. It seems the priority has become how many

cops can we get, how many prisons can we get. My colleague from

New York, Mr. Houghton, will tell you that in Albany the issue is

not like it used to be for the Congress, how many unwanted military bases are they going to fund, but how many prisons can they

get in the upstate area?

So, it is not a New York State problem that we are building more

prisons than schools, more prisons than housing. It is a national

problem and we are investing $6,000 or $7,000 a year for a kid in

New York City—and even that is being debated now in the city

council of New York—and no one dare challenges the $60,000 a

year that we spend to keep a kid at Rikers Island in the detention

center.

It seems to me that tax incentives are proposed to get businesses

to be truly partners in what we are trying to do. Tens of billions

of dollars are spent by multinational corporations preparing their

own to meet the test of competition and technology. Unfortunately,

we do not have the methodology, we do not have the experience,

and we do not even have the initiatives within our public school

system.

There are many who talk about vouchers—which really means

that you have given up, that you would rather have the private sector come in and to take over the institutions that allowed so many

poor immigrants to get their feet on the ground.

I think that a partnership between the private sector and our

public school system, as well as our private school system would

give us an opportunity, Pete, not only to look at the tax aspect but

to look at the overall threat to our national security in saying that

this great Nation is not keeping up. With the private sector giving

us guidelines and enumerating the needs for the decades ahead

into the next century, we can demand more of our educational institutions. They need to develop criteria that go far beyond intellectual ability but incorporates technology to keep us a world leader.

10

Now, it seems to me that if we go to the bargaining table internationally with 1.6 million people incarcerated—and if you add the

drug problems to this, the unwanted children to this, the crime, the

violence—we are talking about close to a trillion dollar burden that

our trade negotiators go to the table with.

Instead, what we should be talking about is the number of people

who we prepare to work, whether it is through college, whether it

is by technical training, whether it is just making certain that

when they get that diploma, they have an opportunity to get a job.

I told the President of the United States that this is the solution

to the political problems that we have with the trade agreements.

If you show the Members that represent areas of high unemployment that the schools and the training are available for them to

participate in the rewards of the NAFTAs and the other fast-track

trade agreements, and they would be the biggest advocates.

But, of course, if we are dealing with communities that have no

training, oversized classrooms, where they are going to funerals

more than they are going to graduations, where the diplomas are

not given but certificates of attendance are given, where they know

that there is no hope out there, where they know that doing drugs

and making babies are not going to destroy what they never can

even dream they can only hate trade agreements they think others

benefit from. I am telling you, Mr. Chairman, that I am prepared

to work with whomever you say to work with on whatever bill it

is, to swallow whatever inequities may exist for one group, if we,

as Republicans and Democrats can say that we are prepared to

raise the standard of education in this country. I think education

is the biggest investment that we can make in the national security

of this great republic.

I stand ready to work with you, not to argue with anybody. I do

not have a set agenda, but I will be looking to over 50 education

directors of multinational companies and saying, come let us be

partners, tell us what you need, help us to get it.

I know that it will be important to reduce class size, and let

teachers teach. I have talked with the most outstanding union

leaders we have in this country and they are ready to give up their

hard-earned labor victories if we can just assure them that the

classes will be smaller and that supplies will be there and they,

too, would get the training to keep up with the necessary skills we

need for the next century.

So, you can see that the opening statement that was given by my

colleague is a little different from the way that I hope the Committee goes. There will be enough criticism in every proposal. But if

we can develop a proposal that encourages everyone’s opportunity

for an education—college or no college—with the private sector saying that is what we need, we can reduce our taxes, increase our

potential and become even a greater Nation.

Thank you, Mr. Chairman.

Chairman ARCHER. Thank you, Mr. Rangel.

Are there questions for Mr. Rangel?

Does any Member of the Committee wish to inquire?

[No response.]

Chairman ARCHER. Thank you very much, Mr. Rangel.

11

Our next witness is scheduled to be Senator Paul Coverdell and

I see the Senator is here. Senator, please have a seat at the witness table. We are delighted to have you here with us. We will be

most pleased to receive your testimony and I think you are probably aware of our rules that your oral testimony will be received.

If you have any more lengthy written statement that can be inserted into the record without objection.

So, welcome to the Ways and Means Committee.

STATEMENT OF HON. PAUL COVERDELL, A U.S. SENATOR

FROM THE STATE OF GEORGIA

Senator COVERDELL. Thank you, Mr. Chairman.

I am pleased to have the opportunity to visit with you and your

distinguished Committee and very quickly because of time commend you for the great contributions you and this Committee are

making to our country. I am one of those great admirers of the

Chairman.

If I might, Mr. Chairman—I recognize that your jurisdiction

deals with the tax consequences but I think a brief overview of S.

1 is in order.

First, S. 1 has a provision that deals with drugs and violence in

schools and offers families, through a pilot program, the option of

escaping from certifiably violent and drug-ridden schools. It provides local schools incentives to make their school districts safer

and freer of violence.

It does have a number of provisions that make higher education

more affordable and I will come to that in just a moment. One of

the central provisions of the legislation, Mr. Chairman, is to eliminate among the most egregious mandates Washington has imposed

on the educational system and local communities through the imposition of the 1970 legislation on special education, IDEA, the Individuals with Disabilities Education Act.

S. 1, over a period of 6 years, eliminates that mandate by funding the Federal portion of IDEA that was originally envisioned to

be 40 percent of the cost. The Federal Government has never honored the commitment and is only funding approximately 7 percent

of the cost.

And then the last provision, Mr. Chairman, deals with the promotion of adult education and family literacy. So, S. 1 is a broad

ranging educational act.

I would simply say, Mr. Chairman, that with 40 percent of American students in elementary and secondary education fearful for

their safety, with 60 percent of them arriving to college unable to

effectively read, and with 20 percent of them bringing a weapon to

school, we have a serious problem with regard to the Nation’s ability to be educated.

And I might say, Mr. Chairman, that one of the guarantors of

American freedom is an educated people.

With regard to the tax provisions, both the administration and

Senate leadership have put forth comprehensive education proposals. While we agree on the need to assist families with college

costs, we differ in our approach. The administration would provide

large tax credits and tax deductions which critics argue will primarily benefit those students already attending college.

12

S. 1 would provide a long-term savings incentive to help families

prepare for their children’s future costs. The program would not expire and would have a 5-year cost of $1.8 billion.

The administration proposal would provide credits for current or

immediate tuition costs. Experts argue that increased government

tuition subsidies result in tuition cost increases. S. 1 contains a

long-term savings plan that would not be tied to current tuition

costs.

The President’s proposal links receipt of his Hope scholarship to

student performance. A child would only be eligible for the tax benefit if they maintained a B average. Critics are arguing that that

puts in motion grade inflation.

S. 1 does not punish working or hardworking average students.

None of the tax incentives in our bill places a judgment on academic achievement. We leave those matters to the family and to

the college.

Under the President’s plan, students become ineligible if their

grades drop or if they commit a drug offense. Since the benefits

come through reduced taxation, the IRS would have to monitor the

student’s performance and behavior.

S. 1 would use the current tax system to provide credits and incentives. Eligibility for the benefit would be determined by the law

and not subject to school grading systems.

Under the administration’s proposals, government control is the

focus: Hope scholarships—government monitors the academic and

personal behavior of the student. Direct lending changes—the government control over college loans is increased at the expense of

the private sector, and college loan forgiveness benefits—available

to students who work in charitable and government programs like

the administration’s new literacy program.

S. 1 does not increase government control. It allows families to

save. It gives families the option of investing in a state college savings program or to save on their own to send their child to an instate or out-of-state school; it allows the private sector and the

States to help families with college costs; it encourages employers

to provide education assistance to their employees.

Mr. Chairman, this past Monday at 5 o’clock in the afternoon, I

and the members of the education task force on the Senate side

met with Secretary Riley. This is my second meeting with the Secretary and we envisioned the creation, as the Chairman knows, of

a working task force that would be bicameral and bipartisan singling out education as one of the five major areas with which the

Congress and the administration see some common ground.

There are common issues, and I encourage, promote and look forward to these ongoing discussions. It would be my intention on any

of the tax discussions to make this Committee completely aware of

the findings that would result from any of these ongoing dialogs so

that the Committee would have a constant and contemporary view

of all those discussions.

I do think they are important and they are dealing with a subject

of critical importance to the future integrity of the Nation.

With that, Mr. Chairman, I conclude my remarks. I hope that I

have kept within the timeframe of this Committee and I would be

glad to entertain a question or two if that is relevant.

13

Chairman ARCHER. Senator, thank you for some very excellent

testimony and very thoughtful analysis of some of the major problems facing our educational system. We are very, very grateful to

have that input.

Are there any Members who wish to inquire?

Mr. Rangel.

Mr. RANGEL. Thank you, Mr. Chairman.

Senator, as I said earlier, while we all have a lot of different

ideas, I think the idea that the Congress and the President are getting involved in this on the national level breaks new ground. For

so long, I have been allowed to believe that the education of American youth was a question of local school boards and that congressionally we had to keep our noses out of it.

I think now the President is providing leadership in recognizing

that if we do not build an educated work force, it could threaten

our economic growth. Having said that, I am working with a group

of Members in different Committees here—so that we do not have

turf problems. I am working with Republican leaders as well as our

Democratic leaders.

I hope you would consider bringing together a handful of Members of the other body that have demonstrated an interest in this

because I think our biggest obstacle is going to be who is in charge

of the legislation.

There are so many different aspects of our educational needs

spreading over some many different Committees that, since you

have made the effort to come here, I would like to meet with you

and see whether or not we can develop various proposals that—

when we pull together this quilt—it will cover the needs of America, notwithstanding the fact that many Committees made contributions.

Senator COVERDELL. Well, Congressman Rangel, we have worked

together on subjects in the past. I would certainly look forward to

reenergizing or accepting your suggestion. The concept of the task

force which was appointed by the Majority Leader in the Senate,

was premised on the very point you just made, a recognition that

the issue was multicommittee jurisdictional. It was an effort to facilitate those multiple jurisdictions and to move the issue to center

stage. So, I accept that offer.

Now, the other point I would make and this was also reiterated

by Secretary Riley, is that S. 1 still recognizes that the principal

responsibility for education rests with the States, communities and

parents. And nothing in S. 1 constitutes a mandate. It sees the

Federal Government, I think appropriately, as a partner and a

facilitator.

Secretary Riley, in all his remarks that I have heard, reconfirms

this fundamental jurisdictional venue. Obviously, at least from my

point of view, local States cannot determine international shortages—whether we have enough scientists or enough computer technicians to adequately compete. That is an appropriate Federal role.

I think that role was established by Secretary Bell very vividly

when he wrote ‘‘A Nation At Risk.’’ He was warning the Nation of

a pending crisis with which we, of course, are confronted here

today.

14

I will conclude by simply saying that our office will be in touch

with yours within the week. We will have to see how we might facilitate the discussions you invited.

Mr. RANGEL. And I will bring the partnership of the business sector with whom I am working very closely. They can give us their

agenda for the next century.

Mr. Chairman, has the Speaker appointed an education task

force, to your knowledge in the House?

Chairman ARCHER. Not to my knowledge.

Mr. RANGEL. Well, I hope we can join in asking him to do it. I

would ask to serve on it if you see fit to appoint Members to it.

Thank you.

Chairman ARCHER. Mr. Collins.

Mr. COLLINS. Thank you, Mr. Chairman.

Mr. Chairman, I just wanted to join with you and the other

Members of the Committee in welcoming my colleague and friend,

Senator Paul Coverdell, from Georgia. I had the pleasure of serving

with Senator Coverdell when he was Georgia State Senator and I

am well aware of his commitment to education, to families, to children, and also his commitment to economic growth. It is with

pleasure that we welcome him here today. And also his most capable and dedicated assistant Molly Dye.

Thank you, Mr. Chairman.

Senator COVERDELL. Thank you. It is true that Congressman

Collins and I have served together in the Georgia Senate. Those

days were a little more peaceful than up here, but it is always good

to see my good colleague from Georgia.

Thank you for the welcome.

Chairman ARCHER. Mr. Levin.

Mr. LEVIN. Senator, welcome. I just wanted to say a quick word.

I think the spirit of your testimony is very much welcomed and appreciated by everybody on this Committee.

And I hope that we can proceed not only on a bipartisan basis

and bicameral but with kind of an open mind on these issues and

not bring too many of our preconceptions.

Let me just give you one example and that relates to special education. There was a mandate, and we should no doubt take a look

at that mandate, that is now 25 years old or so, but in doing so

I hope we will take a look at where this country was in the late

sixties and early seventies in terms of educating handicapped children.

In the midsixties, late sixties, when I was in the State Legislature in Michigan, we discovered that more than half of the children

who had a handicap, physical or emotional or mental in Michigan,

did not have a single hour of classroom opportunity. That was more

than half. And we took some action but what was true in Michigan

was also true in most States of this Union, and I think the verdict

is somewhat clear that if there had not been a national commitment to educating handicapped kids, today we would be in a very

different position than we are.

And that mandate did not mean basically that Washington was

running the handicapped classroom, that was still done within the

local community. The mandate was that local communities should

educate handicapped children.

15

So, as we kind of take out our conceptual swords I just hope that

we will take an open-minded look at that issue and other issues.

Senator COVERDELL. Well, I appreciate the comments from Congressman Levin. Let me say that S. 1 accepts the value, so to

speak, of the mandate, but simply deals with the fact that the Federal commitment to help fulfill the mandate was never honored.

And, so, S. 1 envisions us meeting the financial requirements that

were suggested to the States at that time.

And it would move the Federal portion of the funding for IDEA

to the 40 percent level that was originally envisioned but never

done.

Now, separate and apart from S. 1, in the Labor and Education

Committee is separate legislation that deals with IDEA or special

education. I have not reviewed the details of the legislation but

conceptually understand it to be pointed toward flexibility for the

local systems because as it has emerged and matured, while its

goals were very laudable and continue to be, we have discovered

issues that have constrained some of the logical management of the

situation in the local school district area.

Congressman Levin, I will say this, that I do not visit with a

education board member or principal who is not talking about this

mandate, they are not talking about retrenchment, but they are

talking about management tools that they need. So, that would be

apart from S. 1 and it may be as Congressman Rangel suggested,

because of the inner involvement with education, that we ought to

maintain close communication with those Committees’ works as

well.

Mr. LEVIN. Good. I very much agree with that spirit, thank you,

Mr. Chairman.

Chairman ARCHER. Mr. Christensen.

Mr. CHRISTENSEN. Thank you, Mr. Chairman.

Senator, I wanted to get your thoughts on Georgia’s Hope Program, if you have looked at the program and get your perspective

on it. And, also wanted to hear how you thought they monitored

the program as far as what the President has proposed to us with

the IRS monitoring grades of a B or better.

Senator COVERDELL. Well, first of all, I guess one of the essential

differences would be that the Hope scholarships in the State of

Georgia are funded from a nongeneral funding source.

They are funded by a lottery which is a whole separate issue.

But that is the source of all funding for Hope scholarships.

I would have to say that they have been generally well received

by the community and the utilization is extensive. My guess is, although we have not had sufficient time to truly measure it, that

any program that is grade related will ultimately have the effect

of grade inflation. I just don’t see how it can be avoided.

It has always been a conflict of mutual goals. I have always believed we ought to have incentives, strong incentives for people to

be better achievers. But I also recognize that there are students

who are very disciplined and who are endeavoring to do their very

best to achieve but they are not in the top 10 percent.

And I have always had a nagging question for myself that I have

never fully resolved as to why a family that happened to be the

proud parents of one of those children would be denied assistance

16

in higher education because of the natural, natural constraints on

the asset that God gave that child.

So, I have always had a bit of a conflict over that point.

Mr. CHRISTENSEN. OK. A couple of things that some of the reports I have looked at in terms of the Hope scholarship. First of

all, it tends to favor, obviously, the Caucasian, the Asian, it disproportionately affects those that are in the affirmative action sector.

Other concerns that I would like to hear your thoughts on are

first of all, should it be on a need-based program as far as if we

were to follow through with the Hope scholarship, even though I

most likely believe that right now our high schools, K through 12

are what we need to focus on and put some efforts into major repair rather than focusing on a 2- or 4-year type of a program in

postsecondary. The public school systems in our inner cities today

are a disgrace and we need to focus on that.

Senator COVERDELL. Well, clearly, Congressman, there is no

higher education system that is truly competitive with that of the

United States. And the essence of the breakdown for education in

America is in elementary and secondary levels, the problems outside of an acknowledged concern for this with less means getting

the college education. The crisis, and it is a crisis, is at the elementary level.

And the majority of S. 1 is pointed at that crisis. It does have

sections that relate but, as I said in my testimony, its emphasis for

higher education is to encourage people to plan and to facilitate

that planning versus an immediate reward for somebody who is essentially already there.

But as Congressmen Levin and Rangel have said or suggested,

we are at the preliminary stages of these discussions and we ought

to hear out everybody.

Mr. CHRISTENSEN. Thank you, Senator.

Chairman ARCHER. The gentleman’s time has expired.

Mr. Ensign.

Mr. ENSIGN. Thank you, Mr. Chairman.

Senator, just in this discussion, I know some of this is not within

the jurisdiction of this Committee, but education is, as Congressman Rangel talked about, all of our concern and hopefully a lot of

the turf battles will not occur on education that normally occur up

here. But following up with what my colleague from Nebraska was

talking about, having been in the business world and seeing the

type of graduates that we have coming out of high school and literally coming out of college today, it is not, yes, there are some

problems with them maybe not being technically trained well

enough, but a bigger problem from my own perspective being in the

business world but also from the perspective of a lot of other

businesspeople that I have talked with, are the basics.

People do not have the basics to be able to train on top of, you

know, to get the computer skills, to get the other skills, the technical skills on top without—it is kind of like building, you know,

in scripture where it talks about building a foundation on sand,

when the rains and the floods come it just washes it away.

If we do not have the foundations built in the public school system, of the basics of the three Rs, that it seems to me that all of

17

the Hope scholarships, all of the things that we are doing in college

are, well, very difficult to have very much success with. We are

going to have to spend a lot more money and we will end up doing

what Congressman Rangel talked about, throwing more money at

prisons.

My question would be, though, is that we are talking about the

Federal role in education now. How do we see an effective role for

the Federal Government in education? It seems to be statistically,

the more the Federal Government gets involved with education, the

more we have dumbed down our schools, the more that those public

schools are not teaching the basics in education. You know, I forget

where I was hearing this the other day, but it was since the beginning of this century literally one grade every 10 years we have

dumbed down.

I mean there are people that graduated from high school today

that cannot pass third grade, fourth grade tests from the beginning

of this century.

So, you know, philosophically, we want to do something here, we

all want to feel good about what we are doing here, but what can

we do from the Federal level to truly have an effect and not just

make legislators feel good about what they are doing?

Senator COVERDELL. Well, first of all, let me say, Congressman,

I essentially agree with your frustration and I think it is well vented. I have said that we can do whatever we want in schools but

an American family has to expect the fundamentals. That a child

who graduates from high school must be able to read, to write and

to add and subtract.

Everything else they can try to impose what they choose, but the

basics must be done. And I think in essence, that is what you are

saying.

Now, the Federal role, as I said, is a partner and not a boss. And

I believe that it is a Federal role to do what we are doing here

which is to alert the families and citizens of our country that we

have a breakdown. I think we have a responsibility about the general state of the Nation.

And when a fundamental issue that impacts the security and

health of our Nation is in jeopardy, I believe that, as Federal officers, we have a right to be speaking to it.

I believe S. 1 outlines the appropriate role. It talks about the

problem, it frees up Federal mandates so that local communities

have resources to do the job they need to do and it states that families must not be forced in America to go to drug-ridden schools.

And it becomes a partner on literacy and adult education and it becomes a partner in tax planning for a family to prepare themselves

for higher education.

It is just as important to say what it does not do. There is no

mandate in the measure. There is no enforcement provision to force

a citizen or a school or State to do anything. It is a partner. We

know there is a problem, and I think we are obligated to help just

as if there were a natural disaster. This is a disaster.

Thank you for your question.

Mr. ENSIGN. Thank you, Mr. Chairman.

Chairman ARCHER. Are there any other questions for the panel?

[No response.]

18

Chairman ARCHER. Evidently not. Senator, thank you so much,

it was excellent testimony and excellent colloquys with Members of

the Committee.

Senator COVERDELL. Thank you, Mr. Chairman and thank you

again for the good work you do.

Chairman ARCHER. Our next witnesses are a panel of two of our

colleagues from North Carolina, Congressman David Price and

Congressman Bob Etheridge.

If you will come to the witness table, we will be pleased to hear

your testimony.

I am sure you two gentlemen are aware of the rules of our Committee that we would like for you to keep your oral presentation

to 5 minutes or less and your written presentation or testimony can

be included in full in the record without objection.

Would you lead off, Mr. Price?

STATEMENT OF HON. DAVID E. PRICE, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF NORTH CAROLINA

Mr. PRICE. Thank you, Mr. Chairman.

We appreciate the opportunity to testify here this morning and

we commend the Committee for the attention you are paying, the

serious attention to education affordability.

I appreciate the chance to talk with you briefly about the Tax

Code as it relates to higher education. I have been a professor of

political science and public policy for 19 years, I am the father of

two recent college graduates, so,

I do know firsthand how important higher education is to our

young people and also how much it has come to cost.

Today I want to discuss how we can adjust our current tax policies to help with this critical issue that we face as a Nation, educating our young people and training our work force. Specifically

what we want to talk with you about today is a bill that Bob

Etheridge an I have introduced, H.R. 553, the Education Affordability Act.

This bill would amend the 1986 Tax Code to make education

more accessible and affordable for students and their families.

In the last decade, as you well know, the economics of higher

education have become more grim. Adjusting for inflation, the median income in America has remained stagnant, while college costs

have soared, over 25 percent for public education and 40 percent

for private universities, placing higher education out of reach for

many working families.

I am pleased that higher education has finally reached the radar

screen of both the executive and legislative branches of this government because as I talk to those that are leading large and small

companies across my district, I hear how important a trained work

force is to their enterprise.

Without skilled workers these companies cannot compete in an

international market and without a trained work force, areas like

the Research Triangle of North Carolina cannot expect our economic success stories to continue.

All of this means that we are at a critical point in terms of public

policy. It is quite basic. If we want to compete in the global marketplace, we need to train our workers. And tax policy, I believe is one

19

area where we can take significant steps to address this higher

education crisis.

Unfortunately, the current Tax Code does not reflect our urgent

need to train our work force. In 1986, Congress created a simpler

and fairer Tax Code but tax reform was not entirely consistent in

the way it picked and chose among credits, deductions, and exemptions. And the incentives it provided have gotten increasingly out

of line with some of our country’s most pressing needs.

The Education Affordability Act would help bring our Tax Code

in line with our growing emphasis on education and work force

training, would help families save for and then finance higher education. Our bill has three easy-to-implement provisions.

First, the bill would restore the deductibility of interest on student loans. Currently, a family can deduct their mortgage interest.

Isn’t going to college as important, as basic as owning a home, let

alone owning a second home at the beach?

Families ought to be able to deduct student loan interest in the

same manner, making borrowing more affordable.

Second, the Education Affordability Act would fully exempt scholarships and fellowships from taxable income. If your child receives

a $500 scholarship for tuition currently that is tax exempt. However, if your child is lucky enough to receive a scholarship covering

living expenses or work-study fellowship, he or she would be taxed

on the portion of this award that is not directly used for tuition.

We all know that tuition is only part of the expense of sending

our children to college, and that we shouldn’t penalize students

who work hard and are given scholarships for college by then taxing them on these awards.

Last, H.R. 553 would allow families who have individual retirement accounts to draw down money penalty free for higher education purposes. Waiving the current 10 percent fee for early IRA

withdrawals would encourage working families to save for their

children’s education if families saved more they would have to borrow less. This provision would not set up a new type of IRA, nor

would it create a new government program. Instead it would use

the existing savings infrastructure to facilitate savings for higher

education.

Overall, the Education Affordability Act is a important step in

changing the Tax Code to open up the doors of educational opportunity and to train our young people for the work place of tomorrow.

As I mentioned before, I am pleased we have a President who is

committed to improving our Nation’s competitive position by educating our workers. I think his proposal for tax credits and deductions for higher education is extremely important to providing affordable education to students, especially for those first 2 years beyond high school that are becoming almost a requirement for a

good job in this country.

I am also pleased to learn more this morning about Senator

Coverdell’s proposal. The bipartisan effort here is quite impressive

and I am pleased that this Committee is giving such serious attention to the full range of measures.

I have introduced bills similar to the Education Affordability Act

in three previous Congresses. Members on both sides of the aisle

20

have cosponsored these measures in the past and they are doing

so again. The provisions included in the Education Affordability

Act are truly the least we can do for our students who want to pursue a college education and, therefore, in turn, improve their

chances in an increasingly competitive job market.

Any education tax relief bill that we pass in this Congress,

should include these three important provisions: student interest

deductibility, tax-exempt scholarships and penalty-free IRA withdrawals.

Thank you for your attention, I would be happy to answer any

questions that you may have about this bill or its implications for

higher education.

[The prepared statement follows:]

Statement of Hon. David E. Price, a Representative in Congress from the

State of North Carolina

Good morning. I appreciate the opportunity to talk to you about the tax code as

it relates to higher education. As you may know, teaching is my career. As a professor of political science and public policy for 19 years and as the father of two recent

college graduates, I have seen first hand how important higher education is to our

young people and how much it has come to cost.

Today, I want to discuss how we can adjust our current tax policies to help with

a critical issue we face as a nation: educating our young people and training our

workforce. Specifically, I want to acquaint you with a bill that I have re-introduced

with Congressman Bob Etheridge, H.R. 553, the Education Affordability Act. This

bill would amend the 1986 tax code to make education more accessible and affordable for students and their families.

In the last decade, the economics of higher education have become more grim. Adjusting for inflation, the median income in America has remained stagnant, while

college costs have soared—over 25% for public universities and 40% for private universities—placing higher education out of reach for many working families.

I am pleased that higher education has finally reached the radar screen of both

the Executive and Legislative Branches. As I talk to those leading large and small

companies across my district, I hear how important a trained workforce is to their

enterprise. Without skilled workers, companies cannot compete in an increasingly

international market, and without a trained workforce, areas like the Research Triangle of North Carolina cannot expect our economic success story to continue.

All of this means that higher education is at a critical point in terms of public

policy. Its pretty basic: if we want to compete in the global marketplace, we need

to train our workers. Tax policy is one area where we can take significant steps to

address this higher education crisis. Unfortunately, the current tax code does not

reflect our urgent need to train our workforce.

In 1986, Congress created a simpler, fairer tax code. Tax reform was not entirely

consistent, however, in the way it picked and chose among credits, deductions, and

exemptions. The incentives it provided have gotten increasingly out of line with

some of our countrys most pressing needs. The Education Affordability Act would

help to bring our tax code in line with our growing emphasis on education and

workforce training and would help families to save for and then finance higher education.

Our bill has three easy-to-implement provisions: First, this bill would restore the

deductibility of interest on student loans. Currently, a family can deduct their mortgage interest. Isnt going to college as important, as basic, as owning a home, let

alone a second home at the beach? Families should be able to deduct student loan

interest in the same manner, making borrowing more affordable.

Second, the Education Affordability Act would fully exempt scholarships and fellowships from taxable income. If your child receives a $500 scholarship for tuition,

currently this is tax-exempt. However, if your child is lucky enough to receive a

scholarship covering living expenses or a work-study fellowship, he or she would be

taxed on the portion of this award that is not directly used for tuition. And we all

know that tuition is only part of the expense of sending our children to college. We

should not penalize students who work hard and are given scholarships for college

by taxing them on these awards.

Lastly, H.R. 553 would allow families who have Individual Retirement Accounts

to withdrawal money penalty-free for higher education purposes. Waiving the curVerDate 11-SEP-98 10:34 Oct 05, 1999 Jkt 057910 PO 00000 Frm 00023 Fmt 6633 Sfmt 6602 D:57910 W&M3 PsN: W&M3
21

rent 10% fee for early IRA withdrawals would encourage working families to save

for their childrens education. If families saved more, they would have to borrow less.

This provision would not set up a new type of Individual Retirement Account, nor

would it create a new government program. Instead, it would use the existing savings infrastructure to facilitate savings for higher education.

Overall, the Education Affordability Act is an important step in changing the tax

code to open up the doors of educational opportunity and to train our young people

for the workplace of tomorrow.

As I mentioned before, I am pleased that we have a President who is committed

to improving our nations competitive position in the global marketplace by educating our workers. His proposals for tax credits and deductions for higher education

are extremely important to providing affordable education to students, especially for

those first two years beyond high school that are becoming almost a requirement

for a good job.

I have introduced bills similar to the Education Affordability Act in three previous

Congresses. Members on both sides of the aisle have cosponsored these measures

in the past and are doing so again. The provisions included in the Education Affordability Act are truly the least we can do for our students who want to pursue an

college education and, in turn, improve their chances in an increasingly competitive

job market. Any education tax relief bill that we pass in this Congress should include these three important provisions: student interest deductibility, tax-exempt

scholarships and penalty-free IRA withdrawals.

Thank you for your attention. I would be happy to answer any questions that you

may have about this bill or its implications for higher education.

Chairman A

Congressman Etheridge, you may proceed.

RCHER. Thank you, Congressman Price.

f STATEMENT OF HON. BOB ETHERIDGE, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF NORTH CAROLINA

Mr. ETHERIDGE. Thank you, Mr. Chairman.

I appreciate the opportunity to speak on behalf of this legislation

that my good friend, David Price, and I have introduced. Let me

join him in commending you, Mr. Chairman, and Members of this

Committee for taking up what I think is one of the most important

issues this Congress could deal with in this legislative session beyond the protection of our borders. Because, I think this bill will

help protect this country’s future for a long time to come.

I appreciate the opportunity also to talk to you about this bill because I think that enhancing education affordability is one of the

things we need to do to help people obtain the schooling and training that they are going to need as we approach the information and

technological age that we are moving into now and in the 21st century. This a tremendous challenge this country has not faced in a

very long time.

Mr. Chairman, and Members of the Committee, I am a freshman

member of this body. I am proud to be here. Prior to my being

sworn in about 2 months ago, I served for 8 years as the elected

State Superintendent for the schools of the State of North Carolina.

In that job, I had the tremendous responsibility for helping educate the young people and ensuring that our State’s next generation would be equipped to face the tremendous challenges that they

face in the ever-changing world.

And, let me say to you this morning that we have enjoyed some

success in that challenge. Some of you may have seen, just this

past week, Education Secretary William Riley designated North

Carolina as the winner of the most improved player award in the

22

widely regarded National Assessment of Education Progress. The

assessment measures the fourth and eighth grade mathematics,

and our eighth graders gained more than any State in the Nation

since the last assessment in 1992.

We are tremendously proud of the hard work of our students, our

teachers, the support of our local communities and business partners that have made this success possible.

But as important as these scores are, good scores do not mean

a thing if a child cannot use them to fulfill his or her God-given

ability to continue the lifelong progress toward education, higher

education and beyond. Today, that means getting a college education. More and more, college degrees are a prerequisite for any

job that is available.

Yet, the cost of higher education often puts those hopes beyond

the reach of many middle-class families. I will not reiterate some

of the points my colleague, David Price has already made. But I

will say to you I think it is important, I commend this Committee

for taking a look at education and the way you want to do it across

the aisle beyond the partisanship. Having served for 8 years I can

tell you that no matter what we do in the halls of this Congress,

no matter what happens in State legislatures or even at boards of

education and county commissioners, the action will take place in

the classroom and our schools today, ladies and gentlemen, are far

better than they are being given credit for. Our teachers are working hard. They need, as John Wooden, a great coach whom I greatly admired, said one time to his players many years ago, he said,

‘‘Young people need supporters not critics.’’

And our teachers need some of that today as hard as they are

working. This bill will start the process. We will roll back, I think,

some of the penalties we put in back in the eighties when we disallowed the deduction for interest and other things, to allow our

hardworking parents to have a chance. Congressman Price and I

met with students from a number of our universities several weeks

ago. I would say to you that if you have never had a chance to meet

with young people who are either in college or getting ready to go,

you are going to be surprised at the number of those young people,

not just their parents, but young people are working jobs to save

money to get into school and they are coming out of college with

tremendous debt. We can help change that in 1997.

I want to be a part of that. I know you do. I look forward, Mr.

Chairman, to working with you and in conclusion, let me again

congratulate you on for looking at these issues that I think are so

important, making options of college education affordable for America’s hardworking families.

I believe that this Congress can take on no greater mission in

1997, and as Members of this Committee from both sides of the

aisle, let me congratulate you and thank you and, Mr. Chairman,

I will be happy to try to answer any questions you might have.

[The prepared statement follows:]

Statement of Hon. Bob Etheridge, a Representative in Congress from the

State of North Carolina

Thank you, Mr. Chairman for the invitation to testify on behalf of this legislation

my good friend Mr. Price, and I, introduced on February 6 to help America’s working families afford the increasing costs of higher education. I appreciate the opporVerDate 11-SEP-98 10:34 Oct 05, 1999 Jkt 057910 PO 00000 Frm 00025 Fmt 6633 Sfmt 6602 D:57910 W&M3 PsN: W&M3
23

tunity to present to you this bill that will make such a difference in helping people

attain the schooling and training they need to succeed in an information- and technology-based economy.

Mr. Chairman, I am a freshman Member of this body. Prior to my swearing-in

two months ago this week, I served eight years as North Carolina’s Superintendent

of Public Instruction. In that job, I held the tremendous responsibility for educating

our young people and ensuring that our state’s next generation would be equipped

to tackle the challenges of an ever-changing world.

We have enjoyed some success. Some of you may have seen that last week, Education Secretary William Riley designated North Carolina the winner of his ‘‘most

improved player award’’ in the widely respected National Assessment of Educational

Progress for eighth graders. We are tremendously proud of the hard work of the students and teachers and all the support of our local communities and businesses that

made such an achievement possible. But as important as they are, good scores don’t

mean a thing if a child cannot use them to fulfill his or her God-given abilities.

Today, that means getting a college education. More and more, a college degree

is a prerequisite for a good job and the hope of a decent future, the beginning of

life-long learning. Yet, the cost of higher education often puts those hopes beyond

the reach of many middle class families.

Over the past decade, the price of a public college education has increased 27 percent and a private college by 40 percent while wages have stagnated. Working families often must spend more than one-quarter of their hard-earned income on putting

the kids through college. As the great educator Horace Mann said, ‘‘Education is the

great equalizer’’ in this country. If we are going to ensure equality of opportunity

for all, we must find innovative ways to make higher education more accessible and

more affordable for hardworking, middle class families.

Our bill, H.R. 553, the Education Affordability Act, helps do just that. There are

three simple components of this legislation to provide some tax relief for consumers

of higher education. The first two provisions un-do part of what was done to the

tax code in the Tax Reform Act of 1986. Specifically, we would restore the deduction

for interest on student loans (making them like home mortgage interest—the other

big expense families face), and we would restore the provision making scholarships

and grants fully tax exempt. While I understand that the 1986 legislation was intended to lower overall tax rates by closing deductions, it has resulted in denying

working families the opportunity of an affordable college education.

The third piece of our bill is also contained in President Clinton’s education proposal. This provision allows penalty-free withdrawals from Individual Retirement

Accounts to pay for higher education. Working families have a hard enough time

saving any more. So we should do anything we can to create incentives for them

to save for education. The President estimates under this provision (coupled with

his $10,000 tax deduction) higher education will never be taxed for most families.

By capping this provision at families making $100,000, the President estimates that

over 20 million American families will be eligible for this benefit.

Mr. Chairman, on February 3, Mr. Price and I traveled to the campus of North

Carolina State University to meet student leaders for an informal discussion about

the challenges they—and their families—face in paying for school. Students from

NC State, the University of North Carolina—Chapel Hill, Shaw University, Duke

University, Campbell University, Elon College and Meredith College attended the

event and gave us their first-hand account of the difficulties working families face

in meeting the ever-rising costs of higher education.

Mr. Chairman and distinguished Members of the Committee, I strongly encourage

you to go out in your home districts and meet with college students, those who aspire to be college students and their parents and other family members. Let them

tell you, like our constituents told Mr. Price and me about the challenges they must

overcome just to afford the education that now is a requirement for an entry-level

job on the bottom rung of the career ladder. I am confident you will emerge from

such an encounter ever-more resolved to pass meaningful legislation that will make

a real difference for America’s working families. We strongly believe that H.R. 553,

the Education Affordability Act, is a good step in that direction.

Mr. Chairman, in conclusion, let me congratulate you for convening this hearing

to examine this Congress’s options for making college education affordable for America’s hard-pressed families. I believe that this is the greatest mission Congress could

undertake, and I look forward to working with Members of the Committee from both

sides of the aisle to make such an important accomplishment a reality.

Thank you Mr. Chairman and Members of the Committee.

f24

Chairman ARCHER. Thank you, Congressman Etheridge.

Is there any Member of the Committee who wishes to inquire?

Mrs. Johnson.

Mrs. JOHNSON of Connecticut. I thank you for your testimony

and Congressman Price for your many terms of leadership in proposing legislation along the lines you described today.

I do want to make clear on the record, because I think all of us

across the Congress, are going to have to be honest and realistic

about these things. We did actually restore deductibility of $2,500,

the right to deduct $2,500 in interest and also to make penalty-free

withdrawals for education purposes in bills that got as far as the

President’s desk in the last session.

They were part of larger bills and because these issues have to

be funded they are going to have to be accompanied by funding

sources. And traditionally that has meant the budget.

So, I think we have an opportunity in this session to come to

terms with passing a balanced budget and in the process of that

including some tax losses, tax expenditures as some call them, for

the purposes of helping families carry the burden of education.

That is a position I support. But I do want to say not only has

there been a lot of legislation introduced in the past, but there has

been a commitment sufficient commitment to actually include deductibility of at least a significant amount of interest per year,

$2,500, which covers a lot of loan money and penalty-free withdrawals in the last 2 years, twice going to the President. So, we

are going to have to work together on that base bill so that we can

include in it some of the things that we know are important.

And I also just wanted to put on the record that in 1986, we did

allow the deduction of scholarships and fellowships in, to the extent

that they pay tuition. To the extent that there is a work requirement attached, for instance, for a teaching fellowship, some of that

money is seen as compensation for work and, therefore, taxable.

I think we will have to weigh whether we want to go beyond tuition to excluding what is work compensation given the other alternatives.

So, I thank you for your ideas. There are some other ideas out

there as well, including the President’s and this is an opportunity

for us to work together across Committee jurisdictions and across

party lines but it is going to mean that we have to be really deadly

serious and honest about trying to get to a budget that will meet

the balanced budget goals of the 5-year period.

And in that one small regard, I am sorry that the President’s

budget is not more realistic, but I think we have proven ourselves

to be capable of making the choices that are required in that discipline. And I personally think that better support of education is

imperative and is supportable in the context of our commitment to

a balanced budget.

Thank you.

Mr. PRICE. Thank you, Mrs. Johnson.

It is true that a number of these ideas have come very close to

passage in the past. You may remember that in the 1990 budget

agreement, for example, we came very close to being able to include

25

an interest deductibility provision. So, these are not foreign ideas,

these are ideas that we should be able to get broad consensus

around. And, of course, we would totally agree with your point

about the need to fully pay for these provisions in the context of

an overall budget agreement.

Chairman ARCHER. Mr. Houghton.

Mr. HOUGHTON. Thank you, Mr. Chairman.

Gentlemen, nice to see you, Dave, good to have you back.

Mr. PRICE. Thank you.

Mr. HOUGHTON. I obviously do not disagree with the basic thrust

of your argument. There is not any question about it that we spend

far too much on seniors and far too few dollars in terms of our

younger people and the future.

But I want to ask you a question because I think we talk about

education and training tax provisions and more money and be able

to put less burden on the student.

What about the colleges and the universities? I remember a

study by the Carnegie Corp. several years ago that indicated that

inevitably the cost of education would go up between 2 and 3 percent higher than the CPI. And you just assume that there will be

no cost reductions, no efficiency in the educational atmosphere. So,

therefore, more money is required either by the government or the

families or the individuals or the banks and there is no reign in

terms of anything which the colleges do.

Have you got any comments to make there?

Mr. PRICE. Well, I think your point is well taken about the need

for partners in this struggle to keep education accessible to families

at all income levels. In our State, our State university system has

struggled mightily to keep tuition costs down and North Carolina

taxpayers have basically been asked to share the cost of that in

keeping tuition accessible to families.

And as someone who has taught in a private institution, I can

certainly testify as to the constant fundraising activities there that

have helped buildup an endowment and scholarship funds so that

education at that level is more accessible, as well. So this struggle

is underway but certainly what we are talking about here is only

a piece of that effort, although we think an important piece in

terms of Federal tax policy.

Mr. ETHERIDGE. Let me just add to that. Because of the Carnegie

study that you talked about there is extensive work going on now

by the Education Commission of the States and I assume the other

study groups. The Southern Regional Educational Board is also

taking it on working with colleges and universities around this

country to look at their infrastructure, how to cut the costs, and assist students who are striving to move on to the university because

of the continuing escalation of costs.

We have one private college that happens to be in my district in

North Carolina, that actually cut their overall costs this past year

as a way to attract more students. And it is a little early to know

what that is going to do to their bottom line but it did one thing:

it increased the number of students. And I think these are some

of the things we are going to see a lot of the universities starting

to pay attention to because the cost is continuing to escalate.

26

Mr. HOUGHTON. Well, thank you very much, and I have a little

more time and I just want to explore this a bit further. I do not

know how many billions of dollars are raised every year by higher

education but it is an enormous amount. Most of that money

though goes into buildings, grounds and endowed professorships, a

variety of different things like this.

Not a large percentage goes into scholarships. And I just wonder

when the Federal Government is getting in here, whether there

shouldn’t be a sort of matching or a quid pro quo as we look at this

overall target?

Mr. PRICE. The fundraising that I know about in both public and

private institutions in our State has gone, of course, for a range of

needs including endowed professorships, facilities, equipment. In

the cases I am best acquainted with, a good portion of that and I

can give you the exact figures if that proves relevant for scholarship and fellowship aid, for work study, especially at the graduate

level. That is such a pressing need.

These graduate students hanging on by their fingernails financially, piling up years and years of debt. There is a need for more

university attention to the situation of these students and as we

are saying here today there is need for a better Federal tax policy

so that we are not adding a tax burden on top of these financial

obligations.

Chairman ARCHER. The gentleman’s time has expired.

Does any other Member of the Committee wish to inquire?

If not, the Chair will.

Mr. Jefferson.

Mr. JEFFERSON. Gentlemen, let me ask you a question. The proposals you make, these three, do you propose these on top of the

President’s suggestions or do you propose them instead of his suggestions? And do you think these are more important, the ones that

he is proposing? In other words, if you have to kind of pick and

prioritize, which are the most important if you were able to judge

those?

Mr. PRICE. There is some overlap both with the President’s package and also with the package developed by our friends in the Senate. And the penalty-free drawdown of IRA accounts, for example,

is part of the President’s package, as is deductibility for interest on

loans.

So, we are not claiming that this is a totally new or novel package, nor are we claiming that it is complete. Speaking for myself,

I am particularly interested in the President’s Hope scholarships

that offer those tax credits in those 2 years just beyond high school.

And those credits would be available to people whether or not they

itemize deductions. So, we are not claiming this is a complete package, but we do think it is kind of a bottom line package in the

sense that whatever we do in this area certainly should contain

these items or something like them in offering this kind of basic

tax relief.

Mr. ETHERIDGE. I would concur and I would hope that as the dialog continues over the next several months and we put a package

together that whatever pieces of this are part of another one we develop a much larger education package than what we have right

27

here. Because I think there is a lot to be done at the elementary

level that is crying out for help in this time.

Chairman ARCHER. Does any other Member wish to inquire?

If not, the Chair will conduct a closing, very brief inquiry.

Gentlemen, you have not said whether you are in 100 percent

support of the President’s proposals. And I would like to ask each

of you whether you are, or are not, in support of the tax parts of

the President’s educational proposals.

Mr. PRICE. I am basically supportive of the President’s proposals.

That does not mean they should not be scrutinized and in some instances, possibly refined. But I think basically it is a sound package. I think it is consistent with what we are proposing here. And,

so, I would hope that that package could move forward but, of

course, this Committee and the Congress, as a whole, will want to

look at those proposals carefully, assess their impact and make

whatever refinements are called for.

Chairman ARCHER. The purpose of these hearings is to try to get

as many precise comments as we can on various parts of the proposal, and with your experience and educational background, could

you tell us the areas where you might be concerned and that you

would want to change in the President’s proposals?

Mr. ETHERIDGE. Mr. Chairman, thank you.

I would be very candid and say I have not read it in detail but

I would be happy to do that and come back at a later date. There

are pieces of it that I have looked as he made his presentation earlier and I have just viewed it in a very quick passing.

I think the opportunity to provide for students the hope, the opportunity they can go on to school within the context of getting to

our balanced budget is so important that and there are so many

young people today who want an opportunity to go on to school.

Having said that——

Chairman ARCHER. Generally I think all of us would agree with

that, but can you specifically point out any provisions that you

have particular concern about that you think need to be changed?

Mr. ETHERIDGE. Not at this point, but I would be happy to if I

get a chance to go into detail. I would hope that as we provide opportunities for children to get an education at the university, the

Hope scholarship is a great piece. I like that. I think it provides

some opportunity for the middle class but I want to make sure and

I hope this Congress would make sure there are enough Pell grants

and other assistance for the need-based student. I have heard a lot

of that from my universities that are in my district.

Chairman ARCHER. OK.

Mr. PRICE. Mr. Chairman, if you are looking for some sense of

priorities I certainly think whatever we can do to raise the maximum award for Pell grants so as to improve the mix of loans and

grants, I think the Hope scholarship, the tax credit approach is

good. And I think it is especially important to extend that tax exclusion for employer-provided education assistance. The so-called

section 127 provisions. Those would be very high priorities.

It has all got to be put in context though of our budget goals as

Mrs. Johnson indicated, and, of course, we think that these tax provisions that we have talked about here today are particularly important building blocks of a comprehensive approach.

28

Chairman ARCHER. Congressman Etheridge.

Mr. ETHERIDGE. Chairman Archer, one point I would make as it

relates to K through 12, having spent some time there and let me

say to the Members of the Committee that my background is in

business. I spent 20 years there before serving as superintendent

of the schools.

We have schools in this country that do have some very bad in- frastructure and our State just passed a $1.8 billion bond issue in

a match with locals to help, which is unusual for a State. But the

technology and access to technology for a lot of our schools in rural

areas and even in some of the urban areas is really important in

the current time.

And I would strongly support that piece of it. Anything we can

do to help that process, because what we see and I have seen it

in school after school as I visited as I am sure many of you have,

is that in the schools that have the resources, the students tend to

do better. That is so for a lot of reasons.

One reason is they have got parental support. And I guess if

there is anything we can do to reach out to the business communities and others to encourage that parent to be involved but technology is a critical piece of the effort. It is not a substitute for a

good teacher in front of that classroom. It is not a substitute for

students learning the basics but it certainly can be an aid to that

teacher in helping in that process.

Chairman ARCHER. Well, I understand from both of your com- ments that you, in effect, would support the full $35 billion revenue

loss that is involved in the President’s package. Is that a fair statement?

Mr. PRICE. No. It is not a totally fair statement in that——

Chairman ARCHER. I see Congressman Etheridge nodding.

Mr. PRICE [continuing]. Our statement indicated a favorable disposition toward the President’s proposals. We, of course, will, along

with other Members, await the judgments of this Committee as to

what those priorities might be and what the revenue implications

are, and what the overall package ought to look like. I do not think

any of us are prone to give the President or anyone else a totally

blank check in this area.

Chairman ARCHER. I was kind of hoping you would help us set

some of those priorities but you——

Mr. PRICE. We tried to indicate, Mr. Chairman, what we think

should be at the top of the list.

Chairman ARCHER. The Committee would be pleased to receive

anything in writing that you would like to give us to help us in establishing those priorities, particularly with your educational background.

Mr. ETHERIDGE. I would be happy to.

Chairman ARCHER. Have you had scored at all the revenue loss

from the proposals that you are suggesting? I would assume that

you would suggest those in addition to the President’s proposal

rather than to replace a part of the President’s proposal.

Mr. PRICE. Well, the President’s proposal, as we understand it

and also Senator Coverdell’s proposal includes a good number of

the items that we are proposing. The best estimate we can come

up with and it is a tentative estimate—we do not have a current

29

scoring estimate from CBO—the best estimate we can come up

with is approximately $600 million per year in revenue losses from

our package, which, of course, is far, far less than the President’s

proposal, as a whole.

Chairman ARCHER. OK. Can you tell the Committee what parts

of your package are not included in the President’s proposal?

Mr. ETHERIDGE. The President’s proposal does not include—as I

understand it, now, I have not read all the fine print, I am not sure

we have access to all the fine print—the President’s proposal, as

I understand it, does not do as much as we would like to do in the

area of tax exemption for scholarships and fellowships. But I would

also say that is the least expensive portion of the three-part package that we are talking about.

I think that the President’s proposal does essentially what we

would like to do in the area of IRA drawdowns as does Senator

Coverdell’s package. In terms of deductibility on student loans,

there may be a cap on that in the President’s proposal, but again

his proposal comes close to ours.

Chairman ARCHER. Thank you very much.

Mr. ETHERIDGE. Thank you, Mr. Chairman.

Mr. PRICE. Thank you.

Chairman ARCHER. Our next witness on behalf of the administration is the Assistant Secretary of the Treasury for Tax Policy, Donald Lubick, who is accompanied by David Longanecker, who is Assistant Secretary for Postsecondary Education with the U.S. Department of Education.

Is Mr. Longanecker here?

Mr. LUBICK. He is here, Mr. Chairman, he will join me in replying to your questions. The statement of the Department of Education——

Chairman ARCHER. You do not prefer to have him seated next to

you at the witness table?

Mr. LUBICK. Well, I will make my statement which, as you will

see, is somewhat greater in breadth.

Chairman ARCHER. We are happy to have you back before the

Committee, Mr. Lubick, and if you can summarize as much as possible with your oral testimony, your entire written statement will

be included in the record, without objection. You may proceed.

STATEMENT OF DONALD C. LUBICK, ACTING ASSISTANT SECRETARY FOR TAX POLICY, U.S. DEPARTMENT OF THE TREASURY; ACCOMPANIED BY DAVID A. LONGANECKER, ASSISTANT SECRETARY, POSTSECONDARY EDUCATION, U.S. DEPARTMENT OF EDUCATION

Mr. LUBICK. Thank you, Mr. Chairman and Members of the

Committee. I am happy to appear here before you again today, this

time to discuss the tax provisions of the President’s fiscal 1998

budget. The Committee has scheduled a series of three hearings on

important components of the administration’s tax plan and I would

like to open this series with an overview of the tax plan and its

major themes.

The first part of the budget package consists of a number of targeted tax incentives to promote high priorities of the administration: tax relief for hardworking, middle-income families to provide

30

for their families, educate their children and save for basic needs

and economic relief for distressed areas and assistance to those

coming off welfare to become independent, gainfully employed citizens.

Our gross tax cuts are $98.4 billion through fiscal year 2002. Everyone would like more tax reduction but the fiscally responsible

course we have set on is the attainment of budget balance by 2002.

The budget offsets the cost of these tax cuts by making cuts in

spending and by eliminating unwarranted corporate tax preferences, closing uneconomic tax loopholes and improving tax compliance. And these measures produce budget savings of $34.3 billion through fiscal year 2002.

Reinstatement of expired trust fund excise taxes and similar

matters will produce additional savings of $36.2 billion through fiscal year 2002.

Others have proposed higher tax cuts but our commitment to balancing the budget and sound tax policy requires us to exercise restraint. As Secretary Rubin stated before this Committee on February 11, tax cuts that are much more costly than the President’s

proposals would require us to make cuts that are too deep in Medicare, Medicaid, education, the environment, or other priority areas.

Given the need for fiscal discipline, one of our principles is that

tax relief should be concentrated on middle-income taxpayers. Consistent with that principle, over $90 billion of the $98.4 billion

gross tax cut is attributable to four broad categories that comprise

the President’s Middle-Class Bill of Rights: education incentives,

child credits, capital gains relief for housing, and savings incentives.

I will address education first. The budget contains tax incentives

that you have already discussed to assist families with the costs of

postsecondary education. We believe they will encourage Americans

of every age to pursue their education beyond high school so that

they can compete effectively in the global economy of the next century and achieve a higher standard of living.

These tax proposals complement other proposals in the budget to

increase access to higher education such as the proposal to increase

the maximum Pell grant by $300 and to make Pell grants more accessible to independent students with low levels of earnings.

The $1,500 Hope scholarship nonrefundable tuition credit and

the $10,000 above the line education and job training tax deduction

would help make 14 years of education the norm for all Americans.

They would make a dramatic difference in family finances and are

expected to help 12.3 million students in 1998 alone.

In fact, middle-income families would be able to combine the tuition deduction with the President’s proposal to allow penalty-free

IRA withdrawals for education or with a qualified State tuition

program, in many cases avoiding all income tax upon college savings. We could discuss later some of the other additional education

incentives.

Second, the child credit will provide families with young children

a nonrefundable child credit, $300 in 1997, 1998, and 1999 and increasing to $500 thereafter for each dependent child under the age

of 13.

31

We proposed capital gains tax relief by excluding up to $500,000

of gain for married taxpayers filing joint returns. This would simplify recordkeeping for over 60 million households who own their

homes. The number of taxpayers paying capital gains taxes on residences would be reduced from about 150,000 per year to fewer than

10,000 per year, a quarter of a percent of those selling homes.

To encourage savings we have expanded the availability of IRA

accounts to families with incomes up to $100,000, individuals up to

$70,000. And the purposes for which withdrawals could be made

without penalty tax would be broadened to include higher education costs, first home purchases and long-term employment.

There are other tax incentives that have been referred to, to support private-sector participation in revitalizing distressed communities, to generate job opportunities for long-term welfare recipients. They include current deductions for amounts paid to clean up

blighted brownfields in distressed areas, new empowerment zones

and enterprise communities and a new tax credit for equity investments in community development financial institutions.

To encourage the hiring of long-term welfare recipients in their

transition from welfare to work we have proposed a new credit that

we think will be extremely effective and Mr. Stark, I will be glad

to discuss that in more detail during the question period.

We have extended for a year the research credit and other expiring tax provisions and are about to release as part of the budget

some tax incentives designed to encourage hiring and increased investment in underdeveloped and underutilized areas in the District

of Columbia.

I have mentioned the revenue offsets that are involved here and

those too are intended to eliminate unwarranted tax gaming, to

close uneconomic tax loopholes and to improve compliance.

Finally, Mr. Chairman, we continue to support revenue neutral

initiatives designed to promote sensible and equitable administration of the tax laws, including simplification, compliance and taxpayer rights. And in the near future we propose to release to you

a package of such measures for inclusion as part of our budget.

So, in conclusion, Mr. Chairman, this has been a rapid runthrough of what is about that thick and you can see my briefing

book is equally thick. I offered it to Mr. Rangel but he declined it.

In conclusion, the President’s 1998 budget will reach balance by

2002 with prudent tax reductions that are pro-family, pro-education, pro-economic growth.

The plan targets relief to those who need it the most while at the

same time simplifying the tax system and halting abuses.

We look forward to working with the Committee on these proposals. I would be pleased to answer any questions you might have

and I would like to ask Mr. Longanecker to accompany me because

he is a specialist as Assistant Secretary of Education and I know

you are concerned with some of the implications beyond the tax implications of these proposals. I thank you for your attention.

[The prepared statement follows:]

32

1The President’s budget produces, without a sunset of the tax provisions, balance in FY 2002,

under OMB assumptions. To ensure balance under CBO assumptions, the President’s budget

would sunset after FY 2000 the following tax provisions: the child credit; the HOPE scholarship

tuition credit and tuition deduction; expanded IRAs (except in certain technical aspects); and

the brownfields deduction.

Statement of Donald C. Lubick, Acting Assistant Secretary for Tax Policy,

U.S. Department of the Treasury

Mr. Chairman and Members of the Committee:

I am pleased to appear before you today to discuss the tax provisions of the President’s Fiscal Year 1998 budget. The President’s plan would provide targeted tax relief, promote a fairer tax system and encourage activities that contribute to economic growth, while achieving a balanced budget by Fiscal Year 2002. We look forward to working with all the Members of this Committee to accomplish these goals.

We are especially pleased that, following this overview of the tax provisions of the

budget, the Committee is having this hearing today to focus on education issues.

The President’s FY 1998 budget plan contains a number of proposals to promote

education. In particular, the President has offered several tax proposals to encourage higher education and job training. We welcome this opportunity to discuss these

proposals with you.

In addition to encouraging investment in education, the President’s tax plan

would provide tax cuts to working families, capital gains tax relief and simplification targeted to home ownership, and tax incentives to promote savings and to promote the hiring of the economically disadvantaged. Under the President’s plan, the

gross tax cuts would total $98.4 billion through FY 2002.1

The President’s tax plan is also fiscally responsible. The budget offsets the costs

of these tax cuts by making cuts in spending and by eliminating unwarranted corporate tax subsidies, closing tax loopholes that are not economically sound, and improving tax compliance. These measures produce budget savings of $34.3 billion

through FY 2002. Reinstatement of expired trust-fund excise taxes under the President’s tax plan will produce additional savings of $36.2 billion through FY 2002.

Others have proposed higher tax cuts, but our commitment to balancing the budget and sound tax policy requires us to exercise restraint. As Secretary Rubin stated

in testimony before this Committee on February 11, tax cuts that are much more

costly than the President’s proposals would require us to make cuts that are too

deep in Medicare, Medicaid, education, the environment, or other priority areas.

Given the need for fiscal discipline, one of our principles throughout President

Clinton’s tenure has been that tax relief should be concentrated on middle-income

taxpayers. In 1993, the Administration worked with Congress to cut taxes for 15

million working families by expanding the Earned Income Tax Credit (EITC), and

to help small business by increasing expensing of capital investments and by providing targeted capital gains incentives. A year later, the President proposed his Middle Class Bill of Rights, including child tax credits, deductions for higher education,

and expanded Individual Retirement Accounts. Then in 1996, he signed into law a

number of other tax benefits for small businesses and their employees, as well as

a new tax credit for adoption.

This year, the budget again proposes the President’s Middle Class Bill of Rights,

with a number of proposals aimed at helping middle-class families pay the bills,

raise their children and send them to college, and save for retirement. This year,

however, the plan goes farther. It includes more tax incentives and relief with regard to education and training, capital gains on home sales, work opportunities, and

distressed areas, and provides employment and investment incentives to revitalize

the District of Columbia.

MIDDLE CLASS BILL OF RIGHTS

The President’s Middle Class Bill of Rights focuses on middle-income taxpayers.

It includes targeted tax incentives to encourage investment in education and training. It would immediately and significantly benefit families with young children,

and promote long-term saving. When evaluating the extent to which the Administration’s budget enhances educational opportunities, however, these proposals must

also be considered in conjunction with the President’s Pell Grant proposals, which

give comparable education incentives for those persons who do not have a high

enough tax liability to benefit from a non-refundable tax credit.

Education and Training Incentives.

Well-educated workers are essential to an economy experiencing technological

change and facing global competition. We believe that reducing the after-tax cost of

33

education for individuals and families through tax credits and deductions would encourage investment in education and training while lowering tax burdens for middle-income taxpayers. There is widespread agreement that increasing the education

levels of the U.S. work force is essential to a growing economy and an increasing

U.S. standard of living. The ever-growing expenses of higher education, however,

place a significant burden on many middle-class families.

The President’s balanced budget plan contains tax incentives to assist families

with the costs of postsecondary education. These incentives will encourage Americans of every age to pursue their education beyond high school so that they can compete effectively in the global economy of the next century and achieve a higher

standard of living. Tax relief is provided to families of all kinds, whether they are

saving to send a child to college, paying currently for a parent or child to attend

college or graduate school, or hoping to lessen the burden of student loans. Tax benefits are available not only for undergraduate degree programs, but also for training

to acquire or improve job skills. These tax proposals complement other proposals in

the budget to increase access to higher education, such as the proposal to increase

the maximum Pell Grant by $300 and to make more aid, including Pell Grants,

more accessible to independent students with low income levels. In addition, the

budget proposes to cut a variety of student loan fees.

The tax incentives are a key part of our agenda for higher education because they

provide broad-based assistance, and they do not require more students to participate

in the financial aid system. Also, by providing incentives to save for higher education, they can help families prepare for the cost of college, helping to reduce the

demand for student aid.

The President’s budget contains five specific tax proposals related to higher education. They are:

HOPE Scholarship Tax Credits. Taxpayers would be able to claim a nonrefundable tax credit of up to $1,500 per year (indexed for inflation beginning in 1998) for two years to cover tuition and fees for themselves, their

spouses, or their dependents while enrolled at least half-time in the first

two academic years of a degree or certificate program. To take the credit

in the second year, the student must have attained the equivalent of at

least a B minus grade point average in course work completed before that

year. No credit is available if the student has been convicted of a drug-related felony. Federal grants (but not loans or work-study payments) reduce

the allowable credit. The credit is phased out for families filing a joint return with modified AGI between $80,000 and $100,000 (between $50,000

and $70,000 for single filers), indexed for inflation beginning in 2001. The

credit would apply to course work beginning after June 1997.

Education and Job Training Tax Deduction. As an alternative to the

HOPE scholarship, taxpayers could elect to deduct up to $10,000 per year

($5,000 in 1997 and 1998) of tuition and fees for students enrolled at least

half-time in a degree or certificate program, or for courses to improve job

skills. The deduction can be claimed even by taxpayers who do not itemize.

Unlike the HOPE Scholarship credit, which is calculated per-student, the

deduction does not vary with the number of students in a family. The deduction is phased out at the same income levels as the HOPE Scholarship

credit and would apply to course work beginning after June 1997.

These two provisions will help make 14 years of education the norm for

all Americans. They would make a dramatic difference in family finances

and are expected to help 12.3 million students in 1998 alone. In fact, middle-income families would be able to combine the tuition deduction with the

President’s proposal to allow penalty-free IRA withdrawals for education (or

with a qualified state tuition program); in many cases, this would have the

same effect as avoiding all income tax on college savings.

Tax-Free Employer-Provided Educational Assistance. We should also continue to encourage employers to provide educational assistance to their employees. Currently, up to $5,250 of tuition paid by an employer under a

qualified educational assistance program need not be included in the income of the employee. However, the exclusion for undergraduate education

expires in mid-1997, and the exclusion ceased to apply to graduate-level

courses after mid-1996. The Administration strongly believes that the tax

law should encourage employers that are willing to support employees’ educations, including for those employees who have already graduated from

college and who go back to school to develop new skills. The budget would

reinstate the exclusion for graduate-level assistance retroactive to its prior

34

2 Beginning in 1997, eligibility would be phased out for couples filing joint returns with AGIs

between $70,000 and $90,000 ($45,000 and $65,000 for single filers). Beginning in 2000, eligibility would be phased out for couples filing joint returns with AGIs between $80,000 and

$100,000 ($50,000 and $70,000 for single filers).

expiration, and would extend both undergraduate- and graduate-level assistance through December 31, 2000.

Ten Percent Tax Credit to Small Businesses that Provide Educational Assistance to Employees. In addition, the Administration believes that an additional incentive is needed to foster increased educational opportunities

and work-force training for employees of small businesses that otherwise

may be unable to devote sufficient resources to their employees’ skill development.

To address this concern, the budget proposes that for taxable years beginning after December 31, 1997, and before January 1, 2001, small businesses

(employers with average annual gross receipts of $10 million or less for the

prior three years) would be allowed a 10 percent income tax credit for payments for education of employees under an employer-provided educational

assistance program. This proposal will help offset administrative costs of

small businesses providing educational opportunities for their employees. It

is projected to benefit 1.7 million employees.

Expanded Tax-Free Treatment for Forgiveness of Student Loans. The Administration believes in encouraging Americans to use their education and

training in community service. Providing tax relief in connection with the

forgiveness of certain student loans will help make it possible for students

with valuable professional skills to accept lower-paying jobs that serve the

public. To this end, the budget eliminates the tax liability that normally

arises when debt is forgiven, if the lender is a charitable or educational institution that lends money to a student to pay for education and then forgives the loan after the student fulfills a commitment to perform community or public service at low pay for a certain period of time. The same taxfree treatment would also apply when the Federal government forgives a

loan made through the direct student loan program for a student who has

been making income-contingent repayments for an extended period.

$500 Child Tax Credit.

Over the past decades inflation has reduced the value of the personal exemption,

so the burden of taxes has shifted from smaller to larger families. A targeted child

credit is an efficient way to address the increase in relative tax burdens faced by

larger families. Under the Administration’s budget plan, taxpayers would receive a

$500 nonrefundable credit ($300 in 1997, 1998 and 1999) for each dependent child

under the age of 13. The credit would be phased out for taxpayers with adjusted

gross incomes (AGI) between $60,000 and $75,000. Beginning in 2001, both the

amount of the credit and the phase-out range would be indexed for inflation.

The relief is directed to low- and middle-income taxpayers because of the limited

resources available for tax reduction and higher-income taxpayers’ relatively greater

ability to pay current levels of income taxes. In the year 2000, this proposal will

provide needed tax relief for over 17 million middle-income families. The credit

would be nonrefundable, but working families would first deduct the child credit

from their income taxes before deducting the refundable EITC—making it easier for

them to get the benefit of both credits.

Expansion of Individual Retirement Accounts.

The Administration believes that individuals should be encouraged to save in

order to provide for long-term needs, such as retirement and education. Tax policies

targeted to middle-income taxpayers can provide an important incentive for generating new savings. (By contrast, new tax benefits for savings by upper-income people

are more likely to result in shifting into tax-favored investments of savings that

would otherwise occur.) The Administration’s proposal would expand the availability

of deductible individual retirement accounts (IRAs) to families with incomes under

$100,000 and individuals with incomes under $70,000.2 These thresholds, as well as

the annual contribution limit of $2,000, would be indexed for inflation. As under

current law, if an individual (and the individual’s spouse) is not an active participant in an employer-sponsored plan, the individual (and spouse) would be eligible

for a deductible IRA without regard to income.

Taxpayers would have the option of either deducting the amount deposited in an

IRA account (and paying tax on the contributions and earnings when withdrawn),

or forgoing an immediate deduction but not having to pay tax on either the conVerDate 11-SEP-98 10:34 Oct 05, 1999 Jkt 057910 PO 00000 Frm 00037 Fmt 6633 Sfmt 6602 D:57910 W&M3 PsN: W&M3
35

tributions or earnings on the contributions when the funds are withdrawn from a

new Special IRA, provided the contributions remain in the Special IRA for at least

five years. The purposes for which withdrawals could be made without early withdrawal tax would be broadened to include higher education costs, first-home purchases, and long-term unemployment.

Individuals with moderate incomes and younger people, who are now doing very

little saving, should find the expansion of IRAs to meet a wider variety of savings

needs, such as first-time home purchases and higher education expenditures, very

attractive. This expansion also has a strong policy rationale. Homes frequently provide an important financial resource during retirement years, and education will improve productivity and economic security of the next generation. In addition, the

knowledge that IRA assets are available to deal with possible family crises, such

as unemployment, will make middle-income families more comfortable with beginning a commitment to IRA savings. Moreover, by dramatically increasing the number of middle-income taxpayers eligible for IRAs, financial institutions will have an

increased incentive to advertise vigorously and to promote tax-preferred savings accounts. Widespread advertising and media attention to IRAs should be effective in

increasing awareness of the importance of saving and encouraging IRA contributions, especially among moderate-income taxpayers.

Exclusion of Gains on Sale of Principal Residence.

The budget provides substantial simplification and tax relief for millions of Americans by replacing the current-law tax treatment of capital gains on home sales with

an exclusion of up to $500,000 of gain for married taxpayers filing joint returns

($250,000 for other taxpayers). The exclusion is available every two years, so long

as the taxpayer used the house as a principal residence for at least two of the five

years prior to the sale (the exclusion would be pro-rated for taxpayers forced to

move in less than two years). The exclusion generally applies to sales on or after

January 1, 1997.

The budget proposal would provide substantial simplification. Currently, all

homeowners must keep detailed records of the original cost and improvements to

their home because of the potential for capital gains tax liability, even though fewer

than four percent of home sales result in taxable capital gains. Under the budget

proposal, record-keeping burdens for income tax purposes would be substantially reduced for over 60 million households that own their homes. The number of taxpayers paying capital gains tax on residences would be reduced from about 150,000

per year to fewer than 10,000 per year (one-quarter of one percent of those selling

their homes).

Under current law, capital gains from the sale of principal residences are subject

to tax. However, taxpayers can postpone the capital gains tax by reinvesting in a

replacement residence with a purchase price equal to or higher than the adjusted

sales price of the house that is being sold. In addition, taxpayers age 55 and over

can elect to take a one-time exclusion of up to $125,000 in gains on residences.

The current-law postponement of capital gain from the sale of a principal residence encourages some taxpayers to purchase larger and more expensive houses

than they need because the purchase price of a new home must be greater than the

sales price of the old home. Current law also may discourage some taxpayers from

selling their homes. When taxpayers feel they must move to a less expensive home,

because they are experiencing financial difficulty, going through a divorce, or for

other reasons, they currently must pay tax on any gain on their home sale. The

budget proposal would eliminate these problems in almost all cases.

Similarly, while the one-time capital gains exclusion has successfully relieved

most taxpayers over 55 from tax liability on the sale of their homes, it contains certain tax traps for the unwary that can result in loss of the benefits of the current

exclusion and significant capital gains taxes. For example, an individual is not eligible for the $125,000 one-time capital gains exclusion if the exclusion was previously

utilized by the individual’s spouse. This restriction has the unintended effect of penalizing individuals who marry someone who has already taken the exclusion. The

budget proposal would eliminate these traps for the unwary.

ESTATE TAX RELIEF FOR SMALL BUSINESSES AND FARMS

The budget proposes to ease the burden of estate taxes on farms and other small

businesses, which may have a cash-flow problem when estate taxes must be paid

after death. Under current law, estate tax attributable to certain closely held businesses may be paid in installments (interest only for four years, followed by up to

ten annual installments of principal and interest). A special four-percent interest

rate is provided for the tax deferred on the first $1 million of value. Only certain

36

types of business arrangements are eligible for the installment payment provision,

and a special estate tax lien applies to property on which the tax is deferred during

the installment payment period. To take full advantage of the available tax benefits,

an estate must make an annual filing using complicated interrelated computations

to recompute the payment due each year.

The budget proposal would address the liquidity problems of estates holding

farms and closely held businesses, and simplify the tax laws, by increasing the

value cap on the special low interest rate from $1 million to $2.5 million, expanding

the availability of these rules to other comparable business arrangements, and authorizing the Secretary to accept security arrangements in lieu of the special estate

tax lien. The applicable interest rates would be cut by 50 percent or more, but interest paid would be nondeductible, thus eliminating the necessity for annual filings

and circular computations. These proposals generally would be effective for decedents dying after 1997, but estates already taking advantage of the installment payment plan would be given a one-time opportunity to convert to the lower nondeductible interest rate in order to simplify their filing requirements.

EMPOWERING COMMUNITIES AND THE ECONOMICALLY DISADVANTAGED

The budget contains proposals to spur private-sector participation in revitalizing

distressed communities and to generate job opportunities for long-term welfare recipients.

Tax Incentives to Clean Up Blighted ‘‘Brownfields’’ in Distressed Areas.

To encourage companies to clean up abandoned, contaminated industrial properties located in distressed communities, clean-up costs associated with the abatement or control of certain pollutants would be immediately deductible if incurred

for a qualified site. Qualified sites include business or income-producing properties

located in specified high-poverty areas where it has been certified that hazardous

substances are present or potentially present in the property. The deduction would

be subject to recapture as ordinary income upon a subsequent disposition of the

property at a gain. The proposal would apply to expenses incurred after the date

of enactment.

This incentive is expected to leverage $10 billion in private investment to help

bring an estimated 30,000 environmentally contaminated industrial sites back into

productive use again, helping to rebuild neighborhoods, create jobs, and restore hope

to our nation’s cities and distressed rural areas.

Additional Empowerment Zones and Enterprise Communities.

The Empowerment Zone and Enterprise Community Program would be strengthened by a second round of designations and a new mix of federal tax incentives. The

program rewards communities that develop comprehensive strategic plans for revitalizing their neighborhoods with a wide array of community partners. In the first

round of designations announced in December 1994, 105 communities were selected.

Under the budget proposal, the Secretary of Housing and Urban Development

would be authorized to designate two urban empowerment zones in addition to the

six urban and three rural zones designated on December 21, 1994. This would have

the effect of extending the current empowerment zone tax incentives to these additional areas, with technical modifications. In addition, 20 additional empowerment

zones and 80 additional enterprise communities, which would be subject to modified

eligibility criteria, would be authorized. Among the 20 zones, 15 would be in urban

areas and five would be in rural areas. The 80 communities would be divided between 50 urban areas and 30 rural areas. Areas within Indian reservations would

be eligible for designation.

These additional 20 zones would have available a different combination of tax incentives than those available to existing zones and would include the brownfields

initiative, a current deduction for acquisitions of certain business assets, and an expanded form of tax-exempt financing. In addition, the investment incentives available in the original EZs and ECs would be strengthened.

Tax Credits for Community-Oriented Equity Investments.

Under the budget plan, access to capital in distressed communities would be enhanced through a new tax credit for equity investments in Community Development

Financial Institutions (CDFIs). The Community Development Banking and Financial Institutions Act of 1994 created the Community Development Financial Institutions (CDFI) Fund to provide equity investments, grants, loans, and technical assistance to financial institutions that have community development as their primary

mission.

37

3 ‘‘Long-term family assistance recipients’’ would be defined to include: (1) members of families

that have received family assistance (AFDC or its successor program) for at least 18 consecutive

months ending on the hiring date; (2) members of families that have received family assistance

for a total of at least 18 months beginning on the date of enactment, provided that they are

hired within two years of the date that the 18-month total is reached; and (3) members of families who are no longer eligible for family assistance because of Federal or state time limits, provided that they are hired within two years of the date that they became ineligible for family

assistance.

The budget would make $100 million in nonrefundable tax credits available to the

CDFI Fund to allocate among equity investors between 1997 and 2006. The allocation of credits is capped at 25 percent of the amount invested in any project and

would be determined by the CDFI Fund using a competitive process. Over time, this

incentive is estimated to result in at least $5 billion of new lending and investing

in distressed urban and rural communities.

Tax Credits to Facilitate the Transition from Welfare to Work.

The goal of the Personal Responsibility and Work Opportunity Reconciliation Act

of 1996 is to move individuals from welfare to work. However, it is anticipated that

the process of moving some welfare recipients to work will be a difficult challenge

for a variety of reasons, including a recipient’s lack of prior work experience and

skills relevant to the demands of a changing labor market. To encourage the hiring

of these welfare recipients, the President proposes a new welfare-to-work credit that

would enable employers to claim a 50-percent credit on the first $10,000 of annual

wages paid to certain long-term family assistance recipients 3 for up to two years.

Thus, the maximum credit would be $5,000 per year. The new tax credit would be

effective through September 30, 2000.

In 1996, the Congress replaced the Targeted Jobs Tax Credit with a work opportunity tax credit (WOTC) of 35 percent of qualified wages paid to a targeted group

during the first year of employment, up to a maximum credit of $2,100 per qualified

employee. The WOTC expires after September 30, 1997. The President proposes to

extend the WOTC for an additional year. Moreover, a new category of qualified employees would be added to the targeted groups. Under the President’s proposal, the

WOTC would be allowed to taxpayers who hire certain food stamp recipients (i.e.,

able-bodied adults age 18–50 who, under the Administration’s Food Stamp proposal,

would face a more rigorous work requirement in order to continue receiving Food

Stamps). The credit for this group would be effective for individuals hired from the

date of enactment through September 30, 2000.

OTHER TAX RELIEF PROVISIONS

Extension of Other Expiring Tax Provisions.

The budget would extend each of the following provisions for one year from their

current expiration date:

• The 20-percent credit for research and experimentation expenditures (expiring

May 31, 1997);

• The 50-percent credit for qualified clinical testing of certain drugs for rare diseases or conditions (known as ‘‘orphan drugs’’) (expiring May 31, 1997); and

• The fair-market-value deduction allowed for contributions of appreciated stock

to private foundations (expiring May 31, 1997).

Equitable Tolling of the Statute of Limitations.

To ensure that disabled persons are treated fairly when filing for tax refunds, the

statute of limitations for refunds from the Internal Revenue Service would be delayed when the individual is under a sufficient medically determined disability and

no other person has been authorized to act on the taxpayer’s behalf in financial matters. The proposal would be effective for taxable years ending after the date of enactment.

Tax Incentive for Economic Development of Puerto Rico.

To provide a more efficient and effective tax incentive for the economic development of Puerto Rico, the budget proposes to modify the Puerto Rican economic-activity credit—basically a wage credit—by extending it indefinitely, opening it to newly

established business operations, and removing the income cap. The budget proposal

will address a real need to preserve and create jobs for U.S. citizens in Puerto Rico.

38

4The Administration will propose legislation to completely replace these taxes, effective October 1, 1998, with cost-based user fees, as part of the Administration’s effort to create a more

business-like Federal Aviation Administration.

Allow Foreign Sales Corporation Benefits for Computer Software Licenses.

The foreign sales corporation (FSC) provisions, which provide a limited exemption

from U.S. tax for income arising in certain export transactions, currently are applicable to exports of films, tapes, records, and similar reproductions. Since computer

software is similar to these other types of property, we believe that FSC benefits

should be extended by legislation to licenses of computer software.

Tax Incentives for Economic Development of the District of Columbia.

The budget also includes a package of Federal income tax incentives designed to

encourage hiring and increased investment in undeveloped and underutilized areas

in the District of Columbia. We are still finalizing the details of this proposal and

are discussing the economic development needs of the District with interested business and community leaders. Thus, the specific details of the incentives will be released shortly together with the other components of the President’s plan to revitalize the District as the Nation’s capital and to improve the prospects of success for

home rule. To a large extent, the District tax incentives build on the Administration’s Empowerment Zone and Enterprise Community incentives, the Work Opportunity Tax credit, and the President’s proposed Welfare-to-Work incentive. Also included in the mix are substantial amounts of tax credits specifically designed to increase the availability of debt and equity capital for those projects in the District

that are determined, at the local level, to promote increased economic activity most

effectively.

The IRS will assume responsibility from the District of Columbia for administering the District’s individual income taxes and unemployment insurance taxes, funded by an addition to the IRS appropriation for that purpose. As a condition of this

change, specific authorizing legislation setting out the functions and timing will be

required. The IRS will be responsible for management, tax return and refund processing, customer service, computer operations, compliance and enforcement, and will

have all of its current enforcement powers available to it.

CLOSING CORPORATE TAX LOOPHOLES AND OTHER REVENUE MEASURES

The budget includes measures previously proposed by the Administration to eliminate unwarranted corporate tax subsidies, close tax loopholes that are not economically sound, and improve tax compliance. Such measures include:

• Proposals focused on financial products, to maintain the distinction between

debt and equity, to curtail arbitrage opportunities, to prevent avoidance of gain recognition on functional sales, and to measure income properly;

• Proposals focused on corporate transactions, to prevent tax-free disguised sales

of businesses, to prevent the manipulation of the stock redemption rules to distort

income, to eliminate the use of inventory methods that mismeasure income, and to

reduce corporate subsidies such as percentage depletion on lands received from the

Federal government at a bargain price;

• Proposals focused on the international tax rules, to measure export income more

accurately, to prevent manipulation of the foreign tax credit rules through artificial

labels, and to eliminate distortions resulting from the use of derivative financial instruments; and

• Proposals focused on increasing tax compliance, for example by tightening the

substantial understatement penalty for very large corporations, expanding withholding on gambling winnings, and streamlining debt collection procedures for nonmeans tested, recurring Federal payments.

Extension of Expired Excise and Other Trust Fund Taxes.

The budget also proposes reinstating the excise and other trust fund taxes that

have expired: the Airport and Airways Trust Fund excise taxes; 4 the Hazardous

Substance Superfund Trust Fund excise and income taxes; the Oil Spill Liability

Trust Fund excise taxes; and the Leaking Underground Storage Tank Trust Fund

excise tax. These are not new taxes: they have been applied for years to finance specific programs, such as the provision of air traffic control services and the cleanup

of certain hazardous waste sites. Each of these taxes would be extended through

2007.

39

TAX SIMPLIFICATION AND TAXPAYERS’ RIGHTS

The Administration continues to support revenue-neutral initiatives designed to

promote sensible and equitable administration of the tax laws, including simplification, technical corrections, compliance, and taxpayers’ rights measures. In the near

future, the Administration will propose to Congress a package of such measures.

CONCLUSION

In conclusion, the President’s FY 1998 budget plan proposes to reach balance by

2002 with prudent tax reductions that are pro-family, pro-education, and pro-economic growth, and that are targeted to those who need them the most, with an emphasis on stopping abuses and simplifying the tax system. We look forward to working with the Committee on these proposals. I would be pleased to answer any questions that you might have.

we realize is a complex and comprehensive proposal. I am sure the

Chairman ARCHER. Mr. Lubick, thank you for summarizing what

f Members of the Committee will want to get in depth into some of

the areas that maybe you have not been able to elucidate on in

your testimony, and we are pleased to have Mr. Longanecker with

us also.

I hope the Members of the Committee will attempt to concentrate

on questions about your proposal that relate to education because

we are going to have additional hearings that will get into other

aspects of the tax proposal that you have made. That is not to preclude some ancillary connection between the education provisions

and some other aspects of your tax proposal.

I would like to ask you a couple of very quick questions. I would

like for you to confirm our analysis that the education tax credits

expire at the end of the year 2000. Is that correct?

40

Mr. LUBICK. We do not believe that is correct, Mr. Chairman.

The question is basically one of the assumptions as to whether or

not the budget will be on track to reaching balance by fiscal year

2002.

The CBO has a different set of assumptions. They are much

more conservative than ours. We believe ours are very conservative. For the last 4 years there has been a similar difference in

assumptions. We have been wrong, the economy did better and,

therefore, results were better than we had forecast.

The CBO was wronger and, therefore, we think it is prudent to

continue along a path which has scored four for four. And, therefore we think that although for technical reasons because it is necessary to use the CBO assumptions, we have had to provide a sunset and a procedure for reinstatement if the budget objectives are

on track we are firmly convinced that they will remain on track

and that, therefore, it will not be necessary to sunset these particular provisions.

Chairman ARCHER. Well, Mr. Lubick, I understand the differences between the basic assumptions. That is really not what I

am getting at. You submitted statutory language to us which sunsets these provisions at the end of the year 2000 and is specific,

and there is no question about it, and it further requires an affirmative vote on the part of the Congress for extension. It is not automatic based on what the assumptions are, and every law that we

have where there is a sunset statutorily and a requirement that

there be an affirmative action on the part of the Congress is a sunset. That is statutory law, and that is what you submitted to us.

Now, this is not a question of differences between basic assumptions on what the economy is going to do. There is no guarantee

that the Congress in the year 2001 or the year 2000 will affirmatively act to restore these education credits, is there?

Mr. LUBICK. Mr. Chairman, we believe that the sun will rise immediately following the sunset. It was necessary—we would

have——

Chairman ARCHER. Now, I understand that, but what in your bill

is going to mandate that the Congress take an affirmative vote and

restore these tax cuts, assuming that your assumptions are correct?

Mr. LUBICK. We would be very pleased to submit a draft legislation that says that the continuation of these provisions is contingent on meeting the budget assumptions. But we understand that

the CBO rules of scoring do not permit us to do that, so we have

acquiesced in the only procedure of drafting that CBO would permit us to do. We think in essence it is going to lead to exactly the

same result.

Chairman ARCHER. Mr. Lubick, the CBO will score anything you

send up. They do not mandate the statutory language that you

send up for their consideration. For you to tell this Committee that

you sent up what the CBO told you you had to send up is just not

a reflection of the way this process works. You made the election

to send this language up. Now, I do not know what your motivation

was, but I can tell you that the CBO does not mandate any statutory language. They will score whatever you send up. And you

elected to send this up, for whatever reasons, in contrast to your

41

rhetoric in the presentation of your program when it was first unveiled.

Mr. LUBICK. Mr. Chairman, under our assumptions, clearly there

will be no reason to trigger these provisions off. Now——

Chairman ARCHER. Mr. Lubick, please, let’s stop talking in generalities about assumptions. The specificity of your statutory language that you sent to the Congress for enactment provides a sunset. And it further provides that if it is to be renewed, it requires

an affirmative vote on the part of the Congress of the United

States. It is not automatic. It is not dependent upon whether your

assumptions are correct or not. So we have to deal with the statutory language that becomes the law of the land. And the reality

is—and I do not know why you will not just admit it—that this

sunsets and it will require an affirmative vote on the part of the

Congress to reinstate it.

Mr. LUBICK. Well, Mr. Chairman, I believe that both the Joint

Committee and the CBO have scored the provisions with and without the sunset, and it seems to me they are implicitly recognizing

that if the targets are met, the tax cuts will stay on.

Now, if the Committee wishes to approve these provisions without the sunset, we would certainly endorse that because that is our

objective.

Chairman ARCHER. Mr. Lubick, hypothetically, there can be a

second estimate given to the Congress by the Joint Committee on

Taxation and the CBO. Your statutory language is clear. It is unequivocal. And that is what you have sent up for us to implement.

Why do you keep trying to duck this? What was your reason for

sending that up if you want to try to duck it today before the Committee?

Mr. LUBICK. Mr. Chairman, I am not trying to duck it. The language also includes fast-track procedures for congressional re-enactment. That is the technical vehicle that is necessary to use to

meet all of the requirements to attain the balanced budget by 2002.

Now, we will see in 2000 whether or not we are reaching our

budget targets, and we firmly believe we shall.

Chairman ARCHER. No one today can know whether your basic

assumptions are right or wrong.

Mr. LUBICK. That is correct.

Chairman ARCHER. You have sent up statutory language that

sunsets these provisions at the end of the year 2000, and now you

are trying to speculate as to whether something in the future is

going to happen or is not going to happen. These provisions, statutorily, based on your language, are not an automatic extension,

even under certain speculative circumstances. They have a clear

statutory sunset. And I just would like for you just to say yes, that

is true.

Now, I do not know why you did it that way, but just say yes,

that is true.

Mr. LUBICK. Yes, that is true.

Chairman ARCHER. OK. Thank you very much. [Laughter.]

Mr. LUBICK. I am glad to accommodate.

Chairman ARCHER. I now recognize the gentleman from California for inquiry.

Mr. Stark.

42

Mr. STARK. Thank you, Mr. Chairman.

Don, let me make about three—you might want to write them

down, and with our limited time, I wanted to cover a couple of

points. The first is if, in fact, there is a study or some kind of data

to indicate that the tax credit will really create any new jobs. I am

not being facetious, but I am just unaware of anything that—and

if you do have it, it would help me because I am——

Mr. LUBICK. The studies that exist are of the old targeted jobs

credit.

Mr. STARK. And they were not very—in a net sense, they did not

do much.

Mr. LUBICK. And we believe that these particular credits that we

are proposing, for a number of reasons which I will state, have a

very good chance of being much more effective.

First of all, there has been a change in the low-wage labor markets. Welfare caseloads have fallen, and much more than would be

expected from the performance of the economy. And in the new employment environment, we believe that the subsidies are much

more likely to be helpful in getting—enabling people to get and

keep jobs than they have in the past.

Mr. STARK. As I say, I am skeptical about the caseload changes

so recently, and it is no secret that I did not vote for that welfare

turkey. And so I am not sure that this is a way to fix a bad bill.

But——

Mr. LUBICK. We have also——

Mr. STARK. I want to be—I want a chance to review your reasons, and I am very much in the minority here, so you can enlighten me otherwise.

I would like to go on to a couple of other areas.

Mr. LUBICK. We will send you a communication, Mr. Stark.

Mr. STARK. Because you know my prejudice, I want to now move

over to what Mr. Gladieux will testify to later and see how you

would respond to, I guess, what he and Bob Reischauer wrote and

what the college board seems to think. And they do congratulate

the President. They say we are fortunate to have an education

President consistently and passionately stating that we need to invest more in education and training. Now, that is a pretty nice

thing for you guys.

But—in the next paragraph—the President’s proposed tax breaks

for college tuition would not be an effective way to achieve these

objectives. By and large, they benefit students and families in the

upper-income quartiles where college enrollment rates are already

very high and have been rising. Nine out of ten of the 18- to 24-

year-olds from households in the top-income quartile enroll in some

form of postsecondary education or training now, compared to a

ratio of only one out of two of the lowest-income quartile whom you

are not helping.

Now, I want to just ask you a couple questions. You have children?

Mr. LUBICK. Yes, sir. And they are all educated.

Mr. STARK. I sent some kids to college, but I now have an 18-

year-old that I am about to send to college. I have two questions.

I know Secretary Rubin wants to increase savings and help our

productivity. Why am I encouraged to save when you are going to

43

offer me this tax credit, assuming I retire by the time Fortney goes

to college and so I am below the $100,000? I am not going to save

now. Wouldn’t the country be better off if we all put $100 a month

or so away in savings? Question one.

Question two: When I qualify my son for this credit and I send

you that Huggie, that soggy Huggie for you to test to make sure

he is drug-free, who in the IRS is capable of analyzing this?

It is my sense that the IRS conducting your analysis in vetting

out grade report cards is not going to be very happy with the added

burden that you are going to place on them, and I know that the

law says—and your able staff is going to tell you—they only have

to not have—they have to be arrest-free. But that means you are

going to have to go through all the criminal records in 50 States,

and you are also going to have to audit the grades of these kinds.

And I do not—I will bet you a nickel that the IRS, as they have

in previous administrations, objects to this and that you are creating a nightmare. Who is going to do the urinalysis?

Mr. LUBICK. Let me say, Mr. Stark, I am sorry, but I think you

will have to save anyway——

Mr. STARK. Yes, but not as much.

Mr. LUBICK [continuing]. Because this education credit phases out with incomes over $100,000. So——

Mr. STARK. But not as much. Let’s say I drop below $100,000

when I retire. It is a somewhat disincentive to save. Right?

Mr. LUBICK. I don’t think so, Mr. Stark. Having put three children through college, the credit would have been a help, but it

would in no way have, when you consider the costs of education,

begun to have solved the entire problem. I think by and large it

is going to meet the needs of middle-income families that are having difficulty, combine that with the Pell grants that are going to

help meet the needs of the lowest income taxpayers, and I think

you have——

Mr. STARK. You are going to change those Pell grants to an entitlement?

Mr. LUBICK. Beg your pardon?

Mr. STARK. You are going to change those Pell grants to an entitlement? Do you know something I do not know about the Appropriations Committee?

Mr. LUBICK. I think that is a question I am going to throw to Mr.

Longanecker, along with——

Mr. STARK. My time has expired, but I would like to have you

quantify the number of new jobs you think will be created—new

jobs—in whatever you send me. And I would also like—I would

suspect that you have got some problems with the IRS and how

they are going to deal with the added burden you place on them

to verify these. Our past experience has been, as I know you know,

that they do not like to get very far out of the normal income-expense area and that we may be wandering far afield.

Mr. LUBICK. I would like, Mr. Chairman, if we could have our

reply to Mr. Stark inserted in the record as well.

Chairman ARCHER. Without objection.

Mr. LUBICK. I think we have answers to all of these questions.

Chairman ARCHER. Without objection, your reply in writing will

be inserted in the record.

44

[The following was subsequently received:]

45

f46

Chairman ARCHER. Very quickly, do you provide for any additional appropriated funds to the IRS to carry out this additional

duty?

Mr. LUBICK. Actually, Mr. Chairman, I do not believe——

Chairman ARCHER. Is that not subject to a yes or no answer?

Mr. LUBICK. Yes, that is subject to—no. We think it can be done

within the existing——

Chairman ARCHER. All right. Thank you very much.

Mr. Crane.

Mr. CRANE. Thank you, Mr. Chairman.

Mr. Lubick, I have just one question, and it has to do with the $1,500 tuition credit. I have two of the most outstanding community colleges in the country in my district. One is the College of

Lake County, and the other is Harper College. And they have done

an outstanding job not only in giving kids an opportunity to work,

stay at home, get at least 2 of their 4 years of a liberal arts education there, but they have also worked cooperatively to create special classes for training personnel with some of our major corporations in my district. But their annual tuition rates are $800, and by contrast, the

University of Illinois, if I am not mistaken, is approximately

$15,000 a year. So there is a big financial incentive for a lot of

these kids to get the 2 years off the table as they begin a working

career.

My concern is that that $1,500 credit, it seems to me, is going

to create a lot of pressure on those community colleges to take their

tuition rates up to $1,500.

Mr. LUBICK. Well, Mr. Crane, I do not believe so. If I can recite

a personal anecdote, when I got out of the Army at the end of

World War II in 1946, I went to law school on the G.I. bill. Ninetyfive percent of my classmates were in law school on the G.I. bill.

The government was paying whatever tuition the institution

charged, and during the whole period of my time in school, the tuition did not increase. It was exactly the same, and there you had

no independent forces at work. Almost everybody at school with me

was being totally subsidized as far as tuition is concerned.

We believe there are many, many independent restraints, and I

will ask Mr. Longanecker to comment on that because he is an educational professional and well aware of them.

Mr. LONGANECKER. Yes, I think the natural laws of economics

would argue what you have suggested, but there are other forces,

including the laws of psychology and political science, that we

think will be natural forces against that.

One is that as people hear about this, they are going to expect

that benefit for themselves, and not expect that they will be disadvantaged or that the benefit will essentially go to the institutions

or to the States.

A second is that even though this is a very substantial benefit,

it still is targeted on a discrete set of students. So at those community colleges that you are talking about, this would be for those

students who enroll greater than half time and, for the second

year, maintaining a B-minus average in the first year.

47

As a result, most part-time students—and the majority of parttime students in community colleges today are enrolled less than

half time—will have to pay the tuition, whatever that is. They will

have the benefit of the deduction, but they will still be paying some

of their tuition costs. So you will have the natural market forces

still at work in that institution even though you will have a very

substantial benefit for some students who, for all practical purposes, are going tuition-free to the community college. You will still

have other natural forces constraining the costs, and you will have

the political forces of the population not being really excited about

increasing college costs.

Mr. LUBICK. In fact, Mr. Crane, I have here a study of the National Association of Independent Colleges and Universities, which

predicts that the effect of this will be to reduce the pressures on

tuition and go just the other way, because a portion of tuition today

of the institutions is going to provide scholarships, and they will be

relieved to some extent of that necessity.

Mr. CRANE [presiding]. Well, that is not the Chicago School of

Economics, but I thank you for your presentation.

Mr. RANGEL. Mr. Chairman.

Mr. CRANE. Mr. Rangel.

Mr. RANGEL. Thank you.

Is there anyone in the White House that is going to monitor this

bill and all the pieces that the various Committees have? Because,

like Pete Stark, I think the worst part about the bill are the tax

incentives which are skewed toward high-income people. But I can

live with it. He cannot. I can live with it if it is part of a package

that the President is assured has the support of the American people so that we all can believe that we are benefited—and not just

the well-to-do.

Who would you think would be in charge of monitoring all of

these pieces?

Mr. LUBICK. Well, we have an interagency and White House

group that meets very frequently on that whole subject.

Mr. RANGEL. Let me join with my Chairman and ask that if you

could come up with that person’s name, it would be very helpful

to me.

Mr. LONGANECKER. Actually, as we were mentioning, I think it

is unusual that we are both here today and we are working very

closely together. And you are absolutely right; this is a package.

For us to have the benefits, you have got to have the pieces for the

most needy students combined with the others. And the fellow who

is in charge of that is William Clinton.

Mr. RANGEL. Who?

Mr. LONGANECKER. Bill Clinton.

Mr. RANGEL. Oh, don’t give me a hard time. Don’t do that.

[Laughter.]

Mr. LONGANECKER. That is why he came up here to talk about

it as a package. Actually, the person who is working for him and

working most on this and is, I think, essentially the kingpin is

Gene Sperling in the White House, the National Economic Council

chief.

Mr. RANGEL. OK, because that is a big job.

Mr. LONGANECKER. Yes.

48

Mr. RANGEL. And I ask you, the second thing, is there are a lot

of people in the private sector that want to participate in this?

After all, we are improving the work market for them. They should

have a couple cents to put in. They are spending tens of billions

of dollars training and retraining their own. They are spending billions of dollars in taxes. And they should be partners in this.

Is the private sector working and having input in the President’s

proposal, to your knowledge?

Mr. LUBICK. Well, we certainly have been meeting with the educational community. I am sure that even more——

Mr. RANGEL. Is there anyone that is speaking out? Because once

I see holes and vacuums, I have people to suggest to fill them. But

I do not want to get ahead of the President because, as I said before you came here, I think this is one of the greatest things that

we have. It is creating a climate that we should be creating. Now

we will let Committees add and improve and do the best they can.

But when this is over, our President should be able to say it is not

just a Democratic bill.

Mr. LUBICK. I think there is neither a hole nor a vacuum, Mr.

Rangel, but we would welcome your input and suggestions because

there is always room on the ship for——

Mr. RANGEL. Well, I will talk with Gene Sperling. Gene has met

with some of these people. I am glad to hear it was his name because he has met with the private sector. He is enthusiastic about

this. The Chairman here and I are going to work to see whether

we can have a team to work with this multijurisdictional problem.

I thank Treasury for their part, even though I think it is the worst

part of the bill. But if we can get a good, healthy bill that can get

off the ground, that is more important than picking it apart.

Thank you.

Chairman ARCHER [presiding]. Mr. Hulshof.

Mr. HULSHOF. Thank you, Mr. Chairman.

Mr. Lubick, in your written statement and in your oral testimony, you refer to Treasury Secretary Rubin’s appearance before

this Committee on February 11. I am not sure if you were here or

had a chance to watch the rebroadcast of that, but we had a discussion about possible tuition inflation. And I inquired of the Secretary regarding the possible administrative costs and additional

burdens to colleges and universities as a result of these requirements.

His response to me was, delivered only as the Secretary could,

it will be the cost of a pencil.

Well, televised hearings are a wonderful thing because my office

began to receive calls from registrars from colleges and universities

across the country. Do you share the Secretary’s belief that the proposals that you put in regarding these education incentives would

be merely the cost of a pencil? Do you share the Secretary’s view

on that, sir?

Mr. LUBICK. I have not priced pencils lately, but I do share at

least the implication that it will not be burdensome, because we

have tried, working in conjunction with the Department of Education—this has been a marvelous exercise in interagency cooperation—but we are very sensitive to that and to not imposing requirements that are outside of the normal duties which the agencies

49

perform, which the institutions perform today in dealing with student aid and things like that.

We have designed an information form that we think requires

only limited data which is already accessible to the institutions or

can very easily be obtained. They are not going to be policemen.

The IRS is not going to be a policeman. They are not going to run

around reading blue books. We think the administrative aspects of

this can easily be handled within existing procedures.

Mr. HULSHOF. Mr. Lubick, let me follow up, because schools currently calculate grade point average on a cumulative basis, not on

a tax year basis. There are about a dozen colleges and universities

in my district and some of them do not have advanced computer

systems. Can you assure me that having to recalculate GPAs on a

tax-year basis will not impose an additional cost or burden to those

colleges and universities?

Mr. LUBICK. It is my understanding that they do that semester

by semester, don’t they?

Mr. HULSHOF. Some colleges and universities go quarterly. Some

have trimesters. In fact, according to a survey conducted by the

American Association of Collegiate Registrars and Admissions Officers, 81 percent of all institutions did not record grades received by

other institutions.

So what happens if a student prefers to transfer midyear? If this

transfer occurs, can you assure me and those registrars that there

will not be any administrative burdens or additional costs associated by having to go back and recalculate this GPA? Can you assure me that burden will not be more than the cost of a pencil?

Mr. LUBICK. As far as I can tell—I will not contradict the Secretary on the cost of a pencil, but I can assure you that the burden

will be minimal and within their capability of handling. And, Dave,

if you——

Mr. LONGANECKER. Let me respond. We are doing everything we

can to make sure that this is as simple to administer as possible.

It may cost an expensive pencil for the institutions, but we are

going to make sure that it is as de minimis an administrative burden as possible and still have integrity in the program. There may

be some additional burdens to the institutions. I would not deny

that. But we have a long history of working with those institutions

in the student financial aid area. We assist more than 8 million

students a year today through the variety of student financial assistance programs. So we have a long history of working with the

community and believe that we can do this without substantial additional burden.

Mr. LUBICK. And the cost/benefit ratio to the institutions is going

to be very, very heavily in their favor. The benefits they are going

to receive from the program are going to outweigh any additional

information 1099 form that has to be filed.

Chairman ARCHER. The gentleman’s time has expired.

Mr. Coyne.

[No response.]

Chairman ARCHER. Mr. English.

Mr. ENGLISH. Thank you, Mr. Chairman. And welcome, Mr.

Lubick. We appreciate your being here. Certainly some of the proposals that the administration has come out with are aimed at very

50

important problems, particularly in the affordability of education

for middle-class families. And if there is any dispute here today, I

think it has to do with the specifics of your proposals, not with

your goals.

With regard to the specifics, I would like to focus on a couple of

things. One, I notice that under your proposal, your credit would

be available to students but restricted on the basis of grades and

drug offenses, but not your deduction. Is there a reason for that

distinction?

Mr. LUBICK. Yes, there is, Mr. English. The deduction is available by family, and we have not figured out, if you have got one

drug user or one poor student and one clean student and one high

student, how you average all of those things for a deduction.

Mr. ENGLISH. OK. I am curious. Will your required grade point

average include things like summer programs?

Mr. LUBICK. Well, the grade point average is whatever the grade

point average was through the end of the taxable year. We simplified this proposal considerably from the summer because we recognized there is a discongruence of the academic year and the tax

year. So, in effect, somebody starting in September will go over

three tax years, and we allow the credit in two.

Mr. ENGLISH. What about the fairly common situation where you

have students who are collecting grades from courses taken at

more than one institution in the academic year or tax year? Doesn’t

that dramatically increase the complexity of enforcing a grade

point requirement for the credit?

Mr. LONGANECKER. It could, but the way we are going to do this

is to try to keep it simple. If a school can demonstrate to us that

the student was in attendance at their institution for that period

of time, which is the end of the calendar year, and had those

grades adequately to accomplish this, that will satisfy our purposes.

Mr. ENGLISH. OK.

Mr. LUBICK. We are not going behind the box. The IRS will accept the certification of the institution, and the rules for doing that

will be the Department of Education’s.

Mr. ENGLISH. Both institutions or all three institutions?

Mr. LUBICK. Pardon me?

Mr. ENGLISH. On one return, both institutions or——

Mr. LUBICK. No. You only need it basically from the one institution because the grade point average applies only to the second

year of use of the credit, so it will turn on what the grade point

average was at the end of the preceding year.

Mr. ENGLISH. OK. You know, when I went to college—and this

is a stale experience—I envied some of my friends at Brown because at Brown in those days—and I think this may have been the

result of a policy advocated by a graduate student named Ira Magaziner—a student was able to take all of their courses pass/fail.

Now, what happens if you have an institution where four of the

courses are taken pass/fail and the fifth course is cinema history

and they got an A in it? I mean, does that person qualify in the

same way that someone who is in an advanced physics program

would qualify?

51

Mr. LONGANECKER. Yes. The answer is yes. If the institution

verifies that that student has a better than C-plus average.

Mr. ENGLISH. OK. Let me jump to another thing because my

time is running out. With regard to the drug enforcement provision, that to me suggests a very high level of complexity for a tax

provision. What happens when you have different jurisdictions

where you have ARD under first offense, you may not have access

to those records? What happens to jurisdictions that allow closed

records in the event of a drug offense? What happens to jurisdictions that open up the juvenile records? Are we talking only about

adult offenses or juvenile offenses as well? And how do you reconcile the need to get records to document drug offenses—which,

by the way, I am a strong opponent of drug offenses. I like the notion that you have included in your policy here, but I am curious

how you could possibly enforce it, given those complexities.

Mr. LONGANECKER. Our intention is to enforce this similar to the

way we do currently for Federal Pell grants and other student assistance where we have a similar requirement. What we do is we

do a match with the FBI’s data—or the Department of Justice’s

data system. It is a less than perfect system, but it is satisfactory.

Mr. ENGLISH. So, in other words—and I will leave you with

this—they would have to have the offense recorded within the FBI

recordkeeping in order for it to actually cause someone to lose access to the tax benefit.

Mr. LUBICK. Yes.

Mr. LONGANECKER. Yes.

Mr. ENGLISH. Thank you very much. I appreciate the opportunity

to question you, and I thank you, Mr. Chairman, for your indulgence in that I have gone over my time.

Chairman ARCHER. Mr. Neal.

Mr. NEAL. Thank you, Mr. Chairman.

Mr. Lubick, let me begin by congratulating you and the administration on taking up an issue that is very important to millions of

Americans. I find myself right now in that circumstance of this life

of having a child in college and preparing three more for college.

And if there is anybody on this Committee or if there is anybody

in this room that thinks that the middle class is not struggling

with the costs of college today, either they do not have their antenna up or they are not listening very carefully.

I would guess that there are many young staffers here seated behind some of our panelists today that have come out of college or

graduate school carrying near-mortgage costs after parents have

paid the national standard of 58 to 60 percent of those college

costs. And while I support entirely, as one who spent a lot of my

time in academe in a prior life, the notion of needs-based assistance, we are missing the grander point here of what has happened

to college costs for the middle class across this country.

If Members of the Committee and others believe that it is easy

for parents to reach for $25,000 to $30,000 per year for a child to

go to college based upon an income of $100,000, they are making

a terrible miscalculation. And we should simply poll members of

the staffs that are here today and ask them about what they have

experienced as they tried to meet the costs of paying back these

college loans.

52

I am fortunate. I went to college with a national defense loan,

3 percent. Today the best you can do is about 9 percent. That is

an extraordinary cost on top of $25,000 to $30,000 a year in college

costs.

So I think that one of the most important elements in this debate

is the letter that was sent to Chairman Archer from 268 high-tech

companies requesting that we establish section 127 and make it

permanent and also support this assistance for graduate education

as well.

If the United States on the eve of the new century is to remain

the only superpower on Earth, we have to demonstrate the same

sort of commitment to education that we have offered to national

defense. After all, real national defense means having children that

can read and write and do basic calculations.

So I stand in support of the administration’s effort here, if nothing else but to begin forcing the debate on what this has done. All

you have to do is go to a small setting or an athletic event with

high school children, and the issue of college costs dominates the

conversation. And constantly we are asked, well, what are you folks

doing about offering us some sort of assistance?

Now, specifically, why don’t we talk for a second about your IRA

proposal, and speak to those issues, if you can, for the Committee

and how parents in the middle class could access some of these IRA

moneys.

Mr. LUBICK. First let me say amen to your statement. And on the

IRA question, it actually dovetails very nicely with the tuition deduction proposal. One can save up to $2,000 a year, deductible, in

the IRA. It accumulates income. When it is time to pay the tuition

for the child, a distribution is made without the IRA penalty. And

while income is recognized, there is immediately a corresponding

deduction that washes it out, so the effect is that you can save taxfree for education.

I think the combination of these two provisions is very helpful to

the objectives that you are seeking.

Mr. NEAL. Both sides today, Mr. Lubick—and perhaps the other

panelists might speak to the issue—have also zeroed in on an issue

that is very timely, and that is, what colleges are doing to try to

restrain some of the costs. I think there is some legitimacy to the

criticism that as student aid has become more available and loans

have become more plentiful, the truth is that college costs have

been raised almost in a corresponding fashion. And I think that

that has to be part of this debate. I am not suggesting here that

there is much that the Congress is going to do about restraining

college costs, but I do think that it ought to be part of the overall

debate and discussion.

Mr. LUBICK. I think this is important enough that we will submit

a letter dealing especially with that point, including this study that

has recently been released.

[No information had been received at the time of printing.]

Mr. NEAL. Thank you. Thank you, Mr. Chairman.

Chairman ARCHER. Mr. Ensign. Oh, I am sorry. Mr. Ensign,

would you suspend for a moment?

53

Mr. Longanecker, you have a friend here on the Republican side

of the Ways and Means Committee who would like to take just a

few seconds.

Mr. Ramstad.

Mr. RAMSTAD. Thank you, Mr. Chairman. I am sorry, David, that

I was late. I had another meeting. But I just wanted to formally

welcome Dr. Longanecker to the Committee. We worked together

for 10 years in the Minnesota Legislature, the Minnesota Senate,

and I certainly appreciate your counsel through the years. Also, I

am looking forward to hearing from another distinguished educator

from Minnesota, Dr. McPherson, president of Macalester College,

in the next panel.

So, welcome, David. It is especially good to see you here today,

and I appreciate the outstanding job you are doing as Assistant

Secretary.

Mr. LONGANECKER. Thanks a lot. I have a lot more Minnesota experience than Mike does. He just got there this last year.

Mr. RAMSTAD. Thank you, Mr. Chairman.

Chairman ARCHER. Now, Mr. Ensign.

Mr. ENSIGN. Thank you, Mr. Chairman.

Mr. Longanecker, let me ask you a couple of philosophical questions from the administration’s point of view. First of all, we have

heard talk about K through 12 versus college. Where do you think

the biggest problem in American education lies right now, in colleges or K through 12?

Mr. LONGANECKER. Well, we think that one has to be cognizant

of the issues through the entire spectrum. If you take a look at——

Mr. ENSIGN. Right, but where would you say are the majority,

the biggest problems?

Mr. LONGANECKER [continuing]. Look at President Clinton’s Call

to Action for American Education in the 21st Century. We have serious issues addressed in the Call to Action at all levels of education—preelementary, elementary, secondary, and postsecondary.

Mr. ENSIGN. OK. But just answer my question.

Mr. LONGANECKER. Well, I am the Assistant Secretary for Postsecondary Education, so I would logically tell you that the problems

are in postsecondary education.

Mr. ENSIGN. If we look at how America is rated standards-wise,

our university systems versus K through 12 with other industrialized countries, where are we rated better, with our university

systems?

Mr. LONGANECKER. We are rated much better at the higher education end.

Mr. ENSIGN. Thank you. Having said that—and just because you

are in education, I would imagine you at least have some expertise

on K through 12—would you say that, on average, public schools

or private schools offer—on average, now—a better education in

America as far as test scores and by any measurable standard?

Mr. LONGANECKER. On average, controlling for all factors, there

is relatively little difference, and the research is clear on that.

Mr. ENSIGN. Controlling for? In other words——

Mr. LONGANECKER. Controlling for the academic backgrounds of

the students that they are serving.

54

Mr. ENSIGN. You are telling me that public schools offer the

same——

Mr. LONGANECKER. Are just as good as private schools.

Mr. ENSIGN. Just as good. So in Chicago there is no difference

between Catholic schools and public schools as far as number of

students they send to college, number of students that they——

Mr. LONGANECKER. I am saying you control for the backgrounds

of those students.

Mr. ENSIGN. I am talking about even for the backgrounds. There

is no difference between those?

Mr. LONGANECKER. Yes, that is correct, on average nationwide.

Mr. ENSIGN. On average nationwide. Can you give me the documentation to back up what you are saying there?

Mr. LONGANECKER. Sure.

Mr. ENSIGN. Because that is certainly from everything else that

I——

Mr. LONGANECKER. I will provide that.

Mr. ENSIGN. OK.

[No information had been received at the time of printing.]

Mr. ENSIGN. At the university level, is there a difference between

private and public education, State-run versus——

Mr. LONGANECKER. One of the real differences—I think the difficulty you get in that comparison is that one of the things that

really makes American higher education so distinctly different and,

I think, much greater than the rest of the world is that we have

a very diverse system of higher education, from the community colleges to the private liberal arts colleges, to the uniquely American

research university. That is very different than almost any other

country. So it is very difficult to say what is better.

What we have is a high-quality postsecondary education system

that serves the unique needs of different learners quite differently,

and I think does it well in a blended system.

Mr. ENSIGN. What percentage of the money, tax credit or whatever, is going to higher education in the President’s budget versus

K through 12?

Mr. LONGANECKER. A hundred percent would go to postsecondary

education, not just higher education, that is, collegiate, but also to

vocational and occupational-specific education and training. Much

of it would go to students in——

Mr. ENSIGN. But not K through 12.

Mr. LONGANECKER. That is correct.

Mr. ENSIGN. So none of it is going to K through 12.

Mr. LONGANECKER. That is correct.

Mr. ENSIGN. When Senator Coverdell was here earlier, we were

talking about if you do not have a foundation—that is the whole

idea of Head Start, a proper foundation. Right?

Mr. LONGANECKER. Yes.

Mr. ENSIGN. The whole idea is to prepare them so they can come

to K through 12 and at least be ready to learn. If they are not

ready K through 12 to go to college, I mean, don’t you think we

have a little bit of this backward on where some of the money is

going?

Mr. LONGANECKER. Well, we do not think so, and the reason is

that you need to think of our total comprehensive package. We

55

have been very aggressive with respect to how we can increase the

standards and have high achievement in our elementary and secondary schools through our regular appropriated programs. We

think the tax system is a very appropriate vehicle for providing the

unique kind of assistance that we are proposing to provide here, reducing the burden on those families going to college. We think the

direct appropriated programs are much more appropriate for trying

to increase the standards of elementary and secondary education

and for helping the most needy students in postsecondary through

the Pell grant program and through the student loan programs. So

it is the overall package that we think hangs together.

Mr. ENSIGN. I would be very interested in the research that you

have and who it is from on determining between private and public

education, because we certainly had testimony here and, most of

the information that I have at least been exposed to has shown

that private schools, at least, in America K through 12 are giving

a better education. That was one of the reasons for my line of questioning. If they are giving a better education, in other words, if

your premise is right that they do not give a better education, well,

OK. But if they do give a better education, why wouldn’t we give

scholarships to go to private schools. I think private schools give

a good education. I think they give a distinct education, along the

lines many of the private schools are there to provide, again that

diversity we were talking about, an experience that families can

choose.

Mr. LONGANECKER. But public education provides a good education as well. And I will provide you that.

[No information had been received at the time of printing.]

Mr. ENSIGN. If you had a choice——

Chairman ARCHER. The gentleman’s time has expired.

Mr. ENSIGN. Just real quick?

Chairman ARCHER. Very quickly.

Mr. ENSIGN. If you had a choice between sending your kids in

Washington, DC, to public school or private school, where would

you send them?

Mr. LONGANECKER. My children, all three of them, have attended

public schools from beginning to end.

Mr. ENSIGN. In Washington, DC.

Mr. LONGANECKER. I haven’t lived in Washington, DC. If I lived

in Washington, DC, I don’t know what I would do.

Mr. ENSIGN. Thank you.

Chairman ARCHER. Mr. Levin.

Mr. LEVIN. Thank you. I had to be away for part of the questioning, and I think that you were asked about this issue of income distribution of the beneficiaries of the proposal, and you indicated that

you were going to provide some information on that?

Mr. LUBICK. Well, Mr. Levin, we don’t generally do distributions

of individual text proposals. In this area, as David said, what we

have here is a combination. You have the tax proposal, along with

the Pell grant increase, and it is very, very difficult to—since you’re

not dealing with common denominators, there are asset tests as

well as income tests in the direct programs.

But I think we can give enough general information to show that

there is an equitable distribution for both low- and middle-income

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persons. The Pell grants, quite obviously, are designed to fill the

gap that a tax credit, which is nonrefundable, does not cover, and

in point of fact, at one stage we considered a refundable tax credit,

but the Pell grant approach seemed to be much more effective,

much more efficient, much less complicating, fitted within existing

programs.

And there is more money to some extent going into the Pell grant

increase for the low-income persons than would have been the case

under a refundable credit.

The income phase-outs that are provided for both the credit and

the deduction make it clear that the benefits are distributed among

middle-income taxpayers running from the lowest taxable taxpayers up till the phase-out takes place completely at $100,000.

And in addition to that, for the low-income persons, we have

stacked the credit ahead of the earned income tax credit so the lowest income taxpayers that are eligible for earned income tax credit

will not see any diminution of their otherwise available Hope scholarship credit.

Mr. LONGANECKER. If you look at these in combination, what you

see is that at the very most needy level, the lowest income, the

family starts with 3,000 dollars’ worth of benefit in a Pell. That

gradually reduces. It levels off at around $20,000–$25,000, to the

$1,500 that they’re getting either through Pell or through the tax

credit.

And then it maintains that plateau until about the point where it starts to phase out at $80,000.

Mr. LEVIN. I do think you know this, that the more information

you can supply, the better, because one of the attacks on the proposal is that it would mainly benefit high middle-income families.

Let me ask you quickly—I don’t know if the Chairman heard Mr.

Stark’s opening statement. Mr. Chairman, I know you’d want me

to give Mr. Lubick a chance, and his colleague, to, in 30 seconds,

describe why you think 127 should once again apply to those who

are in graduate programs.

Mr. LUBICK. Well, we think, as has been stated many times

today, that the competitiveness of America turns upon skills, high

skills, high technological skills, and it seems to me that depriving

the benefit of this program for employers to train people in the

most sophisticated information and skills is somewhat insane.

I think we would want to encourage that especially from the

point of view of the ability of the country to perform economically

in a competitive way.

Mr. LEVIN. Thank you.

Chairman ARCHER. Let me make an announcement, sort of a

housekeeping announcement. The Chair hopes to conclude this session at 12 noon and return at 1 p.m. with the next panel. So I hope

we can conclude the questioning for the administration’s witnesses

within the next 10 minutes.

Mrs. Thurman.

Mrs. THURMAN. Thank you, Mr. Chairman.

Good morning, and thank you for being here today. I’m a former

math teacher at the middle school level in a very rural area where

many of these programs are extremely important to some of our

kids.

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One of the things that I would like to ask, as you’re listening to

this discussion, and as we get into testimony and start to receive

mail from our universities, our community colleges and our students, what kind of flexibility are we going to have in looking at

some of these programs to meet the real needs that are out there?

Mr. LUBICK. I’m not sure——

Mrs. THURMAN. I guess I’m asking, is the administration willing

to give us some flexibility? I know that some programs are very important, but I also think that potentially if there are some problems, or if there are some needs that we’re not addressing, or that

we’re not meeting, and we’ve got this pocket of $40 billion, are we

going to have the ability to have conversation, to really work and

see where we might best benefit students in this country?

Mr. LUBICK. Well, I would say, having appeared before this Committee, starting in 1961, we have always found improvement in

proposals which any administration has set up as it goes through

the process.

So our minds are open, and our ears are attuned.

Mrs. THURMAN. With that, then, as you know, the next group of

witnesses has written an editorial or a guest article. One of the

questions they raise is if more than $40 billion is new, resources

really can be found to expand access to higher education. Is this

the best way to invest it? They go into the issue of need based.

Can you respond to that at this point? I know they are coming

up next, but maybe give you a jump so we might ask them some

questions.

Mr. LUBICK. Well, I think as Mr. Neal stated so eloquently, there

is a real need in the middle-income group of the population that

he alludes to.

Now, we quite agree, there is also a need to help those students

who come from nontaxpaying families, and therefore we think we

have been quite flexible in trying to both have our cake and eat it,

too, and address a need that extends across a vast spectrum of the

income distribution.

Mr. LONGANECKER. Our Pell and loan proposals are the most aggressive that have been proposed since the inception of the Pell

grant program. So we’re trying—and over the next 5 years, we’ll

put more into Pell than we’ll put into the tax reduction plans.

That’s a $40-plus billion program over the next 5 years.

So it’s not as though we’re trying to back away from our appropriated programs. That is our primary responsibility. We do think,

however, that our tax-based college financing approach fills a really

important need as well.

I might also mention that we basically fundamentally disagree

with Mr. Gladieux and Mr. Reischauer. We think this will change

the ethic of participation in American higher education.

You know, middle-income families don’t send their children to

college at the same rate as upper-middle and wealthy families.

And, so there is room for growth there. Plus those students don’t

persist in higher education at the rate that students from higher

income families do.

So we think there is some room for improvement in both participation and completion, as there certainly is an unfinished agenda

for the most needy students.

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Mrs. THURMAN. OK. Let me ask another question very quickly,

and this really goes to some issues that this Congress has dealt

with with the welfare reform. I actually had a young woman in my

district a couple of years ago call me.

She’s on welfare, she has two children, and she’s a single mother.

She was eligible for a Pell grant. And she called me because she

was very frustrated in the fact that the Pell grant dollars that she

received bumped her up over the dollars level that made her or allowed her to be eligible for programs for her children, such as

health care with Medicaid, and with some food stamps for her assistance.

And, quite frankly, she was very disturbed in the fact that here

she was trying to work herself out of this, trying to put herself in

a better position, and because of the Pell grant bumping her income up, it actually put her in a situation where she couldn’t receive that because she put her children in jeopardy.

Mr. LONGANECKER. That’s an issue we deal with fairly frequently. It varies substantially from State to State depending on

what their welfare rules are, and how they count benefits. It’s

much less Federal requirements than it is State and local issues

about how they distribute those funds.

To some extent, that’s even a bigger problem today than it was

2 years ago.

Mrs. THURMAN. I think you’re right, and I think somehow we

need to address it. I’d just put that on the table, because I think

as this Congress has worked so hard, and as many of our states

have worked hard to move people from welfare to work, this is an

opportunity. It’s an educational opportunity that we ought not to

be putting people in a position of not being able to accept what

we’re trying to do up here. Thank you.

Chairman ARCHER. I assume that all of the Members have had

adequate time to inquire, and I appreciate your coming up, Mr.

Secretary, and Mr. Longanecker. Thank you for your testimony.

I did not intend, by the way, Mr. Lubick, to be abrupt with you,

but I was trying to move things along, because time was catching

up with us. But we did conclude in time for lunch, so we made our

schedule, and thank you very much.

Mr. LUBICK. It’s always a pleasure to be with you, Mr. Chairman.

[The following questions were subsequently submitted by Mr.

Thomas, to Treasury:]

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[No answers had been received at the time of printing.]

Chairman ARCHER. The Committee will stand in recess until 1

p.m.

[Recess.]

Mr. RAMSTAD [presiding]. We’re going to begin the afternoon

hearing, pending the arrival of the Chairman and most of the

Members who are still across the street voting.

But it’s a privilege to welcome to the Committee our next panel.

Lawrence Gladieux, who is the executive director for policy analysis for the College Board; Thomas Kane, assistant professor at the

John F. Kennedy School of Government—Dr. Kane, good to welcome you here today—at Harvard; Dr. Michael McPherson, president, Macalester College in St. Paul—nice to see you, Mike—and

Dr. Morton Schapiro, dean of the College of Letters, Arts and

Sciences at the University of Southern California; and, not to slight

a gentleman I just had an interesting conversation with, Dr. David

Breneman, who is dean of the Curry School of Education at the

University of Virginia.

Gentlemen, welcome, all of you, to the Ways and Means Committee, and I look forward to your testimony. I particularly want to

welcome my friend, Mike McPherson, who is the distinguished

president of Macalester College in Minnesota.

Our home State is well represented at today’s hearing. This

morning we heard from Dr. Longanecker from the Department of

Education, and also I would note that there are a number of students here from Minnesota in our audience today, from the Minnesota State University Student Association, and the Minnesota

Community College Student Association. It’s good to see you here

as well.

So we will begin our hearing here today. Dr. Gladieux, would you

like to start?

STATEMENT OF LAWRENCE E. GLADIEUX, EXECUTIVE

DIRECTOR FOR POLICY ANALYSIS, COLLEGE BOARD

Mr. GLADIEUX. Thank you, Mr. Chairman. My name is Lawrence

Gladieux. I am director of policy analysis of the College Board, an

association of 3,000 schools and colleges. Along with promoting

high standards for all students, the College Board is a leader in the

practice of need-based student financial assistance, aimed at equalizing access to postsecondary education.

The priority this administration has assigned to education is unprecedented, and the College Board applauds it. However, we have

concerns about the President’s tuition tax proposals, and these are

reflected in a resolution by our Board of trustees that is attached

to my written testimony.

The proposed tax breaks for college tuition would largely benefit

students and families in the upper income quartiles, where college

enrollment rates are already very high, and have been rising. The

plan may be one way to cut taxes, but it is not an effective strategy

for lifting the country’s net investment in education or closing gaps

in opportunity.

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Most of the relief would go to those who are likely to find the

resources and attend higher education regardless.

Since the tax credit under the President’s plan is nonrefundable,

students and families with no or minimal tax liability could not

benefit, and under the administration’s plan, eligibility for the tax

credit would be offset dollar-for-dollar by the amount of Federal

grant aid received by the student.

This would effectively exclude more than 3.5 million students

below the median income who receive Pell grants. The median income in 1995 was about $40,000.

The last attachment to my written testimony is a set of bar

graphs, and it shows on the top a graph of the administration’s estimate of tax benefits for dependent students in the first or second

year of college.

The biggest benefit is at $60,000 of family income, while the benefit is half as much for students at the $20,000 and $30,000 income

levels, if they attend a 4-year private college, and zero or negligible

if they attend a public or community college.

Keep in mind, again, the median income is roughly $40,000.

The administration has not released estimates for income levels

higher than $60,000. But our own estimates—again I refer you to

the last attachment, the bar graphs at the end of my testimony—

suggest that the biggest benefits of all will be in the top income

quartile—roughly $70,000 and higher.

The larger benefits kick in as the full value of the $10,000 deduction comes into play, especially for dependent students attending

relatively high tuition colleges. In a nutshell, the higher the income, the more benefit; the lower the income, the less benefit.

Even if the tax credit were made refundable, thus helping some

low-income students, in my view the timing reduces its practical

value. A tuition bill paid in the fall might result in a year-end tax

refund 4 or 6 months later. A second semester tuition payment in

January might produce tax relief 12 to 14 months later. Some taxpayers might plan ahead and adjust their payroll withholding, but

many couldn’t afford to.

I also worry, as do others in the higher education community,

about unintended consequences of the proposal, including regulatory entanglement with the IRS that was discussed this morning.

In the end I believe it would add multiple layers of complexity,

not only to the Tax Code, but to the overall financing of students

in higher education. But my biggest concern comes down to fairness and equity.

As proposed, the tuition tax breaks would establish by way of the

Tax Code a major new entitlement for the middle and especially

upper middle class, over time, I think, shifting resources away from

the neediest students and families.

The administration has proposed a much needed $300 increase

in the maximum Pell grant, but this does not balance the scales,

compared to a $1,500 tax credit, or a $10,000 tax deduction. It only

begins to restore the purchasing power of Pell grants that has been

lost in the past 10 years or more.

The College Board applauds the Pell increase, and we will support it vigorously, but the overall plan remains imbalanced in our

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view. Federal higher education policy has long promoted access,

and this fundamental commitment should not be eroded.

If the country really can afford $30–$40 billion in new resources

to make college more affordable, surely it would be better invested

in proven grant, loan and work-study programs that do expand access.

Finally, I do support judicious use of the Tax Code to help students and families. I suggest the Committee consider these two

points: First, we need to encourage more middle-income families to

save well in advance of their children’s education, and I support

the piece of the President’s plan that calls for savings incentives.

Such incentives are also in Republican and Democratic bills in Congress.

Second, tax relief for student borrowers in repayment would also

be constructive. Debt burdens are rising precipitously for many students. We support Republican and Democratic bills that are pending in the Congress that call for above-the-line deductibility of interest on student loans with benefits phased out at higher income

levels.

Adjustments to the Tax Code along these lines would not be an

expensive drain on the Treasury, or add great new complexity to

the tax system, and they would complement, not compete with, existing need-based aid programs. So I hope the Committee will consider those kinds of proposals.

Thank you, Mr. Chairman, for this opportunity to address these

important issues of tax policy and financing of higher education. I’ll

be glad to answer questions.

[The prepared statement follows:]

Statement of Lawrence E. Gladieux, Executive Director for Policy Analysis,

College Board

My name is Lawrence Gladieux. I am executive director for policy analysis of the

College Board, a national association of 3,000 schools and colleges dedicated to advancing equity and excellence for all students. Along with promoting high standards

for all, the College Board since the 1950s has been a leader in developing the principles and practice of need-based student financial assistance aimed at equalizing

access to postsecondary education.

Two attached documents place my testimony in context:

• The first is a resolution issued by the Trustees of the College Board last month

that ‘‘commends the Clinton Administration for its substantial support of education;

reaffirms the College Board’s historic commitment to need-based student financial

aid; and urges that proposals for tuition tax credits or deductions not be allowed

to substitute or reduce funding for need-based aid.’’ The resolution expresses concern that, with pressures to balance the federal budget, the government will not be

able to ‘‘afford the estimated revenue loss from the tuition tax proposals while maintaining—let alone expanding—current appropriation levels for need-based student

aid programs.’’ Consistent with the Trustee resolution, a recent survey of College

Board member institutions indicated strong support for restoring the value of Pell

Grants and other increases in need-based student aid; they also support tax incentives, but not at the expense of need-based aid.

• The second is an op-ed piece that I co-authored last fall with Robert Reischauer,

former director of the Congressional Budget Office. From the standpoint of both tax

and education policy, we questioned the wisdom of investing $40 billion in scarce

federal resources in the tuition credit/deduction plan.

As both the resolution and the op-ed piece began, I want to begin my testimony:

The priority that this Administration has assigned to education is unprecedented

and the College Board applauds it. We are fortunate to have an education president

who has argued consistently and passionately that the country needs to invest more

in education and training to boost economic growth, expand opportunity, and reduce

growing income disparities.

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But the President’s proposed tax breaks for college tuition would not be an effective way to achieve these worthy objectives. By and large they would benefit students and families in the upper income quartiles, where college enrollment rates are

already very high and have been rising. Nine out of ten 18–24 year-olds from households in the top income quartile enroll in some form of postsecondary education or

training, compared to a ratio of one out of two from the lowest income quartile. The

plan may be one way to cut taxes, but it is not an effective strategy for lifting the

country’s net investment in education or closing gaps in opportunity. Most of the

relief would go to students and families who are likely to find the resources and

attend higher education regardless.

College tuition levels have been rising faster than inflation for the past 15 years,

so the burden of paying for higher education has increased for most families. But

with widening income disparities in the 1980s and 1990s, it has increased the most

for those on the bottom rungs of the economic ladder. College costs are taking a

larger and larger bite out of the lowest family incomes.

The proposed tax breaks will not help those most in need. Since the current version of the tax credit is non-refundable (in an earlier version it would have been

refundable), students and families with no or minimal tax liability could not benefit.

And under the Administration’s plan, eligibility for the tax credit would be offset

dollar-for-dollar by the amount of federal grant aid received by the student. This offset provision would effectively exclude more than 3.5 million students below the median family income (almost $40,000 in 1995) who receive Pell Grants.

As part of its overall package for making college affordable, the Administration has proposed a much-needed $300 increase in the maximum Pell Grant, but this

does not balance the scales compared to a $1,500 tax credit or a $10,000 deduction,

and it only begins to restore the purchasing power of Pell Grants that has been lost

in past two decades. Since 1979, the value of the maximum Pell has steadily dwindled relative to the cost of higher education, in 1995 covering less than 40 per cent

of the average cost of attendance at a four-year public institution and only 15 percent of the average cost at a four-year private institution.

In addition to the offset for federal grants, tuition and fees as counted in the formulas would be reduced by the amount of non-federal grant aid. This would exclude

or limit eligibility for the tax breaks in the case of many moderate-to middle-income

students who receive various non-federal grant and scholarship assistance. State, institutional, and private grant programs extend assistance to students in the $30–

60,000 range or higher. Thus many middle-income students who are the intended

target of the Administration’s proposal will not benefit.

I might add that even if the tax credit were to be made refundable, thus extending the benefit to some lower-income students, the timing of such a tax benefit reduces its practical value to families trying to make ends meet. A tuition bill paid

in the fall might result in a year-end tax refund four or six months later; a secondsemester tuition payment in January might produce tax relief 12–14 months later.

Some taxpayers might plan ahead and adjust their payroll withholding, but most

won’t, and many can’t afford to. The tax code, I suggest, is not an effective vehicle

for helping people who are struggling to meet current tuition expenditures.

I also worry, as do many others in the higher education community, about unintended consequences of the President’s proposal, including regulatory entanglement

with the Internal Revenue Service. Involving the IRS in the delivery of such educational benefits, I believe, would be a mistake (IRS has consistently argued against

such proposals through several administrations). It is not just the B-average and

drug-free requirements (which are eligibility conditions for receipt of the tax credit

though not the deduction). Colleges would more than likely be implicated in verifying tuition payments as well as receipt of federal and non-federal grant assistance

which offset the tax benefits. In the end, I believe it would add multiple layers of

complexity not only to the tax code but to the overall financing of students in higher

education.

My overriding concern about the President’s plan, however, comes down to issues

of fundamental fairness, equity, and access. If the tuition tax breaks were to be enacted on anything like the scale proposed in the Administration’s 1998 budget, they

would establish by way of the tax code a major new entitlement for the middle- and

especially upper-middle classes, with the potential of shifting federal resources over

time away from the neediest students and families. The focus of federal higher education policy has long been to promote and equalize access, especially for those with

the fewest resources, and this fundamental commitment should not be eroded. We

applaud the Administration’s proposed increase for Pell Grants—and the College

Board will support it vigorously. But the overall package remains imbalanced.

If the country really can afford something approaching $30–40 billion in additional resources to expand access to higher education over the next five years, surely

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it would be better invested in Pell and other grant, loan, and work-study programs.

Existing aid programs are not just for the very poor. They help low- and, yes, middle-income students based on need, and they get the dollars to students when tuition bills are due, not months later in a tax refund.

WHO SPECIFICALLY WOULD BENEFIT FROM THE PROPOSED TUITION TAX RELIEF?

So far, the debate on the President’s proposals has proceeded largely without

data-based projections of the potential distribution of benefits. The Administration

has said that the plan would broadly benefit middle-income Americans. I and others

have suggested that the biggest benefits would go to the upper-middle class. In or

out of the Administration, there is little analysis to inform the debate.

In the education community, we are hampered by the difficulty of assembling all

the data (and tax modeling expertise) required to produce estimates of our own. The

eligibility formulas are complicated. I am attaching descriptions and examples of the

formulas for the proposed tax credit (up to $1,500) and deduction (up to $10,000).

The taxpayer could choose between the two for the first two years of postsecondary

education, after which the deduction alone would be available. To project the potential benefits, data or proxy data have to be assembled on at least the following: income distribution of students and dependency status; enrollment distribution by

year in college and part-time/full-time status; tax filer information; tuition and fees

paid by students/parents; and grants received, federal and non-federal. Many of the

variables are interactive, complicating the modeling and analysis.

Last week the Administration released ‘‘illustrative examples’’ of who would receive the tax benefits among students at several different income levels if they attend an average-cost community college, four-year public institution, or four-year

private institution. I have attached a graphic representation of the Administration’s

estimates of benefits for dependent students in the first or second year of postsecondary education. By far the largest benefits—the full value of the $1,500 tax

credit—go to the student with a $60,000 family income, while the benefit is half that

for students at the $20,000 and $30,000 income levels if they attend a four-year private college and negligible if they attend a public or community college. If the Administration were to release estimates for income levels higher than $60,000, I believe the data would show much larger benefits as the full value of the $10,000 tax

deduction comes into play.

I should underscore that these projected benefits are for dependent students,

those who are deemed to rely primarily on their parents or guardians for financial

support. The Administration’s estimates for independent students (now a majority

of the postsecondary student population) show that the maximum tax credit of

$1,500 would be received by students at the $20,000 and $30,000 levels, whichever

type of institution they attend. The fact is, however, that one-third of independent

students attending four-year institutions and one-fifth attending two-year public institutions have less than $10,000 in annual income, where the Administration’s estimate shows zero benefits. Most of these students simply do not have sufficient income and thus tax liability to take advantage of the proposed credit.

Again, the Administration has not released estimates for higher-income levels,

where the benefits are likely to be the greatest, especially for dependent students

attending relatively high-tuition colleges and receiving the benefit of the tax deduction. To illustrate, I have attached a projection of the average tax benefits by family

income at a private four-year college charging tuition of more than $20,000. The

greatest average tax benefit, more than $2700, would be received by families in the

$70,000–80,000 range. As the bar graph illustrates, even in the $80,000–100,000, income range where eligibility is phased out under the administration proposal, the

benefits would still be greater than they would in the $50,000 range and below.

I have mentioned the inter-activity of the variables in the formula. Even when

more definitive estimates can be developed, the fact is that such new tax benefits

will interact with financial aid policies at the campus (and possibly state) level in

ways that no model can predict. For example, institutions that award substantial

amounts of need-based aid from their own funds are likely to take the tax benefits

into account, either prospectively or retrospectively, when they evaluate family ability to pay. Thus many students and families that might receive the proposed tuition

tax relief could see the benefit offset by reduced eligibility for campus-awarded student aid.

ALTERNATIVE, FOCUSED USES OF THE TAX CODE

Having summarized my concerns about the Administration’s proposals, let me say

that I support judicious use of the tax code to help students and families in financing the costs of postsecondary education. The College Board Trustee resolution recVerDate 11-SEP-98 10:34 Oct 05, 1999 Jkt 057910 PO 00000 Frm 00067 Fmt 6633 Sfmt 6602 D:57910 W&M3 PsN: W&M3
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ommends alternatives that would ‘‘boost college attendance, encourage families to

save for college, and help relieve student debt burdens.’’ Accordingly, I suggest the

committee consider selective tax provisions focusing on the front and back ends of

the college financing continuum, that is:

• College Savings. We need to encourage more middle-income families to save for

their children’s education. Currently, within certain income limits, the tax code excludes from income the interest earned on Series EE Savings bonds if the bonds are

used to pay for higher education. Pending proposals, including the President’s plan

and Republican bills, call for additional incentives for the same purpose, either

through expanded use of IRAs or new investment accounts dedicated to postsecondary financing. Increased incentives for savings would be helpful.

• Student debt burden relief. A measure of tax relief for student borrowers in repayment would also be constructive. Debt burdens are rising precipitously for many

students. Several bills before Congress call for ‘‘above the line’’ deductibility of interest on student loans, with benefits phased out at higher income levels.

I also urge permanent extension of Section 127 exempting employer-provided tuition benefits, for both graduate and undergraduate training, from an employee’s

gross income. This has been an on-again, off-again provision in the tax code. Section

127 is a modest incentive for private sector investment in continuing education of

adults. It supports lifelong learning. Studies show that beneficiaries earn close to

the national average for full-time, year-round employees.

Modest, focused adjustments to the tax code along these lines would not be an

expensive drain on the Treasury or add great new complexity to the tax system, and

would complement, not compete with existing need-based aid programs. I hope the

committee will consider them. (Among pending bills in the House that include one

or more of the above proposals are H.R. 53, ‘‘Higher Education Accumulation Program Act,’’ by Rep. Eshoo; H.R. 82, ‘‘Family Affordable College Tuition Act, by Rep.

Schumer; H.R. 127, ‘‘Employee Education Assistance Act,’’ by Rep. Levin; and H.R.

553, ‘‘Education Affordability Act,’’ by Rep. Price. In the Senate, S. 1, ‘‘The Safe and

Affordable Schools Act,’’ the Republican leadership’s proposal, also includes elements of the above, as does S.12, ‘‘ Education for the 21st Century Act,’’ the Democratic leadership’s proposal.)

Thank you, Mr. Chairman, for this opportunity to address these important issues

of tax policy and financing higher education. I shall be glad to answer the committee’s questions.

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Mr. R

Mr. G

AMSTAD

LADIEUX

. Thank you—Mr. or Dr. Gladieux.

. Mister.

f Mr. RAMSTAD. I don’t want to handout Ph.D.s gratuitously here.

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Mr. GLADIEUX. I sometimes get honorary doctorates that way,

but this time you have it right.

Mr. RAMSTAD. Thank you for your testimony. Mr. Kane.

STATEMENT OF THOMAS J. KANE, ASSISTANT PROFESSOR,

KENNEDY SCHOOL OF GOVERNMENT, HARVARD UNIVERSITY, CAMBRIDGE, MASSACHUSETTS

Mr. KANE. Thank you, Mr. Chairman, and other Members of the

Committee for giving me the opportunity to speak today. I just

wanted to make clear at the beginning that I’m not representing

Harvard University or the Brookings Institution or any other place

I’ve ever worked before. I am just here as a taxpayer and as an

economist who has studied higher education issues for a few years

now.

I want to make three specific comments about the administration’s proposal, and then close with just one general observation

about the crisis in higher education. First, regarding targeting.

Given what’s been going on in the labor market, college enrollment

rates have been rising. The proportion of 18- to 24-year-olds enrolled in college, today, is about 33 percent higher than it was in

1980. But its been mostly middle and higher income families who

have been responding to the changes in the labor market. To the

extent that there is a problem, it’s been the low-income students

who have been lagging. If you look at the administration’s proposal, there is $300 in it

for the lowest income Pell grant recipients in the form of increased

grants. On the other hand there’s a $2,800 tax benefit for somebody

in the 28-percent tax bracket who is attending an expensive private

institution. Those benefits are a little bit lopsided, and I think, as

several people have mentioned, moving more of the benefit into the

Pell grant program would be a step in the right direction.

Second, I wanted to mention two administrative concerns. One

issue that wasn’t mentioned this morning is the potential for abuse

of the tax credit for leisure-oriented course work, which I fear, is

potentially the most costly administrative concern at issue. There

is language in the proposal to limit the credit to people who are

half-time students in degree-granting programs. However, once

there’s $1,500 on the table, taxpayers and colleges are likely to

show great ingenuity in figuring out how to qualify virtually any

course for the credit, even courses on whale-watching or Oriental

rug-buying, which presumably are not the intent of the legislation.

That’s going to be a problem down the road, and we’ve not talked

about that very much.

The second administrative concern was discussed this morning:

the B-average requirement. Now, I agree with David Longanecker

and Mr. Lubick that the administrative problems are not insurmountable. But we ought to be asking ourselves not just whether

we could administer a B-average requirement, but whether the

benefits of the proposal justify the costs.

Let’s take a step back and ask ‘‘Why are we doing this?’’ Well,

presumably the whole point of the B-average requirement is to encourage people to work harder during their first year in college.

But the requirement could have exactly the opposite effect. For instance, any risk-adverse student would take easier courses during

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their first year to try to make sure that they got the B-average, or,

as other people have mentioned, there’s the possibility of grade inflation. I oppose the B-average requirement not because it’s administratively impossible, indeed the administrative obstacles don’t

seem insurmountable, but because I just don’t see the benefits of

the proposal exceeding the costs imposed on colleges and the IRS.

And I think the administrative costs would be nonnegligible.

Third, I want to say something about the potential for tuition inflation. I may be an optimist, but contrary to the fears of some of

the plan’s critics and, perhaps, contrary to the secret hopes of

many college presidents out there, I don’t think that this proposal

will lead to much tuition inflation. The reason is simple: even the

families who are getting tax relief, won’t be getting any additional

tax relief when their college raises tuition. So if I am the president

of Kalamazoo College, I might like to raise my tuition, but I might

lose some students to Macalester College if I did. To the extent

that there is competitive pressure out there, I think that tuition inflation will be negligible.

Finally, I just wanted to make a comment, just generally, about

our student financial aid system. And that is that simplicity and

transparency should be fundamental policy objectives here. The

fact is we already have a number of grant and loan programs to

help families pay for college. However, the system is so complicated

that you have to have a college degree in order to understand it.

The President’s message resonated, I think, because many families

out there are honestly worried about how they’re going to pay for

college, and are a little baffled about the range of programs that

we have available. I think we could go a long way to relieving families’ anxiety about paying for college by simplifying and consolidating the programs that we already have, and need not end up

spending a lot more money in the process.

Thank you, Mr. Chairman, for giving me the opportunity to testify today, and I look forward to questions at the end.

[The prepared statement follows:]

Statement of Thomas J. Kane, Assistant Professor, Kennedy School of

Government, Harvard University, Cambridge, Massachusetts

INTRODUCTION

In his 1997 State of the Union address, President Clinton declared educational

reform the top priority of his second term. Indeed, the Administration’s agenda for

higher education is unabashedly ambitious, to ‘‘...make the 13th and 14th years of

education—at least two years of college—just as universal in America by the 21st

century as a high school education is today.’’ 1 To fulfill that promise, the Administration has proposed two major initiatives for higher education: an increase in federal grants to low-income undergraduates and various forms of tax relief for those

with family members in college. Beyond evaluating the narrow strengths and weaknesses of the Administration’s proposal, the goal of this testimony is to assess how

well the proposal meets the long-term challenges in financing higher education.

Declining labor market prospects for those without college training have led more

families to seek out a college education for their children. Yet such investments are

costly to parents, students and other taxpayers, amounting to roughly $12,000 per

year at a public 4-year university and $6,000 per year at a community college—not

counting the earnings foregone by students in college. The challenge over the next

decade will be to find a way to pay for college that does not discourage family earnings or savings, which encourages students to make the most of the value of the

resources at their disposal, and which allows students from all family backgrounds

to make worthwhile investments in college. The Administration’s proposal will offer

some short-term relief to families concerned about rising tuition bills. However, in

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the wake of this latest attempt at incremental reform, we will be left with an even

more complicated morass of financial aid programs, which will continue to leave

families baffled about the amount of aid available and which potentially distorts

family savings and investment decisions. The final section of the paper provides

some ideas for how to tackle these longer term issues with more far-reaching structural reform.

A SIMMERING CRISIS IN HIGHER EDUCATION

As reported by newspapers around the country, college tuition has risen sharply

over the past decade and a half. Between 1980 and 1995, the average tuition (including required fees) at public and private 4-year colleges grew by 91 percent and

83 percent respectively, even after taking account of overall changes in consumer

prices.2 Increases of such magnitude usually provoke a response. Therefore, it was

only a matter of time before the U.S. House of Representatives held hearings on

‘‘cost escalation’’ in higher education in the summer of 1996. In a confrontation repeated in state legislatures around the country, uncomfortable college presidents

have been forced to extol the social benefits of higher education, while student representatives complained about rising debt burdens. What lies behind the recent tuition increases?

There have been four basic economic and demographic forces pushing us into the

current crisis: First, the labor market value of a college education has increased dramatically. In 1979, the average male college graduate earned 49 percent more annually than the average high school graduate. By 1993, that differential had nearly

doubled, to 89 percent. Not surprisingly, families and students have been responding: the proportion of college-age youth enrolled in college grew by one-third between 1980 and 1995, from 26 percent to 34 percent.3 Over the same time period,

the number of associate, bachelor’s and doctoral degrees awarded grew by 28 percent, 25 percent and 29 percent, respectively.

Second, in the face of rising public college enrollments, state governments have

been unable to continue paying the same proportion of the cost for each student enrolling in higher education. At public colleges and universities, tuition increases

have far outstripped underlying increases in costs per student. Between 1980 and

1995, real public tuition levels rose by 91 and 72 percent respectively at public fouryear and two-year institutions—even though the educational costs per student (including faculty salaries, library costs, student support services, etc.) rose by just 20

percent.4 In other words, the price that students pay has been rising much more

quickly than the actual costs per student at public colleges and universities.

States—which have traditionally paid a large share of the costs with direct subsidies to institutions—have been compelled by other demands on their budgets to

cut their subsidies per student and to raise the share of costs paid by students and

their families. It is this decline in the share of costs covered by state subsidies—

as opposed to a sharp increase in costs themselves—which accounts for a majority

of the increase in tuition at public institutions, enrolling three-quarters of 4-year

college students.

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The story has been different at private colleges. First, while ‘‘sticker prices’’ increased by 83 percent between 1980 and 1995, the price paid by the average student

rose by only half that rate, after taking account of offsetting increases in institutional grant aid. With the decline in federal need-based grant aid discussed below,

private universities have increasingly used the tuition paid by some students to

keep costs down for other students. On the other hand, cost increases—rather than

declines in public subsidies—were larger at private 4-year universities than at public universities. Costs per student rose by approximately the same amount as net

tuition paid per student—over 40 percent. Despite a careful analysis by Clotfelter

(1996), the sources of this increase in costs at private institutions is not very well

understood. Rising costs are a problem at private institutions. But, to keep the issue

of cost escalation in higher education in perspective, such institutions enroll only

25 percent of all 4-year college students.

Third, the federal government—with budgetary concerns of its own—has not filled

the ever-increasing financial need created by rising public tuition. The real value

of the maximum Pell Grant award—a useful gauge of the aid available for the

lowest-income students—fell by 35 percent between 1979–80 and 1995–96. Yet total

Pell Grant spending actually increased by nearly 10 percent over the same period.

The explanation: changes in the benefit reduction formula, increased enrollments in

college and rising tuition levels have all raised the cost of guaranteeing a given level

of aid.

Fourth, low-income students—who are particularly price sensitive—seem to have

fallen behind as enrollment rates have increased overall. Figure 1 compares the proportion of students entering a 4-year college within two years of high school graduation by family income level, for the high school classes of 1982 and 1992.5 Clearly,

the proportion of high school students entering college has increased. But the increases have been particularly large among those from families with incomes above

$50,000. Entry rates were stagnant for those with incomes below $12,000. Given the

increasing importance of a college education, this widening gap in college enrollment

rates between youth in high and low-income families has disturbing implications for

future inter-generational mobility. Moreover, there is some evidence that the gap between high- and low-income youth increased more in states with the most rapid

public tuition increases.6

Finally, the pressure to spend more on higher education is likely to get worse. The

size of the college-age population—which has declined by 15 percent since 1980, partially relieving the cost pressures from rising college enrollment rates—is projected

to rise by one-fifth over the next 15 years.7 The renewed expansion of the collegeage population is expected to be even more rapid in California, where the population

of 15–24 year-olds is projected to rise by twice the national rate.8

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Simply put: Although labor market trends seem to justify sending more youth to

college, a college education is a very expensive undertaking—costing approximately

$12,000 year at the average public 4-year institution, not counting room and board

costs and the value of the student’s time out of the labor market. As existing federal

and state subsidies for higher education are being stretched thin, families are paying a larger share of the costs. If college enrollment rates remain high—and it

seems prudent to expect so, given conditions in the labor market—public subsidies

will have to go even further. The long-term challenge is to do so equitably and efficiently.

THE CURRENT APPROACH TO FINANCING HIGHER EDUCATION

State, local and federal governments primarily employ two types of subsidies to

help families pay for higher education. First, and by far the largest, are the direct

appropriations from state and local governments to public postsecondary institutions. In 1993–94, the state and local governments appropriated $45 billion in subsidies to public institutions of higher education, the vast majority of which were

used to keep tuition charges low for all students, rather than providing meanstested grants.9

Sparking a lively debate more than two decades ago, Lee Hansen and Burton

Weisbrod (1969) argued that such broad-based subsidies to public institutions were

‘‘regressive,’’ since middle and higher income families were most likely to attend the

elite 4-year institutions which received a large share of such subsidies.10 (See the

relationship between college-going and income in Figure 1.) Critics, most notably

Joe Pechman (1970), responded that the net progressivity (or regressiveness) of subsidies depended not only on the income distribution of public college students, but

also on the marginal source of revenue used to pay for public higher education.

Pechman argued that if state income taxes were the marginal source of revenue,

then, on net, public subsidies to higher education may still be equitably distributed,

since higher income families pay a disproportionate share of public subsidies for

higher education as taxpayers. An obvious difficulty is that it may be difficult to

identify the marginal source of revenue for higher education.

The second largest form of public subsidy to higher education are ‘‘means-tested’’

grant and loan programs to help families pay for college. The largest of these is the

federal Pell Grant program, currently distributing approximately $6 billion per year

in grants to low-income youth and adults. Most states also have their own grant

programs to supplement the Pell Grants, although total spending on state needbased grant programs was roughly one-half the size of the Pell Grant spending. In

addition, the federal government spends several billion dollars per year to pay the

interest on loans for students in school and to pay off defaulted loans.

With the exception of the defaulted loans, most of this aid is distributed according

to a ‘‘backward-looking’’ assessment of a student’s ability to pay. For dependent undergraduates (defined as those who are not married, under age 24, with no military

experience and no dependents), eligibility for aid is based not only upon their own

income and assets, but also upon parental family income and financial assets. Such

‘‘backward-looking’’ means-testing implicitly taxes income and savings, by providing

less aid to those with higher incomes and assets. Because only a single year of income (the prior tax year) is considered and because the implicit marginal levy on

savings (5.6 percent) is repeated each year that one has a child in school, these marginal tax rates can be become quite large.11 Edlin (1993) and Feldstein (1995) estimate that the marginal tax on savings can reach nearly 50 percent for those with

children in college over a span of 8 years.12

Though still high, the implicit tax rates may not be as high as these estimates

imply. First, as Case and McPherson (1986) point out, the marginal tax rate for financial aid is zero for those whose incomes are already too high to qualify for financial aid. Three-quarters of 4-year college students attend public 4-year universities

with an average tuition of approximately $3000. Relatively few of those with incomes in the top income bracket or with financial assets larger than the asset protection allowances would be qualifying for any aid at these low-cost institutions.

Second, the tax rates calculated by Edlin and by Feldstein assumed that any difference between the cost of attendance and the ‘‘expected family contribution’’ was

being met. Yet, as Dick and Edlin (1996) report, the average college does not meet

students’ full financial need. Rather than a 50 percent tax on savings, Dick and

Edlin estimated a marginal asset levy of 8 to 26 percent and marginal income taxes

of 2 to 16 percent for those attending the average-priced college. Though smaller

than a superficial inspection of the financial aid formula would imply, these tax

rates are clearly not negligible.

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THE ADMINISTRATION’S PROPOSAL

The President has proposed two major changes to the way we finance higher edu- cation: an increase Pell Grant spending of roughly $9 billion over the next 5 years;

and a new tax credit and tax deduction for college expenses, estimated to cost approximately $36 billion over the same period.13

The proposed increase in Pell spending is the result of two roughly-equally-costly

changes in the student aid programs. First, the maximum Pell grant would be

raised to $3000 from $2700 for the 1997–98 school year. A $3000 maximum grant

would still be below the 1979–80 level of $3500 (after inflating by the CPI), but it

represents a very substantial rise from the level of $2400 in the first year of the

Clinton Administration. Second, the ‘‘income protection allowance’’ for single, independent students would be raised from $3,000 to $9,150—allowing older, independent students to earn more before having their income taxed away by the student

financial aid formulae.

The proposed tax credit would be a 100 percent credit on the first $1500 in tuition

expenses per person for a first year. Family members would qualify for a second

year by maintaining a ‘‘B average.’’ The value of any Pell Grants received would be

subtracted from the value of a credit. Eligibility would be phased out for families

with adjustable gross income (AGI) between $80,000 and $100,000 for single and

head-of-household returns between $50,000 and $70,000. The credit would be nonrefundable and family members would have to be enrolled at least ‘‘half-time’’ in a

degree program at an institution qualifying for the student financial aid programs

administered by the Department of Education. The proposed deduction would allow families to deduct up to $10,000 in tuition

expenses, for those attending at least half-time in a degree program. As proposed,

the deduction would be an ‘‘above-the-line’’ deduction, available to those not

itemizing. The deduction would be subject to the same income phase-outs as the

credit. Unlike the credit, there would be no limit on the number of years a family

could file for the education deduction, and there would be no grade requirements. Eligible families would have the choice between taking the $1,500 credit or the $10,000 deduction. For a family member in college for the first or second year, those

in the 15 percent tax bracket will generally prefer the credit if they qualify. However, regardless of their grades, those in the 28 percent tax bracket paying more

than $5357 for tuition should choose the deduction, since the deduction will be

worth more (i.e. .28*$5,357=$1,500).

Table 1 portrays the combined value of the Pell Grant increase and the tax

changes for four groups of students: ‘‘dependent’’ and ‘‘single, independent’’ students

attending the public and private 4-year institutions, with average tuition and required fees of $2860 and $12,432 respectively.14 As reported in Table 1, the largest

single beneficiaries of the proposal would be single, independent students. Under

current law, these students lose $.50 in Pell Grants for every dollar of earnings

above $3,000. In other words, with the current maximum of $2700, an independent

students with just over $8,000 in income does not qualify for any Pell Grant. The

proposal would allow these students to protect more of their income, but would keep

the marginal tax rate the same. The second largest beneficiaries would be dependent students in the 28 percent tax bracket attending expensive private universities.

Table 1 should be interpreted in combination with Figure 1. Because higher income

families are more likely to go to college in the first place (and more likely to attend

expensive private schools when they do), they are more likely to benefit from the

proposal.

ADMINISTRATIVE CONSIDERATIONS

As with any new tax expenditure, the proposed credit and deduction creates a

number several novel problems of enforcement for the Internal Revenue Service.

Probably most important, the IRS would face a difficult task preventing families

from using the tax credit for the purchase of leisure-related coursework. To cite an

extreme example, a local university could charge middle and higher income adults

up to $1,500 for a series of whale-watching tours, offer these new ‘‘students’’ credit

toward a marine biology degree and the federal government could end up subsidizing the whole affair. Without monitoring course content directly, the IRS will find

it difficult to prevent such abuse by relying on ‘‘degree-seeking’’ status and ‘‘halftime’’ enrollment alone. This is an inevitable result of providing a 100 percent tax

credit. With $1500 of pure subsidy at stake, families and institutions are likely to

use some ingenuity in finding ways to qualify for the credit.

Second, tax years generally do not overlap with academic years. As a result, since

most academic programs start in the fall, students applying for the first year of

their tax credit will have paid only one-semester in tuition. The ‘‘B-average’’ requireVerDate 11-SEP-98 10:34 Oct 05, 1999 Jkt 057910 PO 00000 Frm 00082 Fmt 6633 Sfmt 6602 D:57910 W&M3 PsN: W&M3
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ment would typically apply to their first semester in college. The second year of eligibility for the tax credit will most often apply to the spring of their first academic

year and fall of their second academic year.

Third, the ‘‘B average’’ requirement for those seeking a second year of tax credits

will be very difficult to police. Including various branch campuses, there are more

than 3700 two-year and four-year colleges in the United States. Many have unique

grade accounting schemes that do not meet the standard 4-point grading scale. As

a result, verifying student grades is likely to be a challenge.

Of the three administrative concerns described above, the ‘‘B average’’ requirement will probably be less troublesome than policing the ‘‘half-time, degree seeking’’

requirement, but it may also be an unnecessary administrative complication. Presumably, the purpose of the requirement is to improve students’ incentives to study

in college. However, it may have precisely the opposite effect, if student’s choose to

take less challenging coursework or if colleges adjust their grading scales. Moreover,

the grade requirement probably fails an equity test as well, since it disproportionately benefits higher-income students. While the ‘‘half-time, degree-seeking enrollment’’ requirement is imperfect and may prove difficult to enforce, it is a fundamental safeguard against abuse. The ‘‘B average’’ requirement is costly and is probably

an unnecessary complication.

THE PROSPECTS FOR TUITION INFLATION

Despite the fears of some of the plan’s critics (and, perhaps, the hopes of some

of the plans supporters in the higher education community), I do not believe that

the proposal will lead to rampant tuition inflation. The reason: although the plan

may provide welcome tax relief to families, it has little effect on the marginal cost

to families when an institution raises tuition. Except for those paying less than

$1,500 in tuition expenses, the most tax relief a family will receive when their college raises tuition will be between $.15 and $.28 on the dollar—and that would

cover only those tuition increases up to $10,000. Moreover, the only families receiving this tax relief will be first- and second-year students from families in the 28 percent tax bracket paying between $5,357 and $10,000 and students later in their careers paying between $1,500 and $10,000. Most others—first and second-year students paying less than $5,357, first and second-year students in the 15 percent tax

bracket (who will be using the credit rather than the deduction), students with incomes too high to qualify for tax relief and those paying more than $10,000 in tuition—will all be paying 100 percent of any tuition increase. Facing prospects of declining enrollments or the political resistance of angry parents, colleges may properly hesitate to raise tuition.

The primary impact of the proposal will be an income effect, rather than a price

effect—as if the federal government were sending families a tax refund unrelated

to how much more they spend on college. Families will spend some of these tax savings on higher education, but are likely to spend most of it on other consumption—

such as a summer vacation or new furniture. Colleges may capture a portion of the

benefit when families choose to consume more education with their tax windfall,

particularly those colleges with considerable market power. But, in the end, relatively little of the tax relief is likely to make it into faculty salaries, dormitories

and libraries.

Depending upon how institutional financial aid is treated, the proposal could have

a larger effect on how colleges distribute financial aid. If institutional grant aid is

to be treated like Pell Grant aid—subtracted from both the credit and the deduction—colleges will have a strong incentive to cut their own institutional aid, since

any such aid would be taxed at 100 percent for the first $1500 in aid for those receiving the credit.

Whereas many colleges may be hesitant to raise student charges on the margin,

they will have a strong incentive to re-label other student charges as ‘‘tuition’’ in

order to allow families to claim the credit or deduction. Under current law, there

is no incentive for colleges to shift room and board expenses into tuition charges,

since they are treated equivalently in the student aid formulae. However, those colleges with current tuition charges below $10,000 (primarily public institutions) will

have a strong incentive to begin to charge on-campus students ‘‘tuition’’ for access

to dormitory study halls, etc. Given that a fifth of the 6 million students at public

4-year colleges live on campus and pay room and board charges averaging roughly

$4,000, there is a possible additional tax expenditure of $1.3 billion if these institutions shift room and board charges into student tuition (assuming that families are

at the 28 percent tax bracket). Although the Treasury department is likely to succeed in developing regulations preventing some of this shifting, an upper bound estimate would represent an 18 percent increase over the current estimated cost.

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EQUITY

Many have criticized the plan for providing large subsidies to middle and higherincome families attending expensive private institutions, and smaller amounts to

the lowest income families receiving Pell Grants. However, a full consideration of

the distributional implications of the current proposal is complicated by the President’s and Congress’ commitment to proposing a budget that will be ‘‘balanced’’ in

2002. Given this consensus, it may be wrong to assume that frugality on the tuition

tax credit and tax deduction proposals will mean a greater contribution toward reducing the national debt or greater prospects for increased student aid in the future.

In fact, if the President and Congress are serious about the 2002 target, then a

smaller education tax credit or tax deduction is likely to mean either a larger capital

gains tax increase or smaller Medicare cuts. Although they may rightly criticize the

plan on grounds of economic inefficiency, many of those criticizing the plan on

grounds of equity may find these alternatives even less appealing.

A MORE FAR-SIGHTED APPROACH TO REFORM

The Administration’s proposal would provide tax relief for families struggling to

pay tuition bills. It would also provide some additional assistance to low-income

youth attempting to pay for college—particularly for older, low-income, single students going back to school. Just like the large across-the-board subsidies provided

by state governments to students attending public colleges, the Administration proposes using public revenues to keep families out-of-pocket expenses down while students are enrolled in school.

However, given the economic and demographic forces pushing college enrollment

rates up, the real challenge over the next decade will be to design a financial aid

system, which does not discourage family earnings or savings, which encourages

students to make the most of the value of the resources at their disposal, and which

allows students from all family backgrounds to make worthwhile investments in college. While providing short-term relief, the Administration’s proposal does nothing

to solve some of the structural weaknesses in our current system for financing college. Indeed, it may complicate matters. The reauthorization of the Higher Education Act this year provides an opportunity to fundamentally rethink how those

subsidies are to be provided in order to maintain access for all groups. In contributing to that discussion, I would add the following observations.

First, simplicity and transparency should be fundamental policy objectives. Information on federal financial aid is primarily delivered by college financial aid offices,

offering financial aid ‘‘packages’’ to the students who apply for aid. One strength of

such a system is that the mixture of grants, loans and work-study can be narrowly

tailored to meet the particular needs of each student. However, an often-overlooked

weakness is that parents and students are often uncertain about the extent of aid

available up until the time that they receive their ‘‘package.’’ Ironically, those whose

decisions we would most hope to affect—those who would not be going to college in

the absence of aid—are least likely to navigate the system easily and anticipate the

amount of aid available.

The mystery surrounding the financial aid application process may explain a longstanding puzzle in research on higher education. On one hand, most research that

has compared college enrollment rates in high and low-tuition states has found that

those states that have high public tuition levels tend to have lower enrollment rates,

all else equal. As hinted above, this is particularly true for low-income youth. On

the other hand, there is very little evidence of any disproportionate increase in college enrollment among low-income youth between the early Seventies and late Seventies when many of our federal programs were expanded.15 (The Pell Grant program was established in 1973.) The answer to the puzzle may lie in the fact that

low-income students on the fence about entering college know about public tuition

levels—which they hear about on the radio or read in newspaper headlines—but

they may be less able to anticipate the availability of aid or to fulfill all the bureaucratic hurdles on the way.

The complications surrounding financial aid policy limits its effect and adds to

parents anxiety. However, it is largely unnecessary. For example, parents and students could be offered a clearly stated guarantee of an amount of aid (e.g. up to

$5000) to finance each year of undergraduate study. Although the mixture of grants,

loans and work-study one received could still depend upon one’s own circumstances,

there is no need to leave the total amount of available aid in question. Students

would at least know how much they would have to finance out of their own pocket,

and could plan their career choices accordingly. Another approach would be to grant

presumptive eligibility to those receiving other means-tested programs—Food

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Stamps, Aid to Families with Dependent Children and the Earned Income Tax

Credit—and inform these families of their likely benefits.

Second, income contingent loan forgiveness provides an alternative form of meanstesting. Most of our current financial aid programs are provided on a ‘‘backwardlooking’’ basis. For instance, eligibility for Pell Grants and subsidized federal loans

is based upon a family’s and youth’s income and assets in the prior year. In contrast, the income-contingent loan option (created during the 1992 re-authorization)

makes a ‘‘forward-looking’’ evaluation of a person’s means—forgiving remaining balances for those with low incomes for 25 years after college. Though the repayment

schedule in the current program has been designed primarily to lengthen the duration of repayment rather than forgive many loans, the program could easily be

adapted to be more generous.

As an alternative to the traditional form of means-testing in student aid, forwardlooking means-testing has several advantages: First, it offers ‘‘insurance’’ to both

high- and low-income families concerned about whether their children will be able

to shoulder their student debt. Parents and students may value the additional peace

of mind even if they never actually have to sign up for the income-contingent repayment option. Second, forward-looking means-testing does not involve the same difficulty in distinguishing ‘‘dependent’’ students—whose parents’ resources are considered in the determination of need—from ‘‘independent’’ students. The distinction between ‘‘dependent’’ and ‘‘independent’’ students becomes moot if subsidies are dispersed on the basis of future incomes, rather than on a single year of income and

assets. Third, the most onerous administrative burden imposed by our financial aid

system—that parents and students spend long hours each year filing complicated

financial aid forms—could be lightened if a larger share of available subsidies were

provided on a forward-looking basis. Indeed, transferring other loan subsidies—inschool interest subsidies, preferential rates on Perkins Loans, etc.—into income contingent loan forgiveness would relieve millions of parents of the need to file financial

aid forms every year to establish their eligibility. Only those seeking institutional

aid (primarily the quarter of students that attend private 4-year institutions) or Pell

Grant or Federal Work Study aid would have to file a financial aid application.

Fourth, ‘‘forward-looking’’ means-testing can greatly diminish the marginal tax rates

on income and savings implicit in the financial aid formula, since subsidies would

be based upon an entire career of income rather than a single year.

Finally, federal spending should complement and not just substitute for state

spending. State governments continue to provide the lion’s share of subsidies to

higher education. The federal government should be looking for ways to help state

governments stretch their resources rather than simply substitute for them. One

idea would be to offer states the opportunity to ‘‘buy into’’ the federal loan programs,

reimbursing the federal government for providing more favorable interest rates or

income-contingent repayment schemes to their residents. Given the mobility of the

Nation’s population across state lines, the federal government is in the best position

to operate an income-contingent repayment scheme efficiently. In order to buffer the

effect of public tuition increases, states may be interested in helping to provide more

favorable loan terms to their residents.

CONCLUSION

It is no coincidence that, as the labor market increasingly values educational attainment, calls to improve the education system have become ever louder. Reformers

have offered a long list of suggestions for improving the quality of elementary and

secondary education—ideas such as school choice, national standards and greater

accountability at the school level.

Many of these proposals—particularly those that improve accountability and flexibility for individual schools—have merit. However, it would be an understatement

to say that additional investments in the K–12 sector are not a fool-proof investment. Ever since the publication of Equality of Educational Opportunity in 1966

(commonly known as the Coleman Report), researchers have argued over whether

marginal increases in school spending have been associated with improved student

performance.

There is no need to enter the fray over whether ‘‘money matters’’ in elementary

and secondary education. That literature is well-established and inquiry is ongoing.

However, I would suggest that we should investigate the prospects for investing

along a different margin: improving not only the quality of elementary and secondary schooling, but also investing in the quantity of schooling received by youth, by

better-targeting existing subsidies for higher education. Although structural reforms

in elementary and secondary education may yet bear fruit, it is time that we reconVerDate 11-SEP-98 10:34 Oct 05, 1999 Jkt 057910 PO 00000 Frm 00085 Fmt 6633 Sfmt 6602 D:57910 W&M3 PsN: W&M3
83

sidered how our current subsidies to higher education are affecting the nation’s investment in human capital.

Table 1. Impact of the Administration’s Proposal by Family Income and Type of College Attended

Unadjusted Family Income: Add’l Pell

Grant:

Tax Credit:Tax Deduct:

Total Benefit:

First 2 Yrs

College:

Later

Years College:

Dependent Student at a 4-Year Public University

$0–20,000 ............................................. 300 0 0 300 300

$30–50,000 ........................................... 0 1,500 429 1,500 429

$60–80,000 ........................................... 0 1,500 801 1,500 801

$117,000+ ............................................. 0 0 0 0 0

Single Independent Student at a 4-

year Public University

$10,000 ................................................. 3,000 0 0 3,000 3,000

$15,000 ................................................. 1,450 50 0 1,500 1,450

$20–30,000 ........................................... 0 1,500 429 1,500 429

$40–50,000 ........................................... 0 1,500 801 1,500 801

$77,000+ ............................................... 0 0 0 0 0

Dependent Student at a 4-Year Private University

$0–20,000 ............................................. 300 0 0 300 300

$30–50,000 ........................................... 0 1,500 1,500 1,500 1,500

$60–80,000 ........................................... 0 1,500 2,800 2,800 2,800

$117,000+ ............................................. 0 0 0 0 0

Single Independent Student at a 4-

year Private University

$10,000 ................................................. 3,000 0 0 3,000 3,000

$15,000 ................................................. 1,450 50 0 1,500 1,450

$20–30,000 ........................................... 0 1,500 1,500 1,500 429

$40–50,000 ........................................... 0 1,500 2,800 1,500 801

$77,000+ ............................................... 0 0 0 0 0

REFERENCES

Callan, Patrick and Joni Finney. By Design or Default?, The California Higher Education Policy Center, June 1993.

Campbell, Paul R. Population Projections for States, by Age, Race and Sex: 1993 to 2020, U.S.

Bureau of the Census, Current Population Reports, P25–1111, U.S. Government Printing Office,

Washington DC, 1994.

Case, Karl E. and Michael S. McPherson. ‘‘Student Aid Incentives and Parental Effort: The

Impact of Need-based Aid on Savings and Labor Supply’’ Technical report prepared for the

Washington Office of the College Board, 1986.

Clotfelter, Charles. Buying the Best: Cost Escalation in Elite Higher Education (Princeton,

NJ: Princeton University Press, 1996)

The College Board. Trends in Student Aid: 1986 to 1996 (Washington, DC: The College Board,

1996).

Dick, Andrew W. and Aaron S. Edlin. ‘‘The Implicit Taxes from College Financial Aid’’ The

Journal of Public Economics (1996)

Edlin, Aaron S. ‘‘Is College Financial Aid Equitable and Efficient?’’ Journal of Economic Perspectives 7 (Spring, 1993): 143–158.

Feldstein, Martin. ‘‘College Scholarship Rules and Private Saving’’ American Economic Review

73 (June,1995): 398–410.

Hansen, W. Lee. ‘‘Impact of Student Financial Aid on Access’’ in Joseph Froomkin (ed.) The

Crisis in Higher Education New York: Academy of Political Science, 1983.

Hansen, W. Lee and Burton Weisbrod. ‘‘The Distribution of Costs and Direct Benefits of Public

Higher Education: The Case of California’’ Journal of Human Resources 4 (Spring 1969): 176–

191.

Kane, Thomas J. ‘‘College Entry by Blacks since 1970: The Role of College Costs, Family

Background and Returns to Education,’’ Journal of Political Economy 102 (1994): 878–911.

Kane, Thomas J., ‘‘Rising Public College Tuition and College Entry: How Well Do Public Subsidies Promote Access to College?’’ National Bureau of Economic Research Working Paper No.

5164, April 1, 1995.

Kane, Thomas J. ‘‘Postsecondary and Vocational Education: Keeping Track of the College

Track’’ in Indicators of Children’s Well-Being: Conference Papers Institute for Research on Poverty Special Report, SR 60b, May, 1995.

McPherson, Michael and Morton Owen Schapiro. Keeping College Affordable Washington, DC:

Brookings Institution, 1991.

84

Pechman, Joseph A. ‘‘The Distributional Effects of Public Higher Education in California’’

Journal of Human Resources 5 (Summer, 1970): 361–370.

U.S. Department of Education, National Center for Education Statistics, Digest of Education

Statistics 1996, NCES 96–133 (Washington, DC: U.S. Government Printing Office, 1996)

ENDNOTES

1. President Clinton, State of the Union Address, February 1997

2. U.S. Department of Education (1996), Table 309, p. 320.

3. U.S. Department of Education (1996), Table 182, p. 189.

4. These figures include the costs of instruction, administration, student services, libraries and

the operation and maintenance of colleges physical plants, but exclude expenditures on scholarships. Figures were adjusted for increases in consumer prices. (U.S. Department of Education

(1996), Tables 339–340, pp. 352–353.)

5. The estimates in Figure 1 are based upon the author’s tabulation of the High School and

Beyond Survey of those with high school diplomas from the class of 1982 and the National Education Longitudinal Study of those graduating from high school in 1992.

6. For more on this, see Kane (1995).

7. U.S. Bureau of the Census, Statistical Abstract of the United States, 1995, Table 17, p.

17.

8. Callan and Finney (1993).

9. U.S. Department of Education, Digest of Education Statistics, 1996, p. 334.

10. Between 1970 and 1977, the Journal of Human Resources was inundated by at least 7

separate responses to an article by Hansen and Weisbrod in that journal.

11. For more on implicit tax rates in financial aid formulae, see Edlin (1993), Feldstein (1995)

and Dick and Edlin (1996).

12. The average tax rates on savings remain low, however, given asset protection allowances

of $36,000 for married parents at age 45, ranging up to $66,000 for parents 65 and older.

13. Although the Administration has also proposed several other initiatives related to higher

education (allowing parents to make penalty-free withdrawals from IRA’s to pay for college tuition, extending the exclusion of employer-provided education benefits, a new 10 percent tax credit for expenditures on employee training by small employers and Presidential scholarships for

students in the top 5 percent of their high school class), I do not discuss those proposals here.

14. Single independent students were assumed to have no dependents and no savings above

the asset protection allowances. The dependent students were assumed to come from a two-parent, two-child family with only one student in college and no assets above the asset protection

allowances. Moreover, I assumed that none of these students were receiving institutional grant

aid.

15. For more on this issue, see Kane (1994, 1995), Hansen (1983) and McPherson and

Schapiro (1991).

Note: The views expressed in this statement do not necessarily reflect those of the

staff members, officers or trustees of Harvard University.

Mr. R

Dr. Schapiro.

AMSTAD. Thank you, Mr. Kane.

f STATEMENT OF MORTON OWEN SCHAPIRO, PROFESSOR OF

ECONOMICS, AND DEAN, COLLEGE OF LETTERS, ARTS AND

SCIENCES, UNIVERSITY OF SOUTHERN CALIFORNIA

Mr. SCHAPIRO. Thank you, Mr. Chairman. There are sound reasons to support the President’s commitment to expand Federal

funding for higher education. Economic returns to attending our

Nation’s colleges and universities are at historic highs, and there

are few who would dispute the great value of the noneconomic returns as well.

At the same time, Federal dollars to support students’ efforts to

get a college education are and will be very scarce. We must do our

utmost to use those precious dollars well.

This is a time of great achievement, but also of great challenge

for American higher education. Despite extraordinary real increases in tuition over the past two decades, the percentage of high

school graduates attending college is around 60 percent, as Professor Kane pointed out, an all-time high.

85

It isn’t difficult to explain why. While in 1980 a student graduating from college could expect to earn about 45 percent more than

a high school graduate, today the differential has almost doubled,

to 85 percent. Economic studies place the rate of return to an investment in a college education at more than 10 percent, a figure

that compares quite favorably with stocks or bonds.

So even in the narrowest economic terms, higher education is a

sound investment. When one adds the important noneconomic benefits, the case for allocating more money to postsecondary education is even clearer.

Yet there are significant challenges facing higher education

today. Even as overall college attendance rates have grown, the gap

between enrollment rates of students from richer and poorer families has widened.

Moreover, for low-income students in many States, the range of

institutional types within higher education is becoming increasingly restrictive. Rising prices at public universities and 4-year colleges, coupled with inadequate student aid for the neediest students, are forcing an increasing percentage of students from lowincome families to attend their local community colleges, whether

or not that is the best alternative for them in light of their aspirations and capacities.

Evidence developed in our work and by other researchers shows

that subsidies to low-income students are much more effective in

stimulating enrollment and expanding educational choice than are

subsidies to students from more affluent families.

There is in our view no question that rising public tuitions, coupled with inadequate student aid, have produced a crisis of college

affordability for many low-income, and some middle-income families.

Expanded Federal investments in higher education are a worthy

way to attack this growing problem. But if our premise is accepted,

the central questions before this Congress are two: First, what is

the most effective vehicle for expanding Federal higher education

investments, and, second, which students should be the target of

such an expansion.

Mr. SCHAPIRO. I now turn to my colleague, Michael McPherson.

STATEMENT OF MICHAEL S. McPHERSON, PROFESSOR OF

ECONOMICS AND PRESIDENT, MACALESTER COLLEGE, ST.

PAUL, MINNESOTA

Mr. MCPHERSON. With your permission, we’re doing this on kind

of a tag team basis. So I’ll follow through on Morty’s beginning.

It is our belief that direct increases in spending on Federal grant

programs for college students are a more straightforward, more

transparent and more effective vehicle for expanded Federal spending than our new Federal tax breaks.

Nonetheless, we must also recognize that in the current political

climate, tax breaks may be more politically saleable than are

spending increases that have equivalent impacts on families and on

the Federal Treasury.

In this light, we believe that the attractions of a tax cut program

for higher education depend critically on the targeting of the beneVerDate 11-SEP-98 10:34 Oct 05, 1999 Jkt 057910 PO 00000 Frm 00088 Fmt 6633 Sfmt 6602 D:57910 W&M3 PsN: W&M3
86

fits. Unfortunately, the most recent incarnation of the President’s

tax proposals has some serious drawbacks.

As we have said, low-income families have suffered the greatest

reduction in educational opportunity, yet the Clinton tax credit proposal denies tax benefits to those who receive $1,500 or more in

Pell grants, generally low-income students, while neither the tax

deduction nor the credit provide benefits to the lowest income families who do not have enough taxable income to qualify for tax relief.

Moreover, the tax deduction the President has proposed will provide greater benefits to persons in higher tax brackets, a result

which is hard to justify, either in terms of distributive equity or in

terms of efficiency in generating higher college enrollments.

President Clinton’s proposals could thus be substantially improved by focusing on credits rather than deductions, by allowing

students to benefit from both tax credits and Pell grants, by eliminating the B-average requirement, by making the credits refundable, and by limiting credits for families with higher incomes.

Such improved targeting of benefits would make the consequences of this program of tax benefits similar to an expanded

Pell grant program, an alternative that is in our view more desirable as policy, but that may well be politically infeasible.

We’re encouraged by the President’s proposal to increase the maximum Pell grant from $2,700 to $3,000, but over the past 15

years college tuition has risen by more than 75 percent, relative to

inflation, while the maximum Pell grant has fallen by about a

quarter.

To restore the real value that the Pell grant had in 1980, we’d need a grant of around $4,000. If an increase of this magnitude is

out of the question, then an alternative way to get money to those

low-income students who desperately need it should be considered.

The fact that the President seeks to expand Federal funding for

higher education is laudable. Economic studies clearly support such

an expansion, but the question we have to ask is whether the massive new inflow of funds that is being proposed will really open the

doors of college education wider than ever before.

We believe the Nation needs a higher education program that

has more benefits to the students for whom the issue of college affordability is the most pressing. Thank you.

[The prepared statement follows:]

Statement of Michael S. McPherson, Professor of Economics and President,

Macalester College, St. Paul, Minnesota, and Morton Owen Schapiro, Professor of Economics and Dean, College of Letters, Arts and Sciences, University of Southern California

There are sound reasons to support the President’s commitment to expand federal

funding for higher education. Economic returns to attending our nation’s colleges

and universities are at historic highs, and there are few who would dispute the

great value of the non-economic returns as well.

At the same time, federal dollars to support students’ efforts to get a college education are, and will be, very scarce. We must do our utmost to use those precious

dollars well.

This is a time of great achievement and great challenge for American higher education. Despite extraordinary real increases in tuition over the past two decades, the

percentage of high school graduates attending college is around 60%, an all time

high. It isn’t difficult to explain why: while in 1980 a student graduating college

could expect to earn about 45% more than a high school graduate, today the differential has almost doubled to 85%. Economic studies place the rate of return to

87

an investment in a college education at more than 10 percent, a figure that compares quite favorably with stocks or bonds. So, even in the narrowest economic

terms, higher education is a sound investment. When one adds the important noneconomic benefits, the case for allocating more money to postsecondary education is

even clearer.

Yet, there are significant challenges facing higher education today. Even as overall college attendance rates have grown, the gap between enrollment rates of students from richer and poorer families has widened. Moreover, for low-income students in many states, the range of institutional types within higher education is becoming increasingly restricted. Rising prices at public universities and four-year colleges, coupled with inadequate student aid for the neediest students, are forcing an

increasing percentage of students from low-income families to attend their local

community colleges, whether or not that is the best alternative for them in light of

their aspirations and capacities. Evidence developed in our work, and by other researchers, shows that subsidies to lower income students are much more effective

in stimulating enrollment and expanding educational choice than are subsidies to

students from more affluent families.

There is, in our view, no question that rising public tuitions coupled with inadequate student aid have produced a crisis of college affordability for many low-income and some middle-income families. Expanded federal investments in higher

education are a worthy way to attack this growing problem. If our premise is accepted, the central questions before this Congress are two. First, what is the most effective vehicle for expanding federal higher education investments? Second, which students should be the target of such an expansion?

It is our belief that direct increases in spending on federal grant programs for college students are a more straightforward, transparent, and more easily managed vehicle for expanded federal spending than are new federal tax breaks. Nonetheless,

we must also recognize that, in the current political climate, tax breaks are more

politically saleable than are spending increases that have equivalent impacts on

families and on the federal treasury.

In this light, we believe that the attractions of a tax cut program for higher education depend critically on the targeting of the benefits. Unfortunately, the most recent incarnation of the President’s tax proposals has some serious drawbacks.

As discussed above, low-income families have suffered the greatest reduction in

educational opportunity. Yet the Clinton tax credit proposal denies tax benefits to

those who receive $1,500 or more in Pell grants—generally low income students—

while neither the tax deduction nor the credit provide benefits to the lowest income

families who do not have enough taxable income to qualify for tax relief. Moreover,

the tax deduction the President has proposed will provide greater benefits to persons in higher tax brackets—a result which is hard to justify either in terms of distributive equity or in terms of efficiency in generating higher college enrollments.

President Clinton’s proposals could thus be substantially improved by focusing on

credits rather than deductions, by allowing students to benefit from both tax credits

and Pell grants, by making the credit refundable and by limiting credits for families

with higher incomes. Such improved targeting of benefits would make the consequences of this program of tax benefits similar to an expanded Pell grant program—an alternative that is, in our view, more desirable as policy but that may

well be politically infeasible.

We are encouraged by the President’s proposal to increase the maximum Pell grant from $2,700 to $3,000. But over the past 15 years college tuition has risen

by more than 75 percent over and above inflation while the maximum Pell grant

has fallen by about a quarter. To restore the real value that the Pell grant had in

1980, we would need a grant of around $4,000. If an increase of this magnitude is

out of the question, then an alternative way to get money to those low-income students who desperately need it should be considered.

The fact that the President seeks to expand federal funding for higher education

is laudable. Economic studies clearly support such an expansion. But the question

we have to ask is whether the massive new inflow of funds that is being proposed

will really ‘‘open the doors of college education wider than ever before.’’ We believe

the nation needs a higher education program that has more direct benefits to the

students for whom the issue of college affordability is the most pressing.

to say that we’re very, very pleased we were able to lure you from

Mr. RAMSTAD. Thank you, Dr. McPherson. And also I just wanted

f Williams College to accept the presidency of Macalester last sumVerDate 11-SEP-98 10:34 Oct 05, 1999 Jkt 057910 PO 00000 Frm 00090 Fmt 6633 Sfmt 6602 D:57910 W&M3 PsN: W&M3
88

mer. And your tag team, I know, has also authored several books

on financing higher education.

So we appreciate your expertise, and I look forward to the questions. Thank you again for being here with us today.

Mr. Breneman.

STATEMENT OF DAVID W. BRENEMAN, PROFESSOR AND DEAN,

CURRY SCHOOL OF EDUCATION, UNIVERSITY OF VIRGINIA

Mr. BRENEMAN. Thank you, Mr. Chairman. I want to make it

clear at the beginning that in my remarks I’m speaking strictly for

myself as an economist who has worked in this area a bit, as a

former president of a private college in Michigan, and currently

dean at a public university.

As with my fellow panelists, I am very delighted that the President and the Congress is taking very seriously a commitment of additional resources to higher education. I think the trick, however,

is to make sure we do this in the wisest possible way.

One of the common criticisms of tuition tax credits and deductions, going back many years, is the notion that they represent essentially a dead weight loss, that they don’t alter anybody’s behavior.

I think that represents a problem with some of these proposals,

as well, that many of the benefits will go to people whose behavior

won’t be changed by the presence of the credit or the deduction.

There is one group of institutions, however, or one group of players where behavior may be affected, and I’ll pose the extreme case

by which to make a point, and acknowledge that there is likely to

be some range of behavior.

First, within those institutions where students apply for student

aid, financial aid, and many of the students in the beneficiary category are likely to be doing that, the student aid office has a very

simple and direct way of converting this credit into institutional

aid. That is, they simply treat it as another external resource of

funding higher education, and offset their own support for student

aid against it.

This is an invisible process. It does not involve an increase in

posted tuition. It simply means that the institution captures some

or all of the credit or deduction for those students who will be eligible for it. And the institutions have all the financial information at

their disposal that they need to make that calculation.

So that’s one case. Even without a posted tuition increase, it is

possible for a certain set of institutions to convert some of this

credit into institutional aid.

Another set of institutions don’t do a lot of financial aid—2-year

publics, many 4-year low-price publics, and the proprietaries. In

that case, the only way that they could capture this would be by

an overt tuition increase, and in that area we’re into essentially a

politically determined price, and I don’t think there is any analytic

way to say what will happen.

The temptation will certainly be present, however, for State officials, as well as college officials, to push tuition up to some degree

to capture some of this benefit.

Now, in some cases, right now in my State, Governor Allen has

imposed a tuition freeze, so this wouldn’t be something we could

89

do. But the potential is there for this to happen, and it seems to

me the only way that one can prevent it from the Federal level is

through jawboning, and I guess we all have our own opinions about

how effective jawboning is in the long run. But it strikes me that’s

a pretty weak reed to lean on.

I think another way to think about a tax credit that I’m sure has

been on all of our minds is whether you’d like to see this credit

turned into a direct expenditure program, having exactly the same

features as the credit.

And I submit that a—I’m just now speaking of the credit—a di- rect, $1,500 credit to families of incomes up to $80,000, and then

I guess ratably reduced below that, doesn’t strike me as the kind

of direct expenditure program most of us would support.

Like my colleagues, I think this kind of money, if we have it

available for higher education, would be far better directed toward

the Pell grant program, increases in the maximum rate.

I am old enough that I was in town in 1978 under the Carter

administration when the Middle Income Student Assistance Act

swept over this Hill like wild fire, and it’s quite remarkable, because that was triggered by a legislative proposal for a tuition tax

credit, and the administration and the Treasury Department were

adamantly opposed to this, and began thinking of how they could

meet this need in some other way.

And for those who may have forgotten, one of the ways the Congress responded was by taking off all the income limitations on the

guaranteed student loan program, the only problem being they

happened to do it at a time when interest rates were in double digits.

And so every family in American with a kid in college, arbitraged

against the GSL, you know, borrowed to the hilt, stuck the money

in a money market fund at 12 percent, and the Treasury very happily paid for several years a very nice benefit to people for that

purpose.

Now, the Congress realized its mistake about 3 years later, and

reversed this program, but after a considerable cost to the Treasury.

I guess my worry right now is that as middle-income political

fears sweep the Congress again that we learn from history and not

do something that 3 years from now we will turn around and regret.

Thank you very much.

[The prepared statement follows:]

Statement of David W. Breneman, Professor and Dean, Curry School of

Education, University of Virginia

Mr. Chairman, I welcome the opportunity to comment on the administration’s proposals for a HOPE scholarship tuition tax credit and an education and job training

tax deduction. I comment from the vantage point of an economist who studies higher education finance, and who has served as president of a private college and as

dean within a public university.

College affordability is a well-documented concern of many middle and upper income families, as well as for low income families. Education and training are essential for young people of today if they are to have productive and prosperous lives.

The entire nation clearly will benefit from increased investment in higher education,

and thus I am supportive of the motivation behind these proposals. My concern,

however, is that the consequences may not be what the administration claims for

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90

creased aid for institutions of higher education, rather than tax relief for families.

While increased institutional aid may be money well spent, that case should be

made directly on its own merits, and not by indirection.

One of the common criticisms of tuition tax credits or deductions for families with

incomes up to $100,000, is that behavior is not changed, i.e., students from these

families would enroll in any event, and thus the tax benefit is a windfall, a deadweight loss to society. In this instance, however, behavior would be affected, but it

would be institutional behavior that would change, not student behavior. Let me explain.

A high percentage of the students who would be covered by these tax benefits

would be applicants for student financial aid, institutional aid as well as federal and

state aid. Responsible officials in college student aid offices are trained to extract

all potential resources from applicants before awarding the institution’s own funds

as grant aid. Student aid offices also have available detailed financial information

on students who apply for aid, so a reasonably accurate estimate could be made for

each student of the likely tax benefits made possible by each of these programs. The

result will be an additional calculation for each student in the relevant income

range, estimating either the value of the credit or the deduction to that family. The

aid office, acting responsibly as steward of the institution’s own funds, will then reduce any institutional aid that might have been awarded by the maximum estimated tax relief available to the family. The credit or deduction will thus function

as an indirect form of aid to institutions, reducing their own aid outlays by the

amount of the tax benefit.

It should be noted that, in the case described above, the actual posted tuition rate

need not increase for the institution to benefit. In essence, what happens is that the

net tuition charge to students will increase by the amount of the estimated tax benefits, where net tuition is the actual amount paid by the student after deducting financial aid. In the simplest case of the full $1,500 tax credit, the institution will

assume that amount as available to the family, and reduce its own award by $1,500,

causing the student’s net price to be $1,500 more than it would have been in the

absence of the credit. This mechanism is virtually certain to operate for all students

eligible for either the credit or the deduction, and who also apply for student financial aid.

There are institutions that award little financial aid from their own resources,

and where the above process would not operate as described—these are primarily

public two-year colleges, some public four year colleges with very low tuition, and

many proprietary schools. For these institutions to benefit from the proposed tax

legislation, their posted tuition prices would have to increase, i.e., the increase in

net tuition is not available to them. The temptation to capture the tax credit or deduction is certainly present, but the outcome is not quite so clear in this case. Public

sector tuitions are politically determined prices, and often involve negotiation with

the governor, the legislature, or the state coordinating board. Political factors can

thus offset economic forces, producing analytical uncertainty. It is not hard to imagine, however, that state officials will see the tax credit and deduction as an opportunity to raise tuition while reducing state appropriations, thereby shifting costs

from state to federal budgets. Jawboning from the federal level may be the only way

to resist such moves, but it seems unwise to rely on rhetoric to produce the desired

outcome.

Let me turn now to another way to think about these tax proposals. When a tax

credit or deduction is being proposed as an alternative to a direct expenditure program, it seems reasonable to ask whether one would support the tax proposal if it

were presented as a direct outlay. In this case, would one support a grant program

that had the features of the tax credit, awarding grants of $1,500 per student to

families with joint incomes up to $80,000, and ratably reduced to incomes of

$100,000? For anyone who supports the concepts imbedded in the Pell Grant program, such a program would be both inefficient and inequitable. The Pell Grant program has the merit of targeting aid to students for whom the aid makes a difference, i.e., those students who would be unable to attend college without the

grant. Does anyone really believe that a grant of $1,500 would make a difference

in the college-going decision of a student from a family with $75,000 annual income?

The forgone revenue devoted to either the credit or the deduction could buy much

more college access if it were added to the existing Pell Grant program in order to

raise the maximum grant.

These considerations would be academic if the Pell Grant program were fully

funded and delivering the opportunity that it did at its beginning, but that is not

91

1On this point, see David W. Breneman and Fred J. Galloway, ‘‘Rethinking the Allocation of

Pell Grants,’’ in U. S. Department of Education, Financing Postsecondary Education: The Federal Role, Proceedings of The National Conference on the Best Ways for the Federal Government

to Help Students and Families Finance Postsecondary Education, U.S.G.P.O., 1996, pp. 23–30.

the case.1 Pell Grants have been underfunded by roughly $6 billion, and thus the

forgone revenue caused by the proposed tax expenditures comes at a significant opportunity cost to the major access program of the federal government. Whatever the

merits of tax relief to middle and upper income families (ignoring for the moment

the earlier argument that little of that benefit would actually accrue to families),

one has to weigh that benefit against what a comparable sum could do if allocated

to increased Pell Grants. I submit that direct expenditure on Pell Grants is superior

on both economic criteria of efficiency and equity.

I am reminded in the current context of the circumstances that led to the passage

of the Middle Income Students Assistance Act in 1978. At that time, the Congress

was motivated by a desire to help middle income students finance higher education.

One of the principal features of that act was to eliminate any income test for the

Guaranteed Student Loan (GSL) program. The result was an upsurge of borrowing

by middle and high income families, using the funds borrowed to arbitrage against

the much higher interest rates available in the market. In other words, families borrowed at the GSL rate of 8 percent, and invested their own funds at the much higher interest rates then prevailing. Having realized this mistake, Congress subsequently undid the damage, but only after considerable needless cost to the Treasury.

I see the same situation developing in this current attempt to aid middle and high

income families, and I urge the Congress to think carefully before committing a

similar mistake.

witnesses, our gratitude for being here today.

Thank you for giving me the opportunity to share these thoughts with you.

Mr. RAMSTAD. Thank you, Dean Breneman, and again, to all the

f I would like to begin the questioning, which is a rare pleasure

for me, now that I’m a temporary Chairman, by asking the other

Members of the panel if you agree with Dean Breneman that we

would be better served by putting more resources into Pell grants

rather than using the Tax Code for education incentives.

Mr. GLADIEUX. Yes, I certainly agree. I think the Tax Code is not

an effective vehicle, as I said, in my testimony, for helping people

who are really trying to make ends meet and struggling to meet

tuition expenditures.

Direct expenditure programs like Pell and the other grant, loan

and work/study programs are just a much more effective way to

close gaps in educational opportunity.

Mr. RAMSTAD. Professor Kane.

Mr. KANE. As I said, to the extent there’s been a problem in access to higher education over the last 15 years, it’s been mostly at

the bottom of the income distribution. So I do think moving the

money into the Pell program would be a better way to close that

gap.

But I would say there are two ways, to improve the tax proposal.

One would be to drop the B-average requirement, where even if we

could administer it, I’m not sure whether the benefits would justify

the costs. A second improvement would be to provide an 80-percent

credit for the first $1,875 or a 75-percent credit for the first $2,000

rather than give 100 percent credit for the first $1,500. By requiring some kind of copayment for the initial tuition expense, you

might avoid some of the greatest abuse of the system—to subsidize

leisure-oriented coursework.

Mr. RAMSTAD. Dr. Schapiro.

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Mr. SCHAPIRO. Yes, I think Tom Kane is definitely right. If we

tinkered with the current bill, we could definitely improve it, but

the larger question is one that you asked. Should we expand the

Pell grant instead, and I think—feel very strongly that we should.

I think everyone here does, and most people who have been studying this, as we have for the last decade or so. It’s a much more efficient way to get the money to those who really need it. Otherwise

you’re going to waste a lot of resources and the bang for the buck

is going to be rather minimal.

Mr. RAMSTAD. President McPherson.

Mr. MCPHERSON. Yes, I agree with that.

Mr. RAMSTAD. So we get a five to nothing verdict here.

Mr. GLADIEUX. Mr. Chairman.

Mr. RAMSTAD. Please.

Mr. GLADIEUX. I might add that putting more money into Pell

grants not only would increase awards for the very lowest income

students, but it would extend benefits further into the middle class.

Student aid is not just for the very poor. It does extend subsidies

based on need into the moderate- and middle-income ranges.

Mr. RAMSTAD. I would also like to ask, pursuant to a comment

that you made, Dean Breneman, I’d like to ask the college administrators on the panel whether you agree that given the increased

administrative costs here to colleges and universities whether we

would, as Dean Breneman put it, see tuition inflation pursuant to

these increased administrative costs, as well as pursuant to the increased tax benefits.

I believe that was your summary statement, that we’re likely to

see tuition inflation as a result of increased tax benefits.

Mr. BRENEMAN. Just to clarify, I didn’t introduce the administrative cost issue.

Mr. RAMSTAD. No, no. That’s my question. I’m asking if similarly

you would see that phenomenon, tuition inflation pursuant to the

increased administrative costs. Would the colleges and universities

pass that down in terms of increased tuition, those administrative

costs?

Mr. MCPHERSON. Well, I’ll try to respond. I should also say, as

other panelists did, that I’m not attempting to speak in any official

sense for Macalester College, but rather as a concerned citizen, and

somebody who studied this area.

I think the administrative burdens, particularly with the B-average requirement, would be nontrivial. Whether colleges could pass

them on would really depend on their market situation, and as

Dave Breneman suggested, it’s a pretty competitive environment.

So to what extent colleges would absorb those costs, to what extent they would pass them on would probably vary.

But I do think the administrative burdens, both for the B-average requirement, and for verifying expenditures for the sake of tax

recording, would be significant.

Mr. RAMSTAD. Thank you, Dr. McPherson. Would anybody else

like to comment?

[No response.]

Mr. RAMSTAD. Mrs. Thurman, do you have questions for this distinguished panel?

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Mrs. THURMAN. Thank you, Mr. Chairman. I need some help

here for a minute. I don’t disagree with you on the Pell grants.

Let’s talk about the direct loan program, because that’s also funded

through Congress.

Is that another area that we could put additional money in to expand for students? I don’t care who answers that. All of you can

answer it. Because I will tell you, the University of Florida was one

of those institutions that in fact did have the opportunity to participate.

They absolutely love it. The students love it. It’s on time. It’s

easy to administer. They get their money at the beginning of the

semester. They are not worried about whether they can pay their

tuition, whether their books are going to get paid, whether they are

going to have living expenses, utilities. Everything works.

Is that an area that we should be looking to expand, or to make

sure that other institutions are covered?

Mr. MCPHERSON. Well, I will offer some response—and I’m sure

others will add to it. There are two questions here. I think one is

expanding the overall level of lending, and then the question of the

vehicle of direct lending versus the guaranty lending program.

As you know, the lending programs are entitlements, so that,

given the legislative rules that determine eligibility, as much

money as is needed is spent to make the lending programs work.

I think the terms of those programs as they stand now reach a lot

of people. I’ll let others comment on whether we should liberalize

those terms in some ways.

I would emphasize that the presence of the direct lending program, I think, has actually made the overall program work better.

My place actually works through guarantors and is not participating in the direct lending program.

We’re getting terrific service, and I think one of the reasons we’re

getting terrific service is that there is competition and the banks

and the guaranty agencies are alert to the fact that they’re working

in a competitive environment. So I certainly think it’s important to

keep the direct lending program going, even though my own college

is not currently a participant.

Mrs. THURMAN. Would you like it?

Mr. MCPHERSON. Well, we are really getting very good service

now, so it’s not clear in my case that it makes sense to change.

Mr. KANE. Also, I know that on the Hill there’s been an ongoing

debate about the cost comparison between direct lending and the

regular loan programs. Actually, I know that’s a complicated debate and I’m not sure, in fact, where I come down on it.

But the greatest strength of the direct lending program is the

simplification it provides students and their families. As I said at

the end of my remarks, we ought to keep in mind that we’ve got

a pricing system that is very complex and confusing for parents

and students, and that the more we do to simplify the user interface we are removing some of the uncertainty about how much aid

is available and relieving families’ anxiety about paying for college.

Regardless of the cost issues, direct lending versus the regular loan

programs, I do think that direct lending has the benefit of being

easier to use.

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Mr. GLADIEUX. My only comment reinforces what has been said:

Let the competition continue between direct loans and the guaranteed loan system. Competition has been good for students, good for

institutions. Some institutions find one program better than the

other. It probably will take a number of more years to see which

is ultimately better, but for now, competition is good for students

and I think good for the student loan industry.

Mrs. THURMAN. Mr. Breneman.

Mr. BRENEMAN. Well, I’m a big fan of direct lending, but I also

think, to the point of middle and upper income families, what

you’re dealing with is not a decision, for the most part, on whether

their child will go to college; it’s where and how will they finance

it. I think properly designed loan programs, such as I think we

have in place, go a long way toward answering that financing problem, which is part of the reason why I tend to see the tax proposals

as sort of deadweight losses.

Mr. HULSHOF [presiding]. Anything further?

Mrs. THURMAN. I do, but I’ll wait.

Mr. HULSHOF. Mr. Jefferson, if you don’t mind, I’ve got some

questions to follow up.

I think, Mr. Breneman, you touched on this a little bit before.

When Secretary Rubin was here on February 11—and I think, if

you were here, with questions earlier, he indicated the administrative costs of the paperwork associated with the $1,500 credit, the

B-minus average, that he indicated there would be no administrative cost—or, as I think he put it, it would be the cost of a pencil.

I think this morning we heard from panelists that it would be a

‘‘de minimis’’ additional cost.

I take it from your previous statements that that’s not an opinion

that you share.

Mr. BRENEMAN. Well, I’m trying to figure out where I ever said

anything about administrative costs. That happens to be something

on which I don’t have any particular point of view.

Mr. HULSHOF. What we’re talking about is the potential pressure

on tuition inflation by these credits or deductions. I don’t know

that anyone is taking a look at what costs might be pushed on to

the colleges and universities.

Has there been any study about the additional costs that must

be borne by colleges and universities if these proposals pushed by

the administration actually go into effect?

Mr. BRENEMAN. Let me try to clarify something, because I think

the former Chairman got the administrative cost issue in with the

tuition inflation issue. I at least would like to try to separate those.

I don’t have a particular knowledge base on the administrative

issue, which some of my colleagues may.

I was simply pointing out that if there is another resource available to finance college in the form of either a credit or deduction,

that the colleges know about, they will have a tendency to want to

capture that themselves.

I used the example of the student aid vehicle. If I’m a student

from a $60,000 family and I’m going to be eligible for $2,000 in tax

benefits somehow, and I also apply for financial aid to a college

that gives a fair amount of its own aid through discounting, and

I’m a financial aid officer in that college, I’m not going to ignore

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the fact that that family is now about $2,000 in benefits explicitly

because the student is coming to college and, to some degree—

maybe not a hundred percent—and in my testimony I treated it as

a hundred percent—but to some degree, I’m going to offset my own

aid against the benefit that that family now has, just as I would

do with any other external form of aid available to a student.

That’s a mechanism that doesn’t have anything to do with administrative costs. It’s just saying that somebody has got the

money on the stump and I’m going to try to capture it before I do

my own aid.

Mr. HULSHOF. Dr. McPherson.

Mr. MCPHERSON. If I could say a bit more about administrative

costs, I don’t think that the administrative costs would be large

enough to have a discernable impact on cost levels at colleges or

on tuition levels. They would be significant enough to make the

wives of registrars and business officers and so on even more harried than they are now.

I also worry that this B-minus requirement will either be administered carefully, in which case it will be expensive and difficult

both for the Department and for the colleges, or not carefully, in

which case I’m afraid down the line we’re going to find people feeling they’re treated unfairly or feeling that there’s abuse in the system.

I don’t think anybody has come forward with a good rationale for

the requirement in the first place. Why don’t we want to help people who get C-pluses?

Mr. HULSHOF. Mr. Gladieux, let me ask you, from your testimony

and your statement and publications, op-ed pieces that you’ve

done—you mentioned that you support increasing Pell grants, but

that we’re even behind the curve as far as the purchasing power

of the Pell grant.

Could you elaborate on that just a little bit for me?

Mr. GLADIEUX. We are way behind the curve. The purchasing

power of the maximum Pell grant has eroded 30 to 35 percent in

the past decade and a half so we need to make up for lost ground.

The increase that Congress voted at the end of the last session

helps a lot and brings it up from 24-something to $2,700 in the

next academic year. The following academic year, 1998–99, it

would go to $3,000 under the President’s plan, and that’s definitely

in the right direction. But as I said in my testimony, it doesn’t

stack up against a $1,500 tax credit and the potential value of a

$10,000 tax deduction, which could mean as much as $2,800 or

$3,100 in tax savings, depending upon the marginal tax rate of the

taxpayer.

Mr. HULSHOF. Let me follow up with this, Mr. Gladieux. If this

were an ideal world, and if you had your druthers, regarding Pell

grants and the purchasing power of the Pell grant, what amount

are we talking as far as bringing it up to where you think it should

be?

Mr. GLADIEUX. You would have to bring it up close to $5,000. The

value of the Pell grant peaked in the late seventies, and I think

to get back there, it would have to approach $5,000 today.

That, in fact, is what Senator Wellstone’s bill would do, and I

think Representative McGovern in the House has introduced a

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similar bill that would take the full estimated cost of the President’s tuition tax proposal and redirect it to Pell grants. In his bill,

the estimate is that that would get us up to a $5,000 maximum

Pell. I think that’s what we should be looking at.

I’m not sure that’s going to happen right away or in the next few

years, but we ought to be pushing in that direction.

Mr. HULSHOF. If I’m not mistaken, I think I just heard a cheer

go up, from sea to shining sea, on college campuses, as a result of

your answer.

My last question is to any of you on the panel. Yesterday, while

we had our oversight hearing, I had 24 students from the University of Missouri system who came to talk about just this issue,

about direct loans, about the Felt program, Pell grants, and all

measures of aid and work study. There was a point made and a

question, quite frankly, that I will put to the five of you.

What about the nontraditional student? Do the administration’s

proposals help the nontraditional student? And by that, I will just

give you a couple of examples that were shared with me.

The 19- or 20-year-old young woman who chooses to be emancipated from her parents and who wants to try to pay her own way

through school, or maybe the young married couple, particularly

the young man who is going to be a freshman, who works part time

at Shakeys Pizza back in Columbia, Missouri, but still pulls a full

caseload of 15 hours per semester. He’s taking a quick look at this,

and the $10,000 deduction isn’t going to help him. He’s not going

to qualify for a Pell grant because he makes enough money from

his part-time job, and at the same time, the $1,500 credit is not

going to be available to him, either.

Is this a situation where we’re allowing a significant portion of

students to fall through the cracks? Mr. Gladieux, you’re nodding

in assent.

Mr. GLADIEUX. I’m glad you asked the question, because I think

we need to recognize in all this that well over half of postsecondary

students today are deemed to be independent, self-supporting, not

relying on their parents for financial support. Most of those students, at least a third in the data that I’ve seen, have incomes of

less than $10,000. I have roughly calculated that about half have

less than $20,000 annual income.

In the administration’s own illustrative examples of who would

benefit at different income levels, the benefit from the tax credit or

the deduction will be zero at those levels. A majority of students

attending public institutions are just trying to make ends meet.

They’re older students who have been working and want to come

back and upgrade their skills or their job position. Many of them

do not have taxable income or tax liability, against which they

could apply these tax breaks.

So I think it will miss a large number of students, particularly

in the community colleges. That’s where the President’s program

has been held out as a great hope for making access universal. I

just don’t think the mechanism is going to do that.

Mr. KANE. There’s one exception, though, and that is for single

independent students. I don’t think any of the students you mentioned would benefit, but for those students out there who are over

age 24, who are still single and have no dependents, the adminisVerDate 11-SEP-98 10:34 Oct 05, 1999 Jkt 057910 PO 00000 Frm 00099 Fmt 6633 Sfmt 6602 D:57910 W&M3 PsN: W&M3
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tration’s proposal would let them protect more of their income before it’s implicitly taxed away by the needs analysis system. Somebody can earn up to $9,000 under the administration plan before—

that is for a single independent student—before that money starts

to get counted against their Pell grant eligibility.

That $9,000 figure would be up from $3,000 today. What Larry

is saying is right. Most independent students wouldn’t benefit, unless they’re already receiving a Pell grant, where they would get

$300 more. But there are some independent students that would

benefit considerably.

Mr. GLADIEUX. I think that’s true. That highlights the point. The

tax breaks really will not benefit these nontraditional older students. The administration has proposed a change to the Pell grant

program for single independent students that would be constructive. That’s part of their package. We applaud the Pell grant enhancements. They will help and the tax benefits will be much less

valuable.

Mr. HULSHOF. Mr. Jefferson.

Mr. JEFFERSON. Thank you.

Professor Breneman, you say that institutions that have significant institutional aid packages, as a result of the Hope scholarships and tax deductions, will adjust their own aid downward; but

you advocate an increase in Pell grants as a way to get around that

problem.

How is it less true that if an institution has a significant institutional aid package that it will not also adjust their package downward if you have a Pell grant increase introduced?

Mr. BRENEMAN. Well, I think they probably will to some extent.

If you had a significant jump, a $4,000–$5,000 Pell grant, in some

cases—you know, I would have to think through the mathematics

of each of these cases—but certainly that would be an aid to a

number of colleges who are trying to fill the need that remains

after existing aid and, in this climate, wind up having to do that

with their own, basically, in most cases, discounting. They’re just

giving the student a reduced tuition, a reduced net tuition.

But the difference, I think, is that the Pell grant mechanism puts

that money into the hands of students, number one, who might in

some cases not even be in college without it, so many of the beneficiaries of the less targeted program are going to be there one way

or another.

Mr. JEFFERSON. I certainly wouldn’t argue against Pell grants. I

was simply trying to understand how in the one case there’s an adjustment downward and in another case there would not be, just

to meet that institutional aid argument that you mentioned.

You also, of course, mentioned two or three other things in here

that don’t deal with that particular concern. But if I understand

you, universities could make an adjustment in either event, depending upon the size of the Pell grant award, and that taken into

account to reduce institutional aid.

Now, you say also that for those schools that don’t give much in

an aid package institutionally, that it might cause an increase in

tuition; otherwise, they can’t benefit from the packages here. I

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ferently with respect to these schools? I guess, if you increase it

substantially, won’t there still be a tendency to raise tuition?

Mr. BRENEMAN. Actually, I think not in quite the same way. The

Pell grant is an income-tested program, and there are few cases of

very low tuition institutions where it’s possible that an increased

Pell grant, if they raise their tuition, would actually raise the eligibility of the students. But, generally speaking, I think most of us

who have looked at this issue—in my case, while I was at Kalamazoo College, an increase in the Pell grant, if I raise my tuition,

I didn’t get three cents more from the Pell grant because it was

capped out by an income test and not by a cost-of-college test.

Whereas, with the tax credit, in principle, if a very high percentage of your student body is covered by it, you have a much higher

chance to capture something.

Mr. JEFFERSON. It would probably depend on how low the tuition

is to begin with, as to whether it would be affected at all.

Mr. BRENEMAN. Right.

Mr. JEFFERSON. The last thing you talk about is the shifting of

costs from State to Federal. Here again, I’m trying to see the distinction between these two aid programs.

What the administration is apparently trying to say—and I’m not

sure how well it’s saying it—is that some of these benefits are designed to assist certain income groups and certain other benefits

which may not be before this Committee, which may not have anything to do with the Tax Code, but may be in the Pell grant area,

are designed to reach other students from other income groups.

And when you put it all together, a whole lot of folks get helped.

This last point you make here about the shifting, tell me how you

differentiate—how the differentiation is made between State and

Federal cost shifting, whether it is a tax credit or a grant.

Mr. BRENEMAN. Or a Pell grant?

Mr. JEFFERSON. Yes.

Mr. BRENEMAN. Well, once again, I think the Pell grants are a

targeted grant, which is probably ultimately going to cover a smaller proportion of the students in a study body. I mean, to some degree, particularly when you get into the 4-year public institutions

that don’t have the student aid mechanism to play with, you’re now

into a politically determined price tuition. Tuition is not something

that most public campuses set arbitrarily. They have to negotiate

it with the Governor, the legislature, and so on.

I think the difference might come in that the tax proposals are

more broad-based and cover a higher percentage of the study body,

so that if you were to push tuition up, you would sort of be taking

across from the entire student body.

Pell grants are still, even in the versions we’ve been talking

about, higher levels, would still be covering a smaller fraction of

the student body, so to be blunt about it, you would have a certain

number of parents in the, say, $60,000 range, that would be resistant, I think, to tuition increases simply because Pell grants have

been raised, because they aren’t necessarily going to benefit from

that. Whereas in the other case——

Mr. JEFFERSON. Mr. Chairman, may I ask one last thing here?

Chairman ARCHER [presiding]. Certainly.

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Mr. JEFFERSON. The administration has made the argument that the $1,500 tax credit is designed to assist people going to community colleges, maybe folks who are already working, who want to

add some more formal education requirements, maybe for a job

switch in the middle of their careers or whatever.

Does this make any sense to you as a way to address that issue,

where you have people out there earning money, who are looking

to change job skills or moving to different careers? Does it make

any sense to you that this can work in that regard?

Mr. BRENEMAN. The tax credit?

Mr. JEFFERSON. Yes, with respect to someone who is already

working, already in the workplace, looking for a change in career,

maybe just wanting to move up in his job or move up in some other

career opportunity, and who is able to go back to school with this

particular assistance.

Mr. GLADIEUX. I would be glad to start by using an example from

California. Students going to community colleges in California I do

not believe will derive any value, any relief from the tax credit.

I can’t tell you exactly the tuition level now, but it is well below $1,500. Tuition in California for community colleges, public 2-year

institutions, is minimal, a couple hundred dollars, in that range. It

used to be zero. Fees were introduced for credit hours within the

last few years. There will be no benefit to community college students in California.

As I said before, I am concerned about the nontraditional students who are trying to go back for a second or third chance and

upgrade their situation, and are just making ends meet. They may

have had a job where they had some significant income, but now

they’re just trying to get by financially while going to school. I don’t

think they’re going to benefit from the tax credit.

So it has been advanced as something that will make the 13th

and 14th years universal or free, and I think it’s going to fall well

short of that.

Mr. SCHAPIRO. I think the stipulation in the bill, where it mandates the offset between the Pell and any additional credit anybody

would get, any additional money, pretty much makes sure that the

number of people who presently cannot afford community college,

who would now be able to afford it, is held to a minimum.

If I could just get back to your question before, I think it was

an excellent question. What’s going to happen if you increase the

Pell grant? Is it going to have an effect on causing individual institutions to cut their own aid, and then is it going to induce these

schools to increase tuition even more than otherwise, because I

think everybody would agree that it’s an empirical question. In

fact, Mike McPherson and I, in a book we published in 1991, looked

at that in great detail.

Let me just take a second to say what we found. We found that,

for private, 4-year colleges, in fact, not only did increases in Pell

not translate into a retrenchment, in terms of financial aid, it was

actually an enhancement of financial aid. In other words, they were

complements rather than substitutes.

What happened was—and this was over the period 1978 to

1985—what happened was the expansion of Federal and State financial aid during that period enabled a number of low-income stuVerDate 11-SEP-98 10:34 Oct 05, 1999 Jkt 057910 PO 00000 Frm 00102 Fmt 6633 Sfmt 6602 D:57910 W&M3 PsN: W&M3
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dents to enter into the world of private education, where they previously weren’t able to. And then the individual private institutions

took up the slack in making it affordable for them. So, in fact, we

didn’t find substitutability; we found complementarity.

The other question, about is it going to be an inducement to raise

tuition, is a little more complicated. We found in this same study

that for private, 4-year colleges and universities, in fact, there was

no statistically significant relationship between changes in the Pell

grant and the tuition that they charged.

On the other hand, for public, 4-year colleges, we found a very

strong, positive relationship. In other words, over that period, when

the Pell grant went up more rapidly, 4-year publics increased their

tuition more rapidly than they otherwise would have. At least

that’s what we found.

Chairman ARCHER. The gentleman’s time has expired.

Let me apologize to all five of you gentlemen that I’ve not been

able to be here for all of your testimony. Unfortunately, there are

other duties that arise where you have to make decisions. But I am

glad that I’ve heard a great deal of it and would like to ask a few

questions of you, if I may.

Why are the costs of college so much more expensive today than

they were 20 years ago? Why have they so greatly exceeded the

rate of inflation?

Mr. KANE. The answer to that question depends upon which type

of institution it is. At public institutions, we should make a distinction between cost per student and tuition. If you look over time,

cost per student at publics have been rising faster than inflation,

but not 70 percent faster than inflation; more like 20 percent faster

than inflation, cumulatively over the last 15 years. In the face of

increases in enrollments and other demands on State budgets,

States have been unable to continue to pay the same share of the

costs that they used to before. The share of costs covered by State

subsidies has declined and that’s a big part of the reason for the

increases in tuition at public colleges.

At privates, the story is a little bit more complicated, because if

you look over time, their sticker prices have shot up even faster

than publics, at about 80 percent. But there’s good news and bad

news. The good news is that at privates, with a lot of institutional

aid, net prices have not risen nearly as quickly as tuition. It has

risen more on the order of 40 percent or so. That’s the good news.

The bad new is, though, costs per student have also increase by

about 40 percent about twice as fast as at public institutions. So

the cost per student increases have been faster at the privates than

they have been at the publics. To summarize, in publics, most of

the tuition increase has not been a cost increase; it’s been a change

in the State subsidy. At privates, the tuition increase exaggerates

the actual cost increase, but the cost increases were bigger at the

privates than they were at the publics.

Chairman ARCHER. Again, in the private schools, why does the

tuition increase rise faster than the cost?

Mr. KANE. Well, they’re doing more institutional aid. They’re

raising the sticker price but charging different students different

rates. The highest income students are probably paying something

closer to the sticker price.

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Chairman ARCHER. Is that so they can more greatly subsidize the

low-income students and create more scholarships?

Mr. KANE. It’s hard to sort out exactly what’s been causing it,

but it may very well be that because the Pell grant maximum, the

Federal grant, has declined in real value over time. Some of the

privates have been picking up that slack with their own institutional aid.

Chairman ARCHER. So you have, in effect, more in the private institutions, a cost shifting, like you have in health care? Is it a comparable type of thing that’s occurring?

Mr. KANE. I suspect that’s part of the story. But there has also

been a change in merit aid, which other people could comment on.

Mr. SCHAPIRO. One way to answer that question is to say where

is the money going. You can point to the revolution in technology

and all the costs that that entails, and some would say the increase

in government regulation I should add. Whether these sorts of stipulations increase costs or not, it’s not going to stop college presidents from blaming it when they increase their tuition. I’m glad my

colleague is laughing here.

As an economist—and we’re all economists here—one way is to

look at where we’re spending the money. The other side is to say

how could they get away with increasing their costs? I mean, there

is a lot of good things that colleges and universities have spent

their money on over the last 15 years. But I can say that if the

market didn’t support these extraordinarily high increases in tuition, they wouldn’t have done it. We can point to, as we did in our

testimony, and Tom did as well, that enrollment rates are at record

levels. People are willing to pay for it. Why? Because the rate of

return to higher education is at a record level.

So you can look at the more recent increases in tuition and

they’re no longer 41⁄2 percent real. They’re now 21⁄2 percent real. Is

it because people have all of a sudden been scared by jawboning

from the president, and is it because they ran out of good things

to spend their money on? The answer is no. They’re hitting a price

wall. Over and over again, more and more schools are now finding

the long lines of no-need and low-need students that used to be

knocking on their door, they’re gone. Now all of a sudden they’re

responding. Not that they don’t have great things to spend their

money on, but all of a sudden the market isn’t strong enough and

the demand isn’t strong enough to sustain those kinds of real increases.

So again, I would point to the fact that people are willing to pay

it and that’s why they increase their tuition, and now they’re not

willing to pay it, which is why we’re getting much closer to an inflationary increase in tuitions.

Chairman ARCHER. Let me follow up. If I heard you correctly, the

applications for enrollment are at an all-time high——

Mr. SCHAPIRO. The enrollment rate.

Chairman ARCHER [continuing]. And yet you say they’re dropping

off and, therefore, there is a price war. Did I misread something?

Mr. SCHAPIRO. What we’re starting to see is a real shakeout in

the higher education industry. The number of schools that are really elite, especially in the private sector, who could basically charge

whatever they wanted and people were willing to pay it, you know,

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that is really dwindling. It has dwindled a lot over the last two decades.

The enrollment rate is still at record levels, but increasingly, certain groups of institutions are starting to find themselves in a

much more competitive situation. Their response, of course, as in

producing any consumer product, is that when you find that your

competitive niche becomes eroded, then you start to moderate your

price increase.

Chairman ARCHER. Mr. Breneman.

Mr. BRENEMAN. Well, I think another spin on that is that the colleges and universities are not quantity adjusters. You know, we all

build a plant and have a faculty and want to enroll a certain number of students. So one of the results of high price increases over

the last 10 to 15 years, as Morty indicated, is that in the private

sector, a growing number of colleges simply can’t fill up, can’t hit

their enrollment targets, at the posted price they’re charging. So

the number of full-pay students has been declining. What the colleges have been doing is working right down the demand curve, not

unlike airlines. This is sort of like ticket prices, sort of the economics of fixed capacity. You’ve got a certain number of students you

want and you’ve got 30 percent who will pay the full price, and

then you start working down with student aid and charge less and

less to the students who can’t or won’t pay the higher price, until

you reach the level you want to get to.

Chairman ARCHER. When you’re doing that, though, do you then

cost shift to the people who are able to pay a higher price? You’re

not actually reducing your costs of education but you’re just shifting the——

Mr. BRENEMAN. Well, to some extent you are doing that. I think

it’s a little more complicated because there are other sources of revenue coming into the school. You have endowment income. But to

some degree you are taking everything you can get from every

source and trying to put it together and balance your budget.

I will have to admit, as a former president who used to write

these tuition letters, it looks, to full-pay parents, like part of their

payment is, in fact, going to subsidize the students in the class who

are lower pay.

On the other hand, virtually nobody is paying the full price.

There is a subsidy level from other sources in any case and you

have to argue that you want a diverse student body and so on. It’s

an issue, though, that I think is a very real one for most college

presidents these days.

Chairman ARCHER. Clearly, from your responses, it is a pretty

complex issue. But I do wonder if the Clinton proposals will now,

in effect, ease some of the pressure on those who are paying the

higher cost and, as a result, accommodate, in an overall sense, the

continued buildup in average costs which have to be paid for some

way or another.

In other words, the true costs. I’m not talking about the bills you

send out. I’m talking about the costs you’ve got to cover. We need

to distinguish those two. When we talk about costs sometimes, we

use them interchangeably, and that’s unfortunate.

But to be more productive and more efficient, which I’m proud

to tell you this Committee has done in the last Congress, because

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we reduced the cost of operating this Committee by 40 percent

when we took over, and we turned out more legislation, more quality legislation, spending 40 percent less. That’s not relative to a

baseline inflationary increase. That’s relative to what was spent

the previous year.

Are any of those pressures being felt in colleges and universities,

that we’ve got to produce more and we have to do it more efficiently with less, or is it kind of ‘‘well, we’ll find a way to cost shift

and we’ll adjust these things and we don’t feel any pressure to be

more efficient’’?

Mr. MCPHERSON. If I could, Mr. Chairman—I’m a private college

president, but I would like to say a word on behalf of public colleges and universities, because a lot of those places really have

been squeezed, as Professor Kane said.

States have withdrawn quite a lot of support. In fact, in real

terms, the decline in State support for public higher education is

about equal to the dollar amounts that are involved in these proposals. So these places, in many States, have had real declines in

spending, and have had tuition increases that don’t even make up

for those declines. So they have had serious experience with having

to fight with really reduced budgets.

Unfortunately, the way State budgeting tends to work, there

aren’t very good incentives to be productive in that case, because

you sort of get the ‘‘Washington Monument’’ phenomenon. You certainly don’t want to try to save and advance, because if you save

and advance, the legislature will take it all away. So it’s hard to

do good forward planning in that environment.

But the pressures really are out there.

Chairman ARCHER. When I was in the Texas legislature on the

Appropriations Committee, we went through a lot of that very

thing with our State-supported universities.

Mr. MCPHERSON. And I think some States are now thinking pretty hard about budgeting systems that will reward schools for being

more efficient, rather than simply trying to get across-the-board

cuts.

Chairman ARCHER. I appreciate all that wonderful background

information, and I want to try to tie it into the Clinton proposals

and what we’re about right now.

Would you say there is at least a degree of softening the edge

of cost shifting if this proposal were adopted for the Hope scholarship or the tax benefits for higher education? I mean, you have said

that at least some degree of what’s occurring is cost shifting to people who can afford to pay.

Now, if it were put into effect, this would certainly impact beneficially those people who are in a better category of being able to

pay. Would that, to some degree, soften the edge of the cost shifting?

Mr. KANE. I could comment on that a little bit.

If I were an institution charging $10,000 now, if I tried to raise

my sticker price to $11,000, even for the families taking the tax deduction or taking the tax credit, they’re paying 100 percent of that

thousand dollar increase.

Now, if I’m Harvard College, or I’m another college that has

some market power, I might still be able to capture some of that.

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But if I am Kalamazoo College, competing with Macalester, I might

love to be able to try and capture some of that tax credit or the

tax deduction. But to the extent that I have now become a thousand dollars more expensive relative to my competitors, I might

find that I am not able to get away with it.

On the other hand, if I’m providing a ‘‘free ride’’ to some lowincome students, the way the proposal is written, it implicitly taxes

at 100 percent any institutional aid that I give to that student beyond a certain amount. Because the student’s tax reduction is

being reduced for any institutional aid that they get, some of that

money is being taxed away, so maybe I will do less cost shifting,

as you say, than I was doing before.

Chairman ARCHER. I appreciate that. But I still must say—and

I think all of you, as economists, would agree with this—that it

gets back to the law of supply and demand. Certainly, to some degree, you’re going to increase the amount of demand through these

tax arrangements. I mean, to some degree. We can argue about the

magnitude of it. And to the degree you increase the demand, you’re

going to have some pressure on inflating the cost of education, or

the price of education.

Mr. KANE. But as economists say, it’s mostly an income effect

rather than a price effect.

Chairman ARCHER. So it’s a question of the magnitude. It may

be very small, you’re saying.

Mr. KANE. Yes. Families will take that tax relief and spend some

of it on higher education, and they will also spend some of it elsewhere.

Chairman ARCHER. Yes. I don’t want to get into a broad-based

economic discussion here. I fully understand.

Mr. KANE. I couldn’t help it. I’ve been teaching this semester.

Chairman ARCHER. What percent of our total educational dollars

are being spent on higher education, postsecondary education, in

the United States? Do any of you know that offhand?

Mr. GLADIEUX. Expenditure on the industry is roughly $150–

$175 billion now. Elementary and secondary, K through 12, is probably $300 billion.

Mr. BRENEMAN. Higher education is about 3 percent of GDP, and

I think K through 12 is about 7 or 8, maybe 8 percent. Does that

sound about right? So it would be a factor of two to one, maybe.

Chairman ARCHER. So about one-third is being spent on postsecondary education. How does that compare to other nations in

the world?

Mr. GLADIEUX. A much bigger proportionate investment, I think,

than most other countries in the world.

Chairman ARCHER. I’m sure it is bigger, but do you have any

idea to what magnitude?

Mr. MCPHERSON. I think you would find big variations. In particular——

Chairman ARCHER. Let’s say Western Europe, where I think

there’s probably a great similarity between the countries.

Mr. MCPHERSON. In Western Europe—and I’m really going on a

kind of ‘‘seat-of-the-pants’’ sense of magnitudes—I think Western

Europe would not look so dissimilar from the United States.

105

If you look among developing countries, there are real differences

in strategies. Some countries have invested very heavily in widespread elementary education and have actually had great success.

Others have invested much less in that and much more in——

Chairman ARCHER. I’m really thinking of developed countries

like Western Europe and Japan, to try to draw a comparison. I still

have to believe, just off the top of my head, that we spend far, far

more than they do in either Japan or Western Europe, and I was

going to ask you this question:

What percent of our high school graduates are educated in higher education in this country compared to Western Europe?

Mr. BRENEMAN. Well, the participation rate in the United States

is 60 percent or more of high school graduates that begin, and it

is much lower—I don’t know, 20 percent maybe, in—it depends on

different countries.

Mr. SCHAPIRO. Twenty to forty, normally.

Mr. BRENEMAN. Their strategy has typically been to admit a

much smaller share and then pay the full cost.

Chairman ARCHER. Exactly.

Mr. BRENEMAN. Our strategy has been to admit a much bigger

share and then work all these incredibly difficult cost-sharing arrangements.

Mr. KANE. Although to some extent their institutions are different. They also do more training——

Chairman ARCHER. What additional percent of our high school

graduates should go to college in the United States for the greatest

benefit of our society as a whole?

Mr. KANE. I don’t think anybody knows what the target would

be, but there’s not much sign that, despite recent increases in enrollments, the value of a college degree is falling. In fact, if anything, the value of a college degree has risen. It has leveled off

some, but if it were that we were at the point where we had too

many people going to college, we ought to expect to see prices start

to fall again, and there has not been much sign of that.

Eventually, I suspect that is going to happen, but it has not happened yet.

Mr. SCHAPIRO. Just to add also. The proportion of low-income

students, students from low-income families who are going on to

American higher education is much too low.

In fact there have been a variety of enrollment studies controlling for academic talent, and they found the following. That a highly talented student from a low-income family is decided less likely

to get any form of postsecondary education than a marginally talented student from a very affluent family. And that has not

changed in 30 years.

Chairman ARCHER. But if we are educating—and I do not want

to belabor this—if we are educating such a higher percentage of

our high school graduates in college than our major competitors in

Japan and West Europe, you have to wonder how much of an additional percentage of high school graduates should go to college. It

is, clearly, clearly, much, much more expensive than elementary

and secondary education.

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It seems to me that this is not the Committee to try to determine

all of this, but it is a basic question that has to be asked at some

point.

I have really taken too much time and I apologize to my two colleagues who have sat through all of this inquiry.

Unless either one of them has a followup, you gentlemen have

been very patient and very helpful.

Thank you so much, and we will go on to our next panel. Thank

you.

Mr. HULSHOF [presiding]. Good afternoon, gentlemen. We welcome you to the Ways and Means hearing room and this Committee, and appreciate very much your patience as the hour is long,

and you have been patiently waiting. We appreciate that greatly.

We will submit, for the record, your written statements, and welcome each of you now to provide whatever oral testimony you wish

to the Committee.

Mr. Ikenberry, would you like to begin?

STATEMENT OF STANLEY O. IKENBERRY, PRESIDENT,

AMERICAN COUNCIL ON EDUCATION

Mr. IKENBERRY. Thank you, Mr. Chairman.

It is a pleasure, even though we are a bit delayed, it is a pleasure for all of us to be with you and we appreciate the opportunity.

I have submitted a more detailed statement for the record, and

if I could, I would just like to make two or three points.

The first, is a point that I am sure the Members of the Committee have heard repeatedly, and it really relates to the importance

of higher education as an investment in the Nation’s future—important not just to the economic health of our society, but also to

the ability of individual citizens, if you will, to pursue the American dream.

We have before us many proposals to expand the use of the Tax

Code to help individuals pay for higher education, and there are

several of these that are not necessarily the special focus of the deliberations of this Committee today but I think deserve notice in

the sense that they have broad bipartisan support on Capitol Hill.

For example, the proposal to expand the flexible use of IRAs, the

deductibility of student loan interest, the making of section 127

employer-provided educational benefits permanent, and so forth.

These would help different groups of individuals in different

ways. Some would help families, some would help students in

terms of their loan interest deduction. And some would help adults

in terms of providing continuing learning.

But the total impact we believe would have a very significant impact on improving the accessibility and the affordability of higher

education.

Let me focus just for a second on President Clinton’s specific proposal for Hope scholarships and a tax deduction.

We think these represent a very significant expansion of the Federal Tax Code for higher education and a beneficial one, modeled

in part after a very successful program in Georgia.

I had the opportunity to visit with my colleagues in Georgia, both

from the University of Georgia, and other institutions, and from

State government there. The reports on the impact of this program

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in Georgia were very positive. It has, in fact, increased access to

higher education in Georgia, particularly in the community college

sector.

Incoming students are better prepared, low-income families have

increased access to, and interest in, higher education, and in terms

of the unintended, or feared negative consequences, in fact, in

Georgia, tuitions have not increased faster than the national average, nor has grade inflation in the case of Georgia been a problem.

I think, however, as we look at the Hope scholarship proposal

and at the tax proposals, it is crucial, as the other witnesses said

on the earlier panel, that the President’s tax plans are coupled

with a very significant expansion of the Pell grant program for lowincome students.

Taken together, this total package could have a very positive impact on lower and middle-income families’ ability to finance higher

education.

The American Council on Education supports the President’s proposal and a board resolution to that effect is attached to my testimony.

We do have two concerns in regard to the proposal. One is that

it should be easy for students and parents to comprehend and understand, and it should be directed to benefit those who need it

most.

We look forward to the opportunity to work with Congress and

with the administration to address these particular issues.

For example, we believe the President’s proposals should be revised to make sure that low-income families in fact do receive a fair

share of the benefits of these proposals. At present, the award rules

would sharply reduce or eliminate the benefits of the Hope scholarship for anyone who received a Pell grant, a State grant, or even

an institutional grant or private scholarship.

We believe the proposal ought to be revised, so that those who

get student aid from these other sources would also be eligible to

participate in the Hope scholarship, or tax credit.

Second, the use of the B average to determine eligibility for the

tax credit in the second year of enrollment in college, we believe

creates a level of uncertainty for students and families as well as

an administrative burden for colleges.

The student will not know if they will be eligible for the tax credit in the second year or not, and will therefore have uncertainty.

Student grades, furthermore, are confidential personal records that

should not be used in the Tax Code.

The administrative burden has been spoken to earlier and I will

not repeat that, but we believe it would be significant.

So, in closing, we believe this is a positive proposal. We do not

believe that it would increase the cost of college. In fact the evidence that we do have suggests that increased Federal student aid

in fact moderates increases in tuition and fee cost. It does not contribute to them.

My own experience as president of the University of Illinois for

16 years also corroborates that. It was in cases in which we were

having to make up for deficiencies in Federal or State aid, where

tuition and fee costs were pressed upward.

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Mr. Chairman, I appreciate this opportunity. I will conclude my

testimony now, but would look forward to the opportunity to respond to any questions.

[The prepared statement and attachments follow:]

Statement of Stanley O. Ikenberry, President, American Council on

Education

Mr. Chairman, and members of the committee, I am Stanley Ikenberry, president

of the American Council on Education (ACE.) ACE is the nation’s principal, independent nonprofit coordinating body for postsecondary education, representing 1,689

two- and four-year public and private colleges, research universities, and national

and regional education associations. The views I am presenting today have been endorsed by the 13 higher education associations listed on the cover page.

I am pleased to have an opportunity to appear before you today as the committee

begins to examine the desirability of broadening the tax code to make college more

affordable for American families. The higher education community welcomes the interest that has been expressed in this subject by the Congress and the Administration. We believe the time is right to explore these issues, and we hope to work closely with you to fashion sound public policy that will complement the existing federal

student aid programs and will yield real benefit to students and their families.

There is little doubt that properly crafted tax assistance will be favorably regarded by the American public. During the 104th Congress, ACE and more than 40

other national associations formed the Alliance to Save Student Aid. As background

for its efforts, the Alliance sought to measure public opinion on federal student aid.

To that end, KRC Research & Consulting, Inc. conducted extensive interviews with

1,000 American adults over a two day period. The survey results provided overwhelming evidence that Americans of all political persuasions support federal

spending on programs that help students go to college. Respondents ranked continued funding for student aid alongside Social Security as a top national priority, with

particularly strong backing for this view from the middle class. Among respondents

with family incomes between $25,000 and $60,000, fully 92 percent said it was important that the federal government maintain programs that help college students.

Furthermore, agreement was high that ‘‘tax dollars allocated for student aid programs is money well-spent.’’ Eighty-six percent concurred with that statement, including 85 percent of conservatives and the same share of Republicans. Agreement

among middle-income voters ranged from 85 percent to 91 percent.

The Congress responded to these concerns last year by increasing funding for the Pell Grant program by $1 billion, elevating the maximum award level to $2700, and

by boosting the work-study appropriation by 35 percent to $830 million. We are

grateful for these increases, and we strongly support the President’s FY 1998 budget

request of an additional $1.7 billion for the Pell Grant program, and an additional

$27 million for the work-study program. However, although our members will work

diligently to persuade Congress to adopt these recommended funding increases, we

are skeptical about the ability of discretionary appropriations to keep pace with the

demand for substantial annual increases in student financial assistance programs

on a sustained, long-term basis. Pressure already is mounting for significant reductions in annual discretionary spending as Congress makes progress toward deficit

elimination, and the pressure is being felt acutely by the Labor-HHS-Education Appropriations Subcommittee, where so many of the nation’s domestic priority programs reside.

Even absent the intense pressure of disciplined deficit reduction, the spotty appropriations history of the Pell Grant program fuels our anxiety about the unlikelihood

of sustainable future funding increases. The maximum Pell Grant award was set

at $2300 in FY 1989, and again in FY 1990. In FY 1991, it was increased to $2400,

and was held steady at $2400 in FY 1992. It was decreased to $2300 in FY 1993,

where it remained in FY 1994. In FY 1995, it was increased by only $50—scarcely

enough to pay for one text book. Overall, between FY 1979 and FY 1995, before it

began its rise to the present level, the Pell Grant maximum award had declined by

more than 30 percent in real terms. Appropriations for the campus-based student

aid programs and the State Student Incentive Grant program have been equally discouraging when measured in real dollar terms.

What is the point of inserting these trend lines into this testimony? The answer

is quite simple. The unevenness and unpredictability of federal need-based student

aid appropriations has contributed to an unhealthy reliance on increased debt financing of college costs. This, in turn, has led many members of Congress, the

President, and members of the academic community to consider whether appropriate use might be made of tax incentives to supplement the existing array of stuVerDate 11-SEP-98 10:34 Oct 05, 1999 Jkt 057910 PO 00000 Frm 00111 Fmt 6633 Sfmt 6602 D:57910 W&M3 PsN: W&M3
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dent aid programs, particularly to alleviate the financing burdens of the middleclass who are served somewhat less well by the need-based programs, and are substantially more reliant on borrowing. Consequently, we believe that one of the most

attractive features of the President’s proposals is his recognition of the need for tax

remedies to coexist in tandem with a robust discretionary student aid allocation.

In regard to the examination of the President’s proposals by this committee, I

would like to make five points for your consideration:

1. Increased investment in higher education is warranted. Access to higher education is vitally important for the nation’s long-term economic growth and social

progress. Throughout this century, increases in the educational attainment of the

workforce accounted for 27 percent of growth in the nation’s wealth. Advances in

knowledge (better education, research, new technologies, and improved managerial

and organizational know-how) accounted for 55 percent. To compete in the global

marketplace, the nation needs a well trained and educated workforce. The Department of Labor predicts that, by 2005, the number of jobs requiring an MA, BA, or

AA each will jump by one quarter. Our colleges train the skilled and flexible workers that American businesses needs.

The acquisition of a college education provides tangible benefits to individuals as

well. Each year, colleges and universities open the doors to a higher standard of living for millions of Americans. In homes with a college degree holder, average incomes are 75 percent higher than in homes with only a high school graduate. Between 1975 and 1992, the expected lifetime earnings of high school graduates barely

kept pace with inflation. During this 18-year period, real wages rose above inflation

only for those with a college degree. A by-product of this increased earning power

is that those with educational attainment above the high school level are far likelier

to be paying the highest marginal tax rates.

Finally, the nation relies on higher education for social progress as well. Educational attainment equates to lower unemployment, and fewer demands on the

public purse for such needs as unemployment compensation and health care. And

even more significantly, education is an engine of upward mobility. Since 1960, for

example, the size of the African-American middle class has tripled—a development

made possible by the increased access to higher education that federal education assistance has fostered; and more women than men have been enrolled in college

every year since 1979, with commensurate growth in their economic clout.

2. Many proposals that we strongly support, including several with bipartisan, bicameral sponsorship, have been introduced to expand the use of the tax code to help

individuals pay for postsecondary education. The proposals we support that have

garnered bipartisan and bicameral support include: an expanded flexibility to use

Individual Retirement Accounts (IRAs) to meet college expenses; and the permanent

exclusion of employer-provided education assistance from taxable income, including

a reinstatement of graduate and professional student eligibility for this benefit (Section 127.) We are pleased that these proposals also are included in the President’s

package, but regret that Section 127 is extended only through the year 2000 in his

plan.

Two variations of expanded IRAs have been advanced: enabling the use of funds

held in the account to be withdrawn without penalty for college expenses; and allowing the establishment of dedicated education savings accounts for which the interest

would accumulate on a tax-free basis, though the funds in the accounts would not

be penalty-free. We would encourage the addition of 401(k) and 403(b) accumulations to these proposals.

Restoring the deductibility of student loan interest has been a higher education

community priority for a decade. Before 1986, student borrowers could deduct interest paid on education loans from their adjusted gross income—assuming the sum

total of their ‘‘below the line’’ deductions exceeded the standard deduction. If the deduction were made an ‘‘above the line’’ provision, numerous young men and women

who have borrowed to finance their education could benefit upon entering repayment. As the average indebtedness of recent college graduates has increased, so has

the potential value of this benefit.

The permanent extension of Section 127 is another long-standing priority of the

higher education community. This provision has particular value in helping to upgrade the skills and abilities of American workers, including those pursuing graduate and professional credentials. By allowing this provision to lapse periodically,

Congress has created a disincentive to employees to pursue continued education. We

urge that Section 127 be extended permanently once and for all.

Other important tax proposals have been advanced by the President and/or members of Congress which also enjoy support from the higher education community.

These include: allowing tax-free withdrawals from qualified state tuition plans; excluding from gross income any amounts received under the federal work-study proVerDate 11-SEP-98 10:34 Oct 05, 1999 Jkt 057910 PO 00000 Frm 00112 Fmt 6633 Sfmt 6602 D:57910 W&M3 PsN: W&M3
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gram, and granting assistance to independent colleges and universities by removing

the cap on tax-exempt bond financing and making tax-free, university-based, loan

forgiveness payments.

3. When coupled with a significant expansion of the Pell Grant program, President Clinton’s proposal to create Hope Scholarships and a $10,000 tax deduction will help

students from low-income through middle-class families to afford a college education. For these reasons, the ACE Board of Directors adopted a resolution endorsing the

broad elements of the President’s comprehensive plan, as well as one that speaks

to other congressional proposals that have emerged. I have appended these resolutions to my statement.

While the President’s proposal for America’s Hope Scholarships differs in several

significant ways from the Georgia Hope Scholarship after which it is modeled, and

while more analysis of its impacts is needed, the Georgia experience still is instructive. I have been to Georgia to meet with officials from the state government and

the University of Georgia, and have been informed by them that the program has

produced profoundly beneficial results. Many students have participated, including

95 percent of the first year students at the University of Georgia and Georgia Tech.

Enrollment has increased. For example, community college enrollments are 40 percent higher over a four-year period. Incoming students are better prepared as evidenced by higher SAT scores, and the demand for remedial education is declining.

In addition, there has been increased participation in higher education by lower income students, tuition has not climbed faster than the national average, and grade

inflation has not been experienced. I would call your attention to a statement attached to my testimony from Dr. Charles Knapp, president of the University of

Georgia that addresses these points in more detail.

The President’s proposal also includes an above-the-line tax deduction of up to $5,000 (1997–98) and $10,000 (1999 and thereafter) for those students who are ineligible for or choose not to participate in the Hope Scholarship tax credit (e.g., because they have completed their second year of postsecondary education.) The deduction could be utilized by a much broader range of students—including part-time

students taking courses to improve or acquire job skills. Like the credit, the deduction is targeted to middle-income taxpayers and phases our ratably for higher-income ranges ($80,000 to $100,000 for joint returns.) This proposal appropriately

supplements other components of the President’s package, and will encourage lifelong learning and retraining among adults, as well as academic persistence and degree attainment among younger students.

4. There are aspects of the President’s proposals that are not as well developed as

they might be, and we hope to work with the Congress to refine and improve the proposals, especially as they relate to the treatment of students from low-income families. Preliminary analysis indicates that low- and moderate-income families would derive

significantly less benefit from the Hope Scholarship and tax deduction plans than

was originally envisioned. The manner in which this proposal interacts with needbased assistance should be revised so as to inject more equity into the award rule

formula. The proposed netting out of all federal and non-federal grant assistance

has particularly harsh consequences for low-income students. Further, netting Hope

eligibility against non-federal aid would provide a powerful incentive for states and

private sponsors to curtail or eliminate their efforts. Finally, the decision to make

this a non-refundable credit also renders it less helpful to lower-income families.

Another problem that exists with the Hope Scholarship, though not with the tax

deduction, is the use of the ‘‘B’’ average to determine the second year of eligibility.

The higher education community has serious concerns about this requirement for

two reasons: first, the proposed requirement would breach the confidentiality of student records; and second, the potential administrative burden in verifying records

this could impose on colleges, parents, and students could well prove to be enormously complicated and unworkable. ACE believes that student grades are confidential personal records which should not be subjected to open scrutiny for tax collection purposes. In addition, the nation’s 3,500 colleges and universities each have idiosyncratic grading systems. Some do not award grades at all. Others do not grade

on a 4.0 scale. For these reasons, we urge Congress to delete the ‘‘B’’ average requirement in favor of the ‘‘satisfactory academic progress’’ standard that is consistent with existing federal student aid statutes.

5. The President’s plans will not have several of the consequences that some of its

critics have implied that it will have. First, as I noted earlier, we hope the ‘‘B’’ average will not be included in any forthcoming tax legislation. However, since critics

are asserting that this aspect of the Hope Scholarship proposal would negatively affect institutional grading policies, I would like to address this issue. We do not believe that its adoption would lead to grade inflation. Several facts support this contention. Foremost among them is the fact that colleges are more vigilant in this reVerDate 11-SEP-98 10:34 Oct 05, 1999 Jkt 057910 PO 00000 Frm 00113 Fmt 6633 Sfmt 6602 D:57910 W&M3 PsN: W&M3
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gard than the public appreciates. In a May, 1995 New York Times article, Clifford

Adelman, a senior research analyst from the Department of Education asserts that

‘‘Contrary to the widespread lamentations, grades actually declined slightly in the

last two decades.’’ Last week’s Newsweek magazine cites the effort being made by

Duke University to recalibrate and lower its grading system in response to a belief

that too many of its students were receiving ‘‘A’s’’—a situation prompted by the increasing admission of students with higher SAT scores. The same article takes note

of Stanford University’s recent reinstatement of the ‘‘F’’ in its grading system.

On this topic, the Georgia experience also is relevant. After four years experience

with the Georgia Hope scholarship, no evidence of grade inflation exists. In addition,

half of the recipients do not make a ‘‘B’’ average, and as a result, forfeit the scholarship in the second year.

A second consequence that will not materialize is that tuition will rise faster because of the President’s proposals. The data show that federal student aid is inversely related to tuition increases. That is to say that when federal student aid

goes up, tuition increases are negligible. Repeated studies of the relationship between federal assistance and tuition increases have failed to establish a positive correlation between the two. (A table illustrating this point is attached to the statement.)

Here again, the Georgia experience is illustrative. Tuition at public and private

colleges in Georgia have not risen under the Hope plan faster or higher than at

other institutions throughout the nation. In my own experience based on my 16

years as president of the University of Illinois, many factors played a part in a decision to raise tuition: the views of the governor and the state legislature, how students would be affected, reaction by the media, and the needs of the library, the

faculty, and the campus generally that would go unmet if we failed to increase tuition. Our goal was to constrain tuition, while maintaining quality. Federal student

aid, unless it was sharply reduced and we had to compensate for lost revenues, was

not a factor. Frankly, I believe the President’s plan would have helped us in the

effort to keep tuition increases to a minimum.

In conclusion, President Clinton and congressional leaders from both parties have

proposed significant changes to federal tax laws that hold out the promise of providing needed assistance to help sustain and expand access to college. These proposals

are diverse and wide ranging in their scope, and we believe that all of them are

worthy of your attention. The President’s package of initiatives and the legislation

introduced in Congress make important linkages between their tax policy proposals

and their enhancement of need-based federal student aid. We urge you to support

this approach in the legislation that you develop. We are optimistic that bipartisan

legislation can be enacted, and we commit ourselves to working with you toward

that outcome.

This statement is on behalf of American Association of Community Colleges, American Association of Dental Schools, American Council on Education, Association of

American Universities, Association of Community College Trustees, Association of

Governing Boards of Universities and Colleges, Association of Jesuit Colleges and

Universities, Council of Graduate Schools, Council of Independent Colleges, National

Association of College and University Business Officers, National Association of Independent Colleges and Universities, National Association of State Universities and

Land-Grant Colleges, and National Association of Student Financial Aid Administrators.

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f117

STATEMENT OF HON. LAWRENCE J. DeNARDIS, FORMER

MEMBER OF CONGRESS; AND PRESIDENT, UNIVERSITY OF

f NEW HAVEN, WEST HAVEN, CONNECTICUT, ON BEHALF OF

THE NATIONAL ASSOCIATION OF INDEPENDENT COLLEGES

AND UNIVERSITIES

Mr. DENARDIS. Mr. Chairman, Representative Thurman, my

name is Larry DeNardis. I am the president of the University of

New Haven. I also serve on the board of directors of the National

Association of Independent Colleges and Universities. NAICU is an

association that represents approximately 900 private, nonprofit

colleges and universities in this country with nearly 3 million students enrolled in their academic programs.

Let me also add that when I served in this distinguished body,

lo those many years ago, the 97th Congress, representing the 3d

District of Connecticut, my primary legislative assignment, though

not on this Committee, was on the Committee on Education and

Labor, where I served on the Subcommittee on Postsecondary Education and therefore had a chance to work on the reauthorization

of the Higher Education Act in that period, 1981, 1982.

The actions that you take in fashioning a package of tax incentives to assist students and families with their college expenses will

have a direct and meaningful impact on families that are facing the

challenges of financing their children’s college education.

118

But I think that you also have a chance to accomplish something

quite more meaningful, and much more important. You have the

chance to send a powerful message to American high school students, that if you work hard, if you successfully challenge a

precollegiate curriculum, then the Federal Government will see to

it that you have the resources to go on to college.

What could be more powerful? What better legacy for us to leave

than to fundamentally reshape the expectations of families and

children about whether a college education is in their future?

These proposals, when appropriately linked to the Federal student aid programs, will tell students, in clear and convincing

terms, that if they want to attend college, they can.

This commitment to our Nation’s youth will also give a boost to,

quite frankly, principals, teachers, and to educators at all levels

seeking to improve their students’ academic performance.

A strong commitment to Federal aid to college students has the

power to reshape our educational system, indeed, our economy, in

numerous ways.

The specific tax proposals before you, when viewed together—and

they must be—illustrate a central point that I want to leave with

you today.

Families plan for and pay college expenses in very different ways

and over a number of years.

For example, they save money while their children are young, in

anticipation of their education. They may tighten their belts to pay

college expenses while their children are in college, and they may

have to borrow to meet these expenses.

NAICU believes that there are appropriate ways to ease the burden at each step of the process. The challenges that lie ahead are

quite simple. How can we assemble a package of proposals that collectively represent the best ideas to help families with their college

expenses.

My full testimony includes thoughts about the array of proposals

that are before the Committee, so I will not repeat my formal testimony.

But I would like to make a comment or two about some aspects

of it. One item that is not getting as much attention today, but I

am sure it will in due course, is section 127 of the Tax Code.

Let me tell you that representing the kind of institution that I

do—private, urban, relatively nonendowed, serving an urban population in our metropolitan area, consisting of a lot of part-time students, and a very large and growing graduate school serving working professionals who attend on a part-time basis—section 127, the

Employer-Provided Educational Assistance Program is enormously

important.

As you know, the administration has proposed to extend the exclusion for employer-provided educational assistance, what we call

section 127, through December 31, the year 2000.

The administration would also like to reinstate the exclusion for

graduate level courses. NAICU strongly supports permanent extension of section 127 for both undergraduate and graduate education.

We have a situation with this program, as you know, and you

took this up last year, and so I think you are well aware of the feelVerDate 11-SEP-98 10:34 Oct 05, 1999 Jkt 057910 PO 00000 Frm 00121 Fmt 6633 Sfmt 6602 D:57910 W&M3 PsN: W&M3
119

ing that we, out beyond the beltway, have. We have an on-again,

off-again treatment of employer-provided educational system.

It causes confusion among employees. It causes extra paperwork

for employers, and it can very negatively impact university budgets, that is, universities like the one that I preside over, where we

have so many adult working students who are fortunate to be employed by companies that offer this benefit.

And these employees, when confronted with a suspension of 127,

as happened last year, and 2 years before that, and 2 years before

that—the way they react is to take a semester off if they are undergraduates, or a trimester off if they are graduate students, and

if the calendar is on a trimester basis, and they will take more

than that off.

They will take two semesters, two trimesters off. They will wait

and see. They will wait and see whether there is going to be reinstatement. Because most of them, at this point, are not willing to

bet on when reinstatement will occur, and they are not willing to

bet that both undergraduate and graduate education will be covered, and last year they were right because graduate education was

dropped.

So I would hope that you would see these problems, that you

would see the unintended effects of an on-again, off-again use of

section 127. I believe that it is a very important provision for encouraging additional training for our work force, and I think it is

also important to bear in mind, that this is a private-sector program.

Employers establish the program, they work to identify the education and training requirements of their employees, and they also

often establish certain academic performance requirements for eligibility for their program.

In Connecticut, we are fortunate to have a number of companies

that offer this assistance. My school serves a number of people who

work at large centers of the defense industry now engaged in a

build-down.

But we have at our university thousands of workers from Sikorsky, from Pratt Whitney, and from the Electric Boat Division of

General Dynamics.

They are trying to prepare for the defense build-down that they

currently see, and their employers have been good enough to continue these benefit programs as they look to careers, perhaps, within a diversified industry of their own company, or in diversification

efforts of other companies.

So I urge you to make 127 permanent. More generally, I would

note that many of the issues that are before you have bipartisan

support, and I would encourage you to find a common ground on

these various proposals.

Our goal ought to be to find a way to take the best ideas and

to assemble them in a coherent policy to assist families with their

college expenses.

It has been suggested that some of these proposals may have certain unintended consequences like causing increased tuition levels

or that they represent a retreat from the principles of current,

need-based student aid programs.

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Let me say that according to some research that we have done

at NAICU, instead of causing increases in tuition, Federal grant

aid to students actually helps to slow the rate of tuition growth at

independent colleges and universities.

We can supply that study to you and would be happy to do so

for the record.

[The study is being retained in the Committee files.]

Mr. DENARDIS. I would also like to touch, briefly, upon the importance of the traditional need-based student aid programs that

we find in title IV of the Higher Education Act; Pell grants which

have been discussed previously, the Work-Study Program, Perkin

loans, supplemental educational opportunity grants, and the State

Student Incentive Grant Programs.

These programs have literally transformed American higher education. No longer are the doors to college closed to hardworking,

talented Americans solely because of their economic circumstances.

These proven programs must remain the cornerstone of Federal

student aid. As you pursue the worthy task of designing tax incentives to help families save and pay for college, please work to ensure that your new efforts dovetail with the historic Federal role

in this area.

Naturally, the Association and its staff, and all of us who preside

over private colleges from coast to coast stand ready to assist you

in this effort. Thank you.

[The prepared statement and attachment follow:]

Statement of Hon. Lawrence J. DeNardis, Former Member of Congress; and

President, University of New Haven, West Haven, Connecticut; on behalf

of the National Association of Independent Colleges and Universities

Good morning, Chairman Archer and members of the committee. I am deeply

grateful for the invitation to talk with you today about the variety of proposals designed to assist students and their families with college expenses. My name is Lawrence J. DeNardis and I am president of the University of New Haven. I also serve

on the Board of Directors of the National Association of Independent Colleges and

Universities (NAICU). I am here this morning representing the 900 private, nonprofit colleges and universities that belong to NAICU, and the nearly three million

students enrolled in their academic programs.

The University of New Haven is an independent, comprehensive university located in southern Connecticut at the gateway to New England. The University has

6,000 students, including 1,500 full-time undergraduate students, 2,000 part-time

undergraduates, and 2,500 graduate students. We offer over 100 programs through

six schools: Arts and Sciences, Business, Engineering, Hotel-Restaurant and Tourism Administration, Public Safety, and Professional Studies and the Graduate

School. Our focus is to prepare both traditional and returning students for successful careers and productive, self-reliant and ethical service to our local and global society.

The tax proposals before you, when viewed together, illustrate a central point that

I want to leave with you today. Families plan for and pay college expenses in very

different ways, and over a number of years. For example, they may save money

while their children are young in anticipation of their children’s education. They

may tighten their belts to pay college expenses while their children are in college,

and they may have to borrow to meet these expenses.

NAICU believes that there are appropriate ways to ease the burden at each step

of this process. The benefits to society fully justify the modest sharing of these burdens between families and the federal government. The challenge that lies ahead

is quite simple: How can we assemble a package of proposals that collectively represent the best ideas to help families with their college expenses.

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SUMMARY OF ISSUES

Incentives to Save for College

On a bipartisan basis, members have introduced legislation to encourage Americans to save, not just for their retirement, but also for future college expenses.

NAICU believes that these proposals are an important building block for any package of higher education tax proposals that the Committee may consider.

For example, taxpayers would be allowed to establish a new type of savings plan,

using after-tax dollars. As long as certain requirements were met, these plans would

be available for future college expenses. In addition, these proposals would encourage Americans to establish and fund, often using tax deductible contributions, Individual Retirement Accounts (IRA). These IRAs would be flexible enough to allow

families to withdraw some of their savings to help with college expenses.

By adopting these types of proposals, we would be sending a powerful signal to

families that saving for their children’s education is critically important. It would

reaffirm the central role that parents should have in financing their children’s education.

The proposals, in various forms, have been put forward by the Administration,

and by members of both parties, and are strongly supported in both the House and

Senate. I encourage you to take the final step and establish savings vehicles to help

parents prepare for their children’s college education.

Hope Scholarships

The Administration has proposed a non-refundable tax credit of up to $1,500 for

certain higher education expenses. This tax credit, called the Hope Scholarship, was

modelled after the Hope Scholarship (‘‘Helping Outstanding Students Educationally’’) program instituted in Georgia in 1993. The proposal has been designed to help

ensure that students can attend at least two years of college.

The proposal has two elements that have been the focus of significant attention.

The first is that, for students and their families to be eligible to claim the credit

in the second year, the student must have maintained a B average during their first

year. The other provision reduces the maximum amount of the credit, on a dollar

for dollar basis, by any other federal grant assistance.

NAICU believes that, while well-intentioned, the requirement that students maintain a B average to remain eligible for the tax credit in the second year creates a

series of significant issues.

This requirement represents a significant intrusion into the academic affairs of

colleges and universities by creating a new relationship between the IRS and college

professors. We do not subscribe to the view that there will be wholesale grade inflation if this proposal were signed into law. The experience in Georgia tells us that

such an outcome is unlikely—approximately one-half of the freshmen with Hope

Scholarships did not maintain the requisite B average needed to remain eligible for

the scholarship in their sophomore year. However, to the extent that students may

adjust their academic program or schedule of classes to remain eligible for this tax

credit, the credit would distort the academic decisions of those students who need,

financially, to claim this credit.

The B average requirement also raises equity issues. According to U.S. Department of Education data, academic performance by race and ethnicity varies significantly. The National Postsecondary Student Aid Study (NPSAS:93) shows that the

proportion of students earning a 3.0 cumulative grade point average or higher

ranged as follows:

White, non-hispanic ................ 48.5%

Asian-Pacific Islander ............. 46.9%

Native American ..................... 40.4%

Hispanic ................................... 35.3%

Black, non-hispanic ................. 29.3%

While the Hope Scholarship tax credit would be available to students whose grade

point average was 2.75 or higher, we believe this data raises an important issue and

would, therefore, urge you to seriously re-consider whether the requirement to

maintain a B average should be part of any higher education tax package.

Tax Deduction for College Expenses

The Administration has proposed an above-the-line deduction for college tuition,

to be phased in over the next two years to its maximum level of $10,000. To be eligiVerDate 11-SEP-98 10:34 Oct 05, 1999 Jkt 057910 PO 00000 Frm 00124 Fmt 6621 Sfmt 6602 D:57910 W&M3 PsN: W&M3
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ble to claim this deduction, students must be enrolled on at least a half-time basis,

unless they are taking a course to obtain or improve job skills. NAICU believes that,

as a matter of tax and education policy, students and families should be able to pay

college expenses with before-tax dollars. Education is an investment in the future

of our children and our nation. Just as companies are allowed a deduction for plant

and equipment—which are investments for their future—so to should families be allowed a deduction for their investments. An above-the-line deduction for college tuition would significantly lower the cost of attending college for millions of families,

and we urge its enactment.

Employer-Provided Educational Assistance

The Administration has proposed to extend the exclusion for employer-provided

educational assistance (section 127) through December 31, 2000. The Administration

proposal would also reinstate the exclusion for graduate-level courses, and apply a

new tax credit to encourage small businesses to provide educational assistance to

their employees. NAICU strongly supports the permanent extension of section 127,

for both undergraduate and graduate classes. We believe this legislation should be

a high priority for this committee. This legislation would eliminate the on-again, offagain treatment of employer provided educational assistance, which causes confusion among employees and extra paperwork for employers. These two problems directly counteract an intended effect of section 127, namely, to encourage additional

training for our workforce. It is also important to bear in mind that this is a private

sector program. Employers establish the program. Employers work to identify the

educational and training requirements of their employees. Employers may establish

certain academic performance standards to be eligible under their program.

NAICU does not have a position on the Administration’s proposal to create a tax

credit for small businesses to offer educational benefits to their employees. However,

we encourage your careful review of this and other ways to encourage small companies to establish these plans.

Tax Treatment of Scholarships and Fellowships

Under current law, most grant assistance is not taxed to students. An exception

to this rule are grants made to students, in return for which the student is required

to perform services for the grantor. For example, Federal Work Study awards, a

form of federal student aid, is considered taxable income to students receiving these

awards.

NAICU strongly believes that subjecting students to tax on grant awards of any

kind is inappropriate and unnecessary. Taxing grant awards to students simply

makes attending college more expensive for many college students. We urge you to

clarify these rules so that students do not face an unnecessary tax burden while

they are attending college.

Student Loan Interest Deduction

Proposals have been introduced in Congress that would create an above-the-line

deduction for certain student loan interest. These proposals would limit the deduction in various ways. These proposals would phase the deduction out at certain income levels, and limit the deduction in both dollar amounts and in the types of repayments that would be eligible.

NAICU supports the deductibility of educational loan interest. This represents an

important tool to assist students and families to repay their college loans, the final

stage in which families pay for their children’s education. These proposals also correct an inequity in current law, under which certain home equity loans used to meet

college expenses are tax deductible. These proposals would allow most families to

deduct the interest they pay on their college loans.

Tax Treatment of Loan Forgiveness

Under current law, there is an anomaly in the student loan forgiveness provisions, found in section 108(f) of the tax code. Under this provision, students may

have portions, or all of a student loan forgiven without incurring a tax liability, if

they pursue careers in certain fields, but only if the loan was forgiven by a public

entity, such as the federal or state government. Consider the example of two students, one attending a public university, and one attending a private university.

One student borrowed through a state-sponsored student loan program, and the

other borrowed under a loan program operated by the college. Both students graduate and take jobs teaching in a Head Start classroom. Under the state program,

a borrower who works in a Head Start classroom is eligible to have their student

loan forgiven. If that happens, the student also would not owe tax on the amount

of the loan forgiven by the state. However, if the private university, utilizing idenVerDate 11-SEP-98 10:34 Oct 05, 1999 Jkt 057910 PO 00000 Frm 00125 Fmt 6621 Sfmt 6602 D:57910 W&M3 PsN: W&M3
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tical criteria as the state, forgave the loans it made to the other student, then that

student would owe tax on the amount forgiven.

The Administration has proposed to apply the same rules to private colleges and

universities that currently apply in the public sector. A similar proposal was passed

by Congress in 1992 as part of a larger tax package, only to be vetoed for unrelated

reasons. NAICU believes this is a meritorious proposal, with only a minor revenue

impact, and is deserving of your support.

Equitable Treatment for 501(c)(3) Bonds

Independent colleges and universities, like their counterparts financed by state

and local governments, have traditionally used tax-exempt financing for the construction, renovation, and modernization of facilities they use in their educational

and research activities. Prior to the 1986 Tax Reform Act, this financing was generally available to both independent and public colleges and universities on the

same basis, in recognition that both sectors serve the same important public purposes. The tax legislation passed in 1986 restricted the access of independent colleges and universities to tax exempt financing by imposing a $150 million volume

cap. Since that time, that cap has damaged efforts to improve the education activities and research capabilities at private colleges and universities around the country.

Legislation has been introduced in the 105th Congress (H.R. 197) to repeal this

restriction and to treat bonds issued on behalf of section 501(c)(3) organizations

comprably to those issued on behalf of public institutions. NAICU strongly supports

legislation to repeal this limitation, and urges your prompt consideration of this bill.

GENERAL COMMENTS

Observers have suggested that some of these proposals may have certain unintended consequences, such as causing increased tuition levels, or that they represent

a retreat from the principles of the current need-based student aid programs.

Impact on College Tuition

Instead of causing increases in tuition, federal grant aid to students actually helps

to slow the rate of tuition growth at independent colleges and universities. Federal

grant aid to students has a significant moderating effect on increases in tuition and

fees in independent higher education. Data analyses of a representative sample of

580 four-year independent colleges and universities, enrolling approximately 2 million of the 2.9 million students in independent higher education, demonstrate emphatically that increases in federal student grant aid actually lower the rate of tuition growth. But as the availability of federal student grant aid has decreased, the

rate of tuition growth has increased.

The figure below shows that independent institutions with less than 5 percent of

their total student grant aid from federal sources have the highest average tuition,

while institutions with more than 23 percent of total student grant aid from federal

sources have the lowest average tuition. Additional evidence of the moderation effects that federal student grant aid has on tuition is found in the results of the statistical analysis in the attachment to this testimony.

Importance of Need-Based Financial Aid Programs

Finally, I would like to touch briefly upon the importance of the traditional needbased student aid programs found in Title IV of the Higher Education Act. Since

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1965, these constellation of programs—student loans, Pell Grants, Federal Work

Study, Perkin Loans, Supplemental Educational Opportunity Grants (SEOG), and

State Student Incentive Grants (SSIG)—have transferred American higher education. No longer are the doors to college closed to hard-working, talented Americans solely because of economic circumstances.

These proven programs should and must remain the cornerstone of federal student aid. As you pursue the worthy task of designing tax incentive to help families

save and pay for college, please work to ensure that your new efforts dovetail with

the historic federal role in this area.

If done appropriately, the steps you take in this area will be historic and represent the opportunity of a generation to make a huge difference in the availability

of college to all.

We stand ready to do our part to assist you in this effort by providing technical

assistance, by generating public support and by pledges to continue in our effort to

cut costs on campus. I look forward to our work together.

CONCLUSION

The actions you take in fashioning a package of tax incentives to assist students

and families with their college expenses will have a direct and meaningful impact

on families that are facing the challenges of financing their children’s college education.

But you also have the chance to accomplish something much more meaningful—

much more important, I believe. You have the chance to send a powerful message

to American high school students that if you work hard, if you successfully challenge a precollegiate curriculum, then the federal government will see that you have

the resources to go on to success in college.

What could be more powerful? What better legacy for us to leave than to fundamentally reshape the expectations of families and children about whether a college education is in their future. These proposals, when appropriately linked to federal student aid programs, will tell students in clear and convincing terms that if

they want to attend college, they can.

This message, this commitment to our nation’s youth, will also give a boost to

principals and teachers—to educators at all levels—seeking to improve their student’s academic performance. A strong commitment to federal aid to college students

has the power to reshape our education system—indeed, our economy and our communities—in numerous ways. I am encouraged that you are having this debate, and

I am proud to be a part of it.

Mr. Chairman, thank you for the opportunity to appear before you today. I would

be happy to respond to any questions you, or members of the committee, may have.

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STATEMENT OF OMER E. WADDLES, PRESIDENT, CAREER

COLLEGE ASSOCIATION

f Mr. WADDLES. Thank you, Mr. Chairman, Mrs. Thurman, it is a

pleasure to be here. Thank you for the opportunity to come and testify, to express some of our views. I represent the Career College

Association, a trade association comprised of a little over 700

schools that provide technical career training to individuals.

One of the things that I want to bring to the table today is the

idea that there is a broad spectrum of training and education that

goes on in this country.

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We have a multitude of faces that are represented at this table,

which represent the full spectrum of education offered throughout

the country. Together we provide the training and education which

fulfill the hopes and dreams of Americans as they pursue their individual career goals and objectives.

We have an opportunity to explore for the first time, I think in

this Committee, this manner of educational assistance in a new

light. It is exciting for all of us to be a part of this taxation process

which enables us to lift off the lid for a moment and take a critical

look at a very complex and challenging system of funding for higher education. It is exciting because with the various tax proposals

we have an opportunity to create additional benefits for Americans

across the country to pursue higher education.

This opportunity can enable us to address a number of issues.

One of the things that I have found in listening today is that

maybe we have made the system too complex and the reality is

that before we make any additional changes we need to be listening. Congressman Rangel and Senator Coverdell were talking

about this earlier this morning, the issue of bringing businesses

into the discussion and listening to the marketplace—utilizing a

variety of voices that historically we have used only in a very narrow and limited fashion.

That this is an opportunity to broaden that process and to, for

the first time, really bring the marketplace into the decisionmaking.

One of the things that I asked the staff to lay out on the Members’ desks today—it only came out Monday so I was unable to

make it part of my testimony—but an article was in USA Today

on the money page, right at the top of the page, ‘‘High Tech Skills

Give Auto Mechanics More Power.’’

And it talks about the treatment of the auto mechanics in many

ways, like high-priced athletes, where they are given signing bonuses, assistance in seeking housing, and additional salary levels

that they had not anticipated.

And they talk about BMW, Mercedes, Ford, Volkswagen, Volvo,

tapping into technical schools to find these workers.This is what

the marketplace is looking for. One of the recent Kiplinger Washington letters that I was going through as I was preparing for the

testimony, back on January 24, talked about the hardest jobs to

fill. Truck drivers. Tool and die makers. Machinists. Auto mechanics. Skilled construction workers. Plumbers. Electricians. And many

others, engineers and others.

But again, as you approach this, you need to look at this in a

very broad approach, and not allow the Committee to become pigeonholed into the process.

Comments concerning the President’s proposals. The President’s

proposals, in many ways, I think, we have a tendency to look at

one portion of them and try to solve all of the ills and challenges

that we confront in the higher education community with one, two,

or three elements. It is a very complicated process.

The $10,000 deduction was first promoted as a result of a

middle-class tax break. Well, that is what it does.

We have heard a variety of testimony today talking about how

it helps this population, does not help that population. When it was

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originally drafted, it was not supposed to provide access for all students. It was targeted at a certain population. The $1,500 tax credit, another area that you can consider assisting some portion of the

population, but it does not solve all the problems either.

Additions to the Federal Pell Grant Program are critical to this

process. This grant aid is targeted and therefore provides a significant portion on the population that is most in need with funds necessary to pursue their chosen educational path.

One of the things concerning our population is people would have

a tendency to say, well, people going to trade and technical schools

may be at the lower end of the economic spectrum.

A recent survey of CCA member institutions has shown that 30

percent of the students we train make over $30,000 a year. The

survey also indicated that a larger proportion of our student population, about 47 to 48 percent, make less than $15,000.

Well, as a result of that we can see how these tax credits can

help a certain portion of our population, a smaller part, but one

that is representative of the nontraditional population.

The other part, we think that the Pell grant addition is an important element to that, that addresses their concerns, as does the

change in the independent student process, the eligibility of those

individuals.

That will enable a larger proportion of the population to qualify.

There are elements to the proposals that we do have concerns over

and we are not endorsing the administration’s proposal.

We are saying that the concepts it promotes are exciting. It is exciting to have the dialog continue and we need to move forward

with it.

The IRS provisions send chills up and down the spines of parents, students, schools, administrators, about how that is going to

be administered.

I don’t believe that anyone in the community harbors any ill will

toward the IRS, but many of us are concerned how they will be involved in the process and what complexities may arise as a result.

The targeting of the populations is a critical element to this process and your greatest challenge as you move forward with the delineation of the kinds of assistance that you can provide.

One of the things that I heard earlier today was the dialog between Congressman Rangel and Senator Coverdell.

The idea of reaching out to each other and having a dialog that

goes beyond just a single Committee of jurisdiction is extremely important.

I had the privilege of serving at the staff level in the Congress

for the last 12 years, both on the House and the Senate side, and

I am very aware of the jurisdictional lines that occur as these kinds

of debates move forward.

Because of the complexity of issues, it is critical that we do enlarge the debate, we do bring to the table more than just the Members of Congress. The people in the community, as you are doing

today, and I congratulate for that, but also the business community

and others that are around the table, need to be there.

From our perspective, the main message that I want to leave

with you is one of inclusion. One of the things that we see in the

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President’s proposal that is heartening and is supportive is the inclusion of our community and sector in the provisions.

CCA does call to your attention that there are elements of the

legislation that have been introduced in both the House and Senate, that may not intentionally exclude portions of the higher education community and the students they serve, but in fact do.

And so we come to the table, suggesting to you that we have, as

in our communication with the Majority staff, shared with them

language that would make sure that the populations that represent

this broad array that we have before you are included in the legislation.

A copy of the letter to the Majority staff is included with my testimony. We have done the same with the Senate side and received

a very positive reception as a result of that.

That inclusion, as you move forward through the technical complex language of title IV and the Higher Education Assistance Act,

and the rest of the IRS Code and the respective provisions dealing

with the prepaid tuitions, with the IRA provisions—all of those are

elements that parents, students, adults, throughout their career,

throughout their life, should have their opportunity to make their

choice at the market demands.

Thank you very much for the opportunity to provide the testimony and I look forward to this being the beginning of a dialog,

beginning of a conversation as we move forward. Thank you.

[The prepared statement and attachments follow:]

Statement of Omer E. Waddles, President, Career College Association

Mr. Chairman and Members of the Committee:

I am Omer Waddles, the President of the Career College Association. I would like

to take this opportunity to thank you for the invitation to testify today. I will be

providing the Career College Association’s views and comments relating to the

President’s recently proposed changes to the tax code. I will also be commenting on

how those changes will affect students and access to postsecondary education.

CAREER COLLEGE ASSOCIATION

The Career College Association (CCA) is a group of over 700 educational institutions offering career-specific educational programs. The variety of member institutions that make up this organizations educate nearly one million students in over

200 occupational fields throughout the nation. CCA schools graduate almost one half

of the technically-trained workers who enter the workforce with training beyond the

high school level.

In addition to the varied curriculum alternatives, CCA schools now provide a critical source of industry-based skill upgrading for front-line workers. It is true that

a worker’s career path will potentially change as many as seven to ten times in a

working life. We are proud that our schools are able to provide America’s workforce

the chance to seek skills necessary to ensure an ability to adapt to these paths. CCA

institutions offer programs which provide individuals certificates, two-year Associate

of Arts degrees, baccalaureate degrees, and master degrees. In addition, a strong

unifying belief of our community is that while we are determined to provide the best

training possible for our nation’s workforce, we are also committed to achieving the

highest possible standards of educational quality.

While our association is a truly diverse group of institutions it is clear that we

have the unique ability to be extremely responsive to the market place. Our schools

know that it is imperative that we are successful in tailoring our services and products to the needs of today’s employers. While thinking beyond today’s market place

demands, we must improve our ability to foresee the skills-sets which tomorrow’s

world of work will be demanding.

An important difference for our schools is that they seek excellence through a

healthy and vibrant entrepreneurial spirit. This spirit ensures that our schools are

engaged in the necessary cutting-edge training which provides a wide array of services and training components. To survive over the long term, our member instituVerDate 11-SEP-98 10:34 Oct 05, 1999 Jkt 057910 PO 00000 Frm 00132 Fmt 6621 Sfmt 6602 D:57910 W&M3 PsN: W&M3
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tions must continue to provide the best quality product as measured by the market

place. If our schools fail in this mission, then the market will choose to hire the

workers from other sources, or even attempt to train the workforce in-house. The

students are also able to seek out a different source for their education and training.

This is the basic proprietary nature of the vast majority of our institutions.

Allowing the customer to determine the economic success of an institution by deciding with their feet has been a time honored tradition in this nation. If the education and training are inadequate, then the students will seek alternative educational opportunities. Through rigorous accreditation standards and strong state

and federal oversight, these institutions also ascribe to a set of principles of quality

and access in postsecondary education.

We have seen a dramatic improvement in the quality of this community. Over

1,500 schools have closed over the last five years through a combination of tougher

accreditation actions and a variety of mandated quality standards relating to economics, curriculums and legislatively required standards. We know that today’s career colleges are far more economically and ethically reliable than those five years

ago. As a specific example of this kind of attrition I cite the experience of the Accrediting Council for Independent Colleges and Schools (ACICS). As ACICS reported

to the Government Accounting Office (GAO), they have had 345 of the schools they

have accredited over the last five years close because of a variety of reasons. This

is just one example of an accrediting group which has seen its population drop as

a direct result of tougher standards, stricter oversight, and a smarter consumer.

NEW DEBATE

I join with my colleagues in expressing my support for the spirit of the current

dialogue associated with the issues on accessing education today. For the first time

in many years we are seeing the debate focus on the issue of how and not why. We

are becoming united about the clear need to provide a viable series of effective paths

to choose from as an individual seeks additional education and training. The President’s focus on the first two years after high school is an important period for many

in our society. It is a time when important life-impacting decisions are made and

skills are developed. I encourage the Committee to keep in mind the similarly important issue of having the opportunity to seek continuing educational opportunities

throughout one’s life.

As you undertake the process of reviewing the proposed legislation and the communities it will impact, it is important that we provide you the facts and figures

describing today’s education and training population. As we see an older and more

experienced population emerge from the baby boomer generation, it is critical that

we all address the reality of today’s market place. We must not limit our actions

to what we define as the traditional community setting with which we are comfortable from our own past. Today’s student population has an increased share of

the older and more experienced individuals. We need to be sure that we are not establishing artificial barriers for these students as we design the delivery systems

through which we are attempting to provide the open door of opportunity.

HISTORIC CHALLENGE

I have spent a great deal of time listening to Administrators and Presidents of

our institutions as they talk about the needs of their communities. The message

that has been reverberating is that employers are looking for educated and trained

individuals who can jump into the mix immediately and remain flexible as the demands of the economy change around them. This is the workforce of today and we

need to adapt our curricula and teaching modules to accommodate industry’s unique

demands as well as the varied challenges presented by today’s student bodies.

It has been an exciting and rewarding experience for our nation over the last 40

years as we have reaped the multitude of benefits provided through a more educated workforce. The newly created access to colleges and universities changed the

way our nation viewed their ability to change economic class levels. This also gave

new hope to parents that their kids could do ‘‘better’’ than they had done for themselves. This was only true because the markeplace perceived value in the education

and training acquired through the new postsecondary opportunities.

With a new array of academic and training structures in place, our nation was

able to attain a position of global leadership. This was the result of not only our

raw military power, but also because of our intellectual capacity and economic

markup superiority. It was clear that our dominance on the world stage has been

the result of something more than simply being militarily stronger. The clear need

has been to be more creative and resourceful in our approach to managing our

human resources. I believe we stand at a similar historic threshold today. We stand

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alone again as the clear world power when it comes to our military prowess. Can

we cheat the fates of time again and avoid the historic and traditional demise of

previous world powers? I believe it is very possible if we look around and identify

the available raw materials remaining in our society.

I believe the answer lies in how successful we are at reaching out to the 70%–

75% of the high school graduates in this country who do not succeed in achieving

a baccalaureate degree. Where do we train these individuals and how do we provide

the basics they may have already missed in their secondary education? Those who

follow the path of a traditional baccalaureate degree receive their opportunity for

maturation during the ‘‘college years.’’ We join in celebrating the success of our current system and believe that we can continue to reap the benefits of this positive

course.

The cruel societal reality is clear: not everyone takes the same path. We need to

be continuing to embrace a broad spectrum of educational and training opportunities. People reach different stages of their own maturation and find their willingness

to learn has changed. This is the basic and obvious reason why my community seeks

to ensure their continued inclusion in the various programs, including tax programs

targeted at our students.

For those wondering whom I am talking about when I refer to our students, I ask

you to simply think about the faces you see when you are traveling. We train the

travel agents booking the flights you take. We train the airplane pilots and mechanics who take you back and forth to Washington, DC. We train the skilled workforce

in the hotels and restaurants you visit. If you get sick then we train everyone in

the doctor’s office except the physician. If someone is working on your computer at

home or in the office we are a major educator and trainer in that field. We even

train the court reporters taking notes at these proceedings today. In reality our

graduates will be seen in the faces of the people you meet and interact with each

day. We take the greatest pride in our work when people can assume the service

is available and reliable.

PRESIDENT’S TAX PROPOSALS

I have already stated I believe the President’s tax deductions and credits have

provided a welcome focus to the national rhetoric relating to our efforts in the areas

of education and training. Now, we need to be raising the legitimate and necessary

questions concerning the current proposals. We need to explore the appropriateness

of the proposed delivery system and what necessary complexities must accompany

such a dramatic initiative.

The HOPE Scholarship, the $1,500 tax credit, is still under last minute refinements by the wordsmiths in the Executive branch. We do know that the Administration’s intention was to make sure all of the postsecondary populations were eligible

to receive the benefits of the tax assistance program. The intent with this credit is

to promote the establishment of an opportunity to have an additional two years of

education beyond high school. Remaining drug free and achieving a ‘‘B’’ average are

two critical thresholds related to retaining eligibility for the tax credit.

A similar description, but without the ‘‘B’’ average, is applicable for the $10,000

deduction option. This proposal allows students to use this assistance in any of the

years of postsecondary education is desired. This proposal is the more universal one

available for those beyond their first two years of postsecondary work, as well as

those unable to qualify for the $1,500 tax credit.

I testify today knowing that any proposals that have a price tag of at least $36

billion over the next five years will pose a challenge to this Congress. I do want to

underscore the importance of the goal of creating greater access and encourage your

continued attention to such a significant matter.

These two proposals represent the backbone of the tax issues and can be considered through a series of questions.

1. Does the President’s tax cut proposal include the private career schools?

The Administration’s work has been seen as an inclusive effort. There are no apparent attempts to exclude any portions of the population in the draft proposals. We

have been assured by individuals in the Department of Education and the White

House that this will remain true as the final legislative language is drafted.

This is critical to the 70%–75% of high school graduates who are churning

through the workplace looking for some skill development and career path choices.

2. Is this delivery mechanism the most effective and efficient available?

The answer to this question depends on the nature of the selected audience that

is targeted and the other elements of the package. The original context for the

$10,000 tax deduction proposal was as part of a ‘‘Middle Income Tax Break’’ package. The targeted audience was intended to be the average and somewhat more afVerDate 11-SEP-98 10:34 Oct 05, 1999 Jkt 057910 PO 00000 Frm 00134 Fmt 6621 Sfmt 6602 D:57910 W&M3 PsN: W&M3
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fluent of our society. During the recent campaign, the $1,500 credit was added to

the overall proposal. Criticism has emerged that these proposals simply do not adequately assist in opening new doors for lower income individuals.

We need to note that the use of the Pell Grant program and the proposed increase

in the maximum award does target the lower income students. If these items can

be seen as a total package then it helps to enhance the overall effectiveness of the

proposals.

The typical CCA school is seeing an increasingly more mature population attend

their institutions. We still have a majority of students coming out of high school but

the average age for many of our campuses rests in the 26 to 28 year old age range.

This means that our assumptions as to the economic impact of each of the tax

changes on our students changes as well.

A recent survey of our students and alumni found that approximately 30% of our

students have a household income of above $30,000. This means that a fair number

of these individuals should be able to reasonably expect to use the benefit from some

type of credit or deduction proposal. At the same time the survey reported 47% of

the student population at CCA schools have incomes below $15,000. This is clearly

the population that is most likely to benefit from the Pell Grant expansion. This is

also true of many of the other sectors of the higher education community.

3. Why should we be establishing additional complexities and a new pattern of

educational oversight through the Internal Revenue Service?

The call for the IRS to begin measuring the quality of a ‘‘B’’ average is one that

quickly sends chills up and down the spines of all students, parents and Title IV

participating institutions. This measure seems to quickly underscore the clear concerns that we can get into if we are not careful. There is no assumption on our part

the IRS would have any alternative intentions, but it is the by-products that may

come from the linkage to these credits that could become a problem. Grade inflation,

monitoring techniques and the intrusion of the government into the academic environment are all concerns that need to be examined before we consider stepping

blindly into this arena.

The debate over who will determine what a fair grade average is and what role

the Government should have is an issue the authorizing committees have also struggled with. This issue must also be considered when weighing the impact on the

lower income individuals and their ability to utilize the credits and deductions.

4. Where are the current budget limitations and how will the cost of these tax proposals impact on established and effective programs like the Pell Grants?

A fear that has been growing confronts the reality of a finite budget and if we

are to pay for the tax cuts, where will the offset occur. The President has laid out

a series of tax increases designed to offset most of the cost associated with his tax

proposals. It is clear that there will be strong opinions on both sides of the aisle

when your Committee considers that package as well.

However, before any agreed-upon tax break package is offset, we want to strongly

urge against the temptation of dipping into the Pell Grant program for sacrificing

an increase in the maximum award. For those who are interested in making the

end legislative product a universal one, we must be sure to look broadly. A single

tax proposal is simply not the silver bullet answer. The Pell Grant has proven to

be a valuable instrument in reaching the first generation students.

5. Have we been down this road before?

We have to be careful as we move down this dual path of tax breaks and Pell

increases. The intent to have both the middle income tax break and an increase in

the Pell Grant has been tried before. In 1978 a similar scenario played itself out

on the national scene. A unified and bi-partisan Congress found itself proposing a

tax credit program while the President was announcing plans for the Middle Income

Student Assistance legislation. The then Democratic-controlled House of Representatives passed the tax credit legislation and the Republican-controlled Senate passed

an expanded Pell Grant and Federally insured loan program. The Congress finally

realized that they could not afford to fund both new programs. Finally in the fall

of 1978 the Congress decided to adopt the guaranteed loan programs and dropped

the tax credit provisions.

A similar competition over funds and initiatives could easily develop again twenty

years later and the reality is that the nations is the loser if this process is not handled well. Access and the opportunity to succeed is the education mission of the day.

We must be sure to learn from the lessons of the past.

6. Are there any other tax provisions which can be additional tools for access to

all types of populations and which both parties can agree upon?

a. Section 127 of the Internal Revenue Code—We would encourage the Committee

to exclude the value of employer-provided educational assistance from an

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individuals’s income calculation. This has been one of those on-again off-again benefits for individuals who need a permanent place in the tax code.

This provision is critical to the adult students who are willing to take on the

added responsibility of working and also attending school. I see this as an important

tool for businesses as they attempt to retool in anticipation of market challenges.

Our nation needs to encourage the training and education activities throughout a

lifetime of work.

b. Reinstate the deductibility of Student Loan Interest—This tool was a very effective means of getting money back into the pockets of individuals who are repaying

their loans. As overall indebtedness has increased so has the burden on individuals

as they repay their student loans. Over the last five years we have been very successful at reducing overall student loan default rates.

This proposal has appeal in both the Republican and Democratic leadership as an

item that would not require an itemized filing to be applicable. This greatly enhances the usefulness and breadth of the provision and would have a positive impact on more students.

c. Education IRAs, Saving Accounts, Prepaid Tuition Plans, and other preparation

tools. These proposals have been coming forward in a variety of forms. We all see

these ideas as helpful tools in preparing for attendance at a postsecondary institution.

The Critical component associated with these plans remains a matter of fairness

and inclusion. While we attempt to create a full spectrum of choice for students, we

need to be sure that all institutions are eligible participants in the incentive packages related to the various saving accounts.

I have already been in contact with the majority staff counsel on this matter, and

in response to their request have provided generic language that will ensure a wide

array of choice and participation. We do not ask for any kind of earmarking or special treatment.

What we are seeking is to ensure that the students and employers across the nation have the full palate of choices available to them. They are looking for the best

fit for their particular needs and circumstances.

CONCLUSION

It is an honor to be able to repond to your request for input on these important

matters. I want to underscore our sincere commitment to being a resource for your

Committee. I know that you have a number of important economic and legislative

challenges in front of you. In addition, many of them are in areas of relatively new

matters of law and public policy. If there is anything that we can provide, or assist

you with, we would be pleased to work with you.

The faith and passion I have for this community comes from my strong belief that

we have an exciting opportunity to benefit from the strength of the American spirit

and character. We can never be satisfied with our current position and level of skills

in the workplace. We must continue to build on the available national talent and

challenge our schools, families, communities and individuals to reach beyond. Education and training initiatives if based on a solid foundation allow for this to occur.

I look forward to working together in our community and with the Committee in

developing a coherent strategy to accomplish this goal. Thank you for the opportunity to testify today.

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CAREER COLLEGE ASSOCIATION

WASHINGTON, DC 20002

February 25, 1997

Mr. James D. Clark

Tax Counsel

Committee on Ways and Means

1102 Longworth Building

Washington, DC 20515–6348

Dear Mr. Clark:

On behalf of Omer Waddles, President of the Career College Association, I would

like to thank you and Mac McKenny for meeting with us on February 13 and allowing us to share with you the mission of the Career College Association.

As we discussed, career colleges and schools play a vital role in the preparation

of a globally competitive work force. Current las provides the same access to federal

financial assistance to students attending the proprietary sector of higher education

to those attending traditional colleges and universities. It is critically important to

our nation’s future to ensure that this equality of opportunity is maintained as new

federal assistance programs are created or old ones evolve.

In order to assure that the proprietary sector of postsecondary education is included in the higher education initiatives which will be considered by your Committee, care must be taken in the drafting. To achieve this goal, we suggest the following:

The legislation, in its definition sections, could define an ‘‘institution of higher

education’’ for purposes of your legislation, as any institution which is included in

the definition of an institution of higher education in section 481 of the Higher Education Act of 1965, as amended, (20 U.S.C. 1088)

(The definition of ‘‘Institution’’ of higher education,’’ as defined under Section 1201

of the Act, covers only the non-profit institutions (primarily the traditional two-year

and four year colleges). We would request that the Committee use the more inclusive definition found under Section 481 of the Higher Education Act.)

Again, we stand ready to assist the Committee as a resource if you have any questions or concerns as you proceed with this important legislation.

Sincerely,

BRUCE LEFTWICH

Vice President for Government Relations

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Career College Association.

Mr. HULSHOF. Mr. Waddles, thanks for your perspective from the

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Our final witness, Mr. Appleberry. We welcome you as president

of the American Association of State Colleges and Universities. You

may proceed, sir.

STATEMENT OF JAMES B. APPLEBERRY, PRESIDENT, AMERICAN ASSOCIATION OF STATE COLLEGES AND UNIVERSITIES; AND NATIONAL ASSOCIATION OF STATE UNIVERSITIES AND LAND-GRANT COLLEGES

Mr. APPLEBERRY. Thank you, Mr. Chairman.

I am James Appleberry, president of the American Association of

State Colleges and Universities, and I am here today to represent

my organization as well as the National Association of State Universities and Land Grant Colleges, together representing more

than 630 campuses and enrolling more than 6 million students.

I also have the endorsement of the Hispanic Association of Colleges and Universities, the National Association for Equal Opportunity in Higher Education, the United Negro College Fund, and

the United States Student Association.

I have submitted my written statement and will summarize for

you in my allotted time.

I am an educator and former university president, not a tax policy expert. My comments will focus on the public policy consequences of tax proposals for educational access.

Two specific problems regarding student access merit the Committee’s attention. First, most low- and middle-income families

have financed their cost of attendance through increased borrowing.

Second, the college participation rate for children of families with an annual income of less than $22,000 is below 60 percent.

This is contrasted with the nearly 90 percent participation rates for children of families with incomes in excess of $65,000.

The President deserves enormous credit for having identified the

problem of access to higher education as a major national concern,

and for proposing the use of the Tax Code to deliver some $36 billion in new resources over the next 5 years.

This is a bold step in our national strategy to increase our investment in human capital. This Committee can use its jurisdiction to

help American families prepare themselves and their children for

another century of world leadership.

The President’s proposals include the following new initiatives.

Hope tax credits, tuition tax deductibility, loan forgiveness tax exemption, tax-free educational savings, employer-provided educational benefits.

We would like to express our unqualified support for the last

three items. Nontaxability of loan forgiveness, educational savings,

and employer-paid educational benefits.

In contrast, the Hope tax credits and the tuition tax deductibility

requires significant modification before they can be justified in

terms of educational access.

Allow me to address the tax deductibility first. This proposal suffers from the interactive effects of three regressive attributes. One,

given the progressive nature of our tax structure, tax deductions

generate individual benefits that are inversely proportional to income.

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For the taxpayers in the upper end of the eligible income scale,

the value of every dollar of the proposed deduction is 28 cents, in

contrast to the very neediest families for whom it is worth literally

nothing, for they have no tax liability.

Two, the proposal would reduce the allowable deductible expenses in a dollar-for-dollar fashion by any student that receives

grant and aid.

Three, the proposal offers the same theoretical opportunity to deduct up to the maximum amounts to all taxpayers, but in reality,

not all taxpayers will be able to avail themselves of the deduction

equally. The reason: low-income citizens tend to be disproportionately concentrated in lower cost institutions.

Allow me to offer an example. At our Nation’s public black colleges the median family income is about $27,000 per year. There,

a typical family would confront a total cost of attendance of about

$9,000, of which only $2,700 would be for tuition and fees.

Assuming an average Pell grant award of $1,500, this student’s

family would receive a reduction of less than $200 in their taxes.

Contrast that with a typical family with a $73,000 median annual

income at our most expensive universities.

Such a family would receive tax benefits of $1,400 now and

$2,800 in future years. Our misgivings have to do with the disparity between the benefits of those two families.

The Committee may wish to consider substituting the deductibility of student loan interest in place of deducting tuition costs.

This action would treat loan financing of investments in higher

education in the same way that home mortgage interest is treated.

The same logic that led Congress to create a deduction of home

mortgage interest instead of the home’s purchase price applies in

the case of higher education.

This policy has several important advantages. One, deductibility

of student loan interest automatically shifts the benefit toward the

children of low- and middle-income families who have to finance

college education through borrowing.

Two, the interest deductibility is spread out over time and would

mitigate some of the ill effects of the student indebtedness on our

economy.

Three, deductibility of tuition will do very little for graduate education. The deductibility of student loan interest would immediately become the largest form of financial aid for financing graduate study.

Let me now turn to the Hope tax credit proposal. One, the decision to turn what was originally a refundable tax credit into a nonrefundable one was a step in the wrong direction.

This change specifically channels the benefits of Hope tax credits

away from the Americans for whom it could do the most good in

terms of access.

Two, the Hope tax credit will be reduced dollar for dollar by the

amount of other Federal grant aid received.

Ironically, the negative effects of this netting of Federal grants

against Hope credits is even more drastic than it would be in the

case of tax deductibility.

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Three, the use of the B average magnifies the regressive nature

of the proposal and could promote outcomes other than those which

are intended.

First, students from at-risk backgrounds tend not to be as academically prepared as those from upper income backgrounds.

Second, neediest students fearing loss of Hope eligibility might

be more likely to avoid difficult courses in favor of less challenging

work, thereby hoping to ensure a second year of Hope eligibility.

Instead, better results would likely result if the current Federal

eligibility standard of satisfactory progress were substituted with

proposed specific grade average.

These concerns can be addressed by the Committee in a manner

that would fully realize our common goal of greater access for all

Americans, a goal espoused both by the President and by Congress.

A refundable Hope tax credit, without the Federal grants offset

contained in the proposed version and the deductibility of loan interest would be giant steps in the right direction.

Mr. Chairman, we stand ready to work with you and the Committee in any way we can to assist you in the historic task before

you and I will be glad to respond to any questions. Thank you.

[The prepared statement follows:]

Statement of James B. Appleberry, President, American Association of

State Colleges and Universities; and National Association of State

Universities and Land-Grant Colleges

INTRODUCTION

Mr. Chairman, I am James Appleberry, the President of the American Association

of State Colleges and Universities (AASCU). I appear before you today on behalf of

AASCU and the National Association of State Universities and Land-Grant Colleges

(NASULGC). Our two associations represent more than 630 campuses and systems

of higher education throughout the nation and its territories. Annually, AASCU and

NASULGC universities enroll more than six million students, and award two thirds

of all baccalaureate and nearly 60 percent of all master’s degrees conferred in the

United States. Our members also award two thirds of all doctorates earned in the

United States. I am honored to have the endorsement of three important national

associations, the Hispanic Association of Colleges and Universities (HACU), the National Association for Equal Opportunity in Higher Education (NAFEO), and United

Negro College Fund (UNCF), for the views expressed here. I am also pleased to inform the Committee that the United States Student Association, the nation’s largest

and oldest student organization, joins us in this submission. I thank you for the opportunity to testify before the Committee.

Mr. Chairman, I appear before you as an educator and former university president, not as a tax policy expert. My testimony on the various tax proposals this

Committee will be examining, therefore, will be strictly limited to the public policy

consequences of proposed tax incentives for educational access and for public institutions of higher education. The broad range of tax relief proposals this Committee

will evaluate in its deliberations under your leadership may all be justifiable in

terms of providing tax relief to certain middle-income Americans. I hope my comments today provide you with additional information as to the educational impact

of the proposed tax cuts, so that you may better judge the extent to which they

merit enactment as sound education policy.

Before addressing any specific initiatives, it may be appropriate for me to set the

context within which this Committee begins the important task of examining possible uses of the tax code in support of higher education. Higher education has always been, and continues to be, an indispensable ingredient of our national wellbeing. College attendance, even if not resulting in college graduation, has civic and

economic benefits that have been well documented. Those with any college education

are more likely to vote and more likely to engage in volunteer activities than those

with only a high school diploma or less. Similarly, fully 66 percent of all personal

income taxes collected are paid by those with some college education, and those with

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a baccalaureate degree or higher pay 43 percent of all federal personal income taxes

while constituting only 23 percent of tax filers.

In our view, the mission of AASCU institutions is to fulfill our nation’s democratic

ideal of sustaining an enlightened and productive citizenry through the uniquely

American attempt at educating not some, but all, of our citizens. Thomas Jefferson

captured the essence of the American civic order by describing it as a republican

regime under which the old aristocracies of privilege would be replaced by ‘‘a natural aristocracy of virtue.’’ What he and other founders had in mind, to put it in more

modern terms, was class mobility and the creation of a society in which the children

of even the poorest families could realistically aspire to success and affluence if they

worked hard. Education has historically been the means of upward mobility and the

great equalizer in our society. The gradual broadening of access to higher education

for ever greater numbers of our citizens reflects the extent to which we have succeeded in actualizing our ideal society.

EDUCATION POLICY CONTEXT

The evolution of our nation’s public higher education infrastructure represents the

first historical step in our collective efforts to realize the lofty goals set forth by our

founders. The creation of low-cost public colleges and universities, which the federal

government assisted through the First Morrill Act, provided educational opportunities for millions of low- and middle-income Americans. The second historical step in

the direction of broadening access to higher education was the G.I. bill, which

opened the doors of college to millions of veterans, and to which much of America’s

post-war economic miracle can be attributed. The democratization of higher education in America produced results in less than one generation, and transformed our

country into the world’s leading and dominant economy. The third giant step in the

direction of fulfilling our stated ideals was the creation of need-based aid programs

subsumed under the Higher Education Act of 1965 (HEA). The need-based student

aid programs contained under Title IV of the HEA have done much to ensure that

a want of financial resources does not become an insurmountable roadblock to college education for academically talented, but needy Americans. In this gradualist

definition of success, student aid has been wildly successful. It is difficult to say how

many of the more than 3.5 million Pell grant recipients could still have attended

college this year without aid, or how many of the more than 6 million student borrowers could have obtained sufficient resources to pay their educational expenses on

their own. Our view is that without the existing student aid programs, most of our

citizens would be unable to pay for their children (or their own) educational costs.

We have, through the combination of state and federal action, managed to take

significant steps in the direction of the kind of society our founders envisioned. College participation rates have been generally increasing over the past decade. This

is true for students from all income levels. The increase in the participation rate

between 1979 and 1994 for the lowest income-quartile—those with annual income

of $22,000 and below—was 13.6 percent, while the upper income quartile—those

with annual incomes of $67,000 and above—increased their rate by 20.5 percent.

The bottom quartile’s increase from its low participation rate below 40 percent in

1985 to almost 60 percent in 1994, though not as large as that of the upper quartile,

is still the clearest evidence that need-based aid and low tuition are a powerful combination of policy tools. We can take pride in what we have managed to achieve thus

far. That we may have failed to fully concretize the ideals of broad and open access

to college does not make the efforts we have undertaken any less valiant. As with

all ideals, the goals are there as beacons intended to guide our efforts. So long as

we persevere, so long as we focus on what needs to be done, and so long as we take

step after step in the right direction, we can be certain that the goal is not an illusive mirage, but a tangible possibility that we may some day actualize. Let me then

examine where we have failed, for we can learn as much from our failures as we

can from our successes.

The principle of low tuition as the best guarantee of equal opportunity is under

severe stress in virtually every state. I hasten to add that tuition at public institutions continues to be the best bargain in our economy. Average tuition at AASCU

institutions for state residents was $2,772 in academic year 1994–95. But the trend

toward higher tuition costs at state institutions is disquieting indeed. The root cause

of escalating public sector tuitions is the budgetary pressures faced by states, which

have had to devote increasingly higher shares of their resources to Medicaid, prison

construction and law enforcement. At the same time, federal need-based grant programs, which are subject to annual appropriations pressures, have steadily eroded

in purchasing power over the past decade and a half, while student loans—the only

entitlement student aid program—have filled the gap.

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The net impact of state and federal actions manifests itself in two already palpable outcomes:

First, while the compelling value of college education has motivated Americans of

all economic backgrounds to attempt to participate in higher education, the most

needy families have financed the costs through increased borrowing. As a result,

students from low- and middle-income families have continued to go to college at

increasing rates, but they have also borne the brunt of the escalating burden of student indebtedness. If this trend continues, at some point in the future, the debt

service on student loans will offset the economic gains of a college degree, and neutralize the class-mobility that education currently provides so effectively.

Second, we have created enormous anxiety about college affordability for our lowand middle-income citizens. This anxiety about ability to finance college education

could have dire consequences in terms of actual participation. We may well be on

the verge of losing the gains of the recent past, especially in the case of low-income

students, who are, not surprisingly, most sensitive about cost. Even at this very moment, when the upward college participation trends give us hope, The college participation rate for children of families with annual incomes of $22,000 and below

hovers at below 60 percent. This is in contrast to the nearly 90 percent participation

rates for children of families with annual incomes of $67,000 and above. More ominously, the baccalaureate completion rates for the two groups has been calculated

by one analyst to suffer a nearly ten-fold disparity.

SUMMARY OF PROPOSED INITIATIVES

It is in the backdrop of the mixed picture painted by these statistics that I should

now turn to the various tax proposals this Committee may examine. The most

prominent, and by far the largest, set of educational tax proposals put forth thus

far comes from President Clinton, who has called for a series of new initiatives in

support of higher education. The President deserves enormous credit not only for

having identified the problem of access to higher education, but also for his leadership in providing a remedy of sufficient budgetary magnitude to give us cause for

optimism that we could indeed fulfill our dream of equal educational opportunity

for all Americans. We are most appreciative of the fact that the President has put

forth a budget proposal that would, by 2002, provide more than double the amount

of federal investments in student aid than was available in 1993. The President’s

overall higher education plan includes not only the new tax incentives that this

Committee will review, but also contains significant increases to existing discretionary need-based student aid programs. In terms of magnitude, however, the tax

proposals before this Committee constitute by far the larger portion of new federal

resources that would be deployed in support of higher education. This is in itself

another major contribution for which the President should be recognized. The vicissitudes of the annual appropriations process have in general worked against adequate student aid funding, and, therefore, against our nation’s long-term economic

well-being. The President’s call for the use of the tax code to deliver some $36 billion

in new resources over the next five years is a bold and decisive step in the direction

of building a more comprehensive national strategy of greater human capital investment. I certainly believe that under your leadership, the Committee will also see

fit to rise to the challenge of using its jurisdiction to help American families prepare

themselves and their children for another century of American world leadership.

The President’s proposals include the following new initiatives:

• ‘‘Hope Scholarships’’—This proposal, named after the state of Georgia’s HOPE

scholarship program, would create a new non-refundable tax credit of up to $1,500

for the first year of at least half-time postsecondary study in a degree or certificate

program. The Hope tax credit would be phased out for single filers with annual incomes of between $50,000 to $70,000, and for joint filers with annual incomes of between $80,000 to $100,000. The tax credit would only cover ‘‘out-of-pocket’’ tuition

and fees, i.e., tuition and fees minus any federal, state or institutional grant aid.

Furthermore, students’ tax credit would be reduced dollar-for-dollar by the amount

of any other federal grant aid they receive. The Hope tax credit would be available

for a second tax year, provided the student maintains a B-grade (defined as a 2.75

Grade Point Average on a scale of 4) and remains ‘‘drug-free.’’

• Tuition Tax Deductibility—This initiative, a modified version of the original

‘‘Middle Class Bill of Rights’’ calls for ‘‘above-the-line’’ tax-deductibility of college tuition and fees, up to a maximum of $5,000 per tax return for the 1997 and 1998 tax

years, and a maximum of $10,000 per tax return thereafter, with inflation indexation. The income phase-outs for tuition tax-deductibility would be the same as

Hope tax credit phase-out levels. Tuition tax-deductibility, however, would be available for all students regardless of grades.

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• Loan Forgiveness Tax-exemption—This proposal would exclude from taxable income the amount of any loan forgiveness received from educational and charitable

organizations in exchange for community service. It would also exclude from taxable

income the loan forgiveness granted to borrowers who, after repaying their student

loans through the income-contingent repayment option for 25 years, receive forgiveness of their outstanding balance.

• Tax-Free Education Savings—The President proposes an expansion of eligibility

for Individual Retirement Accounts (IRAs) to families with incomes of up to

$100,000, and would allow penalty-free withdrawal of such IRAs for educational expenses. This will promote greater savings for college.

• Employer-provided Educational Benefits—This proposal extends the current

(Section 127 of the Internal Revenue Code) exclusion from income of employer-provided educational benefits through December 31, 2000, and re-instates the eligibility

of graduate education for this exclusion.

Mr. Chairman, I would like to express my unqualified support for the last three

items on the list enumerated above.

The exclusion from income of loan forgiveness is particularly appropriate in that

it removes what is clearly an unintended impediment to public service. Modifying

the tax code to encourage, rather than hinder, volunteerism and public service

strikes us as an especially effective means of lessening the impact of high college

debt on graduates’ career choices.

The President’s call for expanded use of IRAs is equally as effective in encouraging and empowering American families to save for their children’s education, and

could go a long way toward reducing the over-reliance on loans.

The extension and expansion of non-taxability of employer-provided educational

assistance is another important means of improving the skills and productivity of

our workforce, and I would encourage the Committee to examine this important provision not only for purposes of extending it, but with an eye to making it a permanent provision.

Expansion of IRAs and extension of Section 127 benefits are both included in S.

1 and S. 12, the two leadership bills introduced in the other body. This indicates

broad bi-partisan support for these two particular approaches to using the tax code

in support of higher education, and I hope this Committee will also find them worthy of its support.

OUR VIEWS ON PROPOSED TUITION TAX DEDUCTIBILITY

In contrast to the these latter initiatives, the first two items on the list, i.e., Hope

tax credits and tuition tax deductibility, require significant modifications before they

can be justified in terms of educational policy. Indeed, tax deductibility of tuition

is beset with so many problems that we propose that it be replaced with a different

provision altogether. I re-iterate that this is not a judgment on our part as to whether certain middle- and upper-income taxpayers—specifically, those with children in

college—deserve tax relief in the abstract. Rather, the question is whether these

particular proposals can help us fulfill our goal of expanded access to higher education.

The proposal for tax deductibility of college tuition, when subjected to this test,

clearly fails to promote the outcomes that it may, on first glance, seem to promote.

The reasons for this judgment on our part are three-fold:

• Because of the progressive nature of our tax structure, tax deductions, even if

they were for the same dollar amount, would generate individual benefits that are

inversely proportional to income. In the case of the proposed deductibility of tuition,

this means that for taxpayers in the upper end of the eligible income scale, the marginal value of every dollar of deduction is 28 cents, in contrast to those closer to

the lower end of income-scale, for whom it would be worth 15 cents, not to mention

the very neediest families, for whom it is worth literally nothing because they have

no tax liability. This unfortunate feature is, of course, endemic to our progressive

income tax system, and would be found in all tax deductions, including some that

AASCU supports. The regressivity inherent to all tax deductions, however, is amplified in the case of tuition tax-deductibility because of its other features, as you will

see below.

• The second contributing factor to our reservations about the tax deductibility

of tuition and fees is that the proposal, as currently configured, would reduce the

allowable deductible expenses in a dollar-for-dollar fashion by any grant aid received

by students. By allocating all grant dollars toward tuition first—instead of allocating them in proportion to relative costs of tuition and fees versus other educational

expenses—the proposal shifts substantial subsidies away from the recipients of

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need-based student aid, and exacerbates the regressive effects due to the structure

of our marginal tax rates.

• Finally, the proposal offers the same theoretical opportunity to deduct up to its

maximum amounts (of $5,000 and by 1999, $10,000) to all taxpayers. But, in reality,

not all taxpayers would be able to avail themselves of the deduction equally. This

is because our lower income citizens tend to be disproportionately concentrated in

lower-cost institutions.

Allow me to illustrate the interactive results of the three causes by a comparison.

Our nation’s public black colleges are among the most important points of access

for minority students. Median family income at these institutions is about $27,000

per year. A student from a family with $27,000 of annual income at these institutions would confront a total cost-of-attendance of about $9,000, of which about

$2,700 would be for tuition and fees. Assuming an average Pell grant award of

$1,500 (based on the President’s proposed Pell grant maximum of $3,000), this student’s family would receive a reduction of less than $200 in their taxes as a result

of tuition tax-deductibility. Contrast this with a family with the characteristic

$73,000 median annual income at our more expensive universities. Such a family,

because they could avail themselves of the maximum deductibility, and because they

realize a gain of 28 cents per dollar of deduction, would receive tax benefits of

$1,400 when the maximum allowable deduction is $5,000, and $2,800 when the proposed maximum of $10,000 takes effect.

Mr. Chairman, the example I just provided should not, in any way, be construed

as implying our opposition to the latter example’s effects in terms of tax relief. Rather, our misgivings have to do with the disparity between the benefits the two families would receive. The targeting of the proposed tax benefits, as shown in this example, bears an inverse relationship to where federal dollars would produce the

greatest net national gains in college attendance. Families in the upper-income

quartile already participate in higher education at near-saturation rates. College

participation rates for children from families at or below the national median family

income (about $40,000) could, on the other hand, be dramatically increased through

better targeting of this proposal at them. Two important changes could substantially

improve this proposal:

• The formula for determination of allowable expenses should be changed from

the proposed ‘‘tuition and fees minus grants’’ to ‘‘cost of attendance minus grants.’’

Cost of attendance is defined by Congress in current law, HEA, Title IV, Part F (20

U.S.C. 1087qq).

• To offset the increased federal cost of broadening the definition of allowable expenses, the maximum deduction could be reduced.

These two changes, while still not providing new educational benefits to our

lowest-income citizens, would better focus this proposal on moderate- and middleincome Americans.

AN ALTERNATIVE POLICY OPTION

Alternatively, the Committee may wish to substitute tax deductibility of student

loan interest payment for deductibility of tuition. Such a substitution would, in effect, treat loan financing of investments in higher education the way home mortgage

loans are treated under current tax law. We believe the very same logic that led

Congress to create deductibility of home mortgage interest instead of deductibility

of purchase price of homes applies in the case of higher education. AASCU supports

an ‘‘above-the-line’’ deduction of up to $2,500 of annual student loan interest payments with income-phase outs similar to the Administration’s proposal. Our proposed substitution has several important advantages, and I should point out that

slightly different versions of tax deductibility of student loan interest payments are

included in both, S.1 and S. 12.

• Because our most affluent citizens do not need to borrow, deductibility of student loan interest automatically shifts its subsidies toward the children of low- and

middle-income families who had to finance college through borrowing.

• The benefits of interest deductibility are spread out over time, and would mitigate some of the ill effects of the student indebtedness on our economy. The adverse

effects of college debt on career choices would be reduced. In addition, the savings

realized by heavily debt-ridden graduates would enable them to participate in our

economy in all of the advantageous ways that previous generations of graduates

have.

• Because of the delayed and incremental nature of student loan interest deductibility, it would certainly not have the potential inflationary consequences that some

have attributed to tuition deductibility. In addition, because the federal government

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itself sets the interest rate for student loans, the deductibility of interest payments

would not result in higher rates.

• While the deductibility of tuition would do very little for graduate education,

the deductibility of student loan interest would immediately become the largest form

of financial aid for financing graduate study. As you are aware, student loans are

the only broad-based form of financial aid for graduate students. While the federal

government has a variety of small categorical grant and fellowship programs for

graduate students, there is no analogue to Pell grants for graduate school. Because

graduate students, while they are in school, tend to have very low annual incomes,

the deductibility of tuition would provide only marginal benefits for them. The deductibility of student loan interest, on the other hand, precisely because it is better

timed to provide steady relief over time, can provide a powerful incentive for more

of our citizens to engage in graduate and advanced studies.

• A larger number of our citizens would benefit from a properly configured student loan interest deductibility provision than would from tuition tax deductibility.

OUR VIEWS ON HOPE TAX CREDITS

Mr. Chairman, allow me to now turn to the Hope tax credit proposal, and share

AASCU’s views regarding that initiative with you and the Committee.

As I have already mentioned, in calling for higher education tax credits, the President has proposed a major new mechanism of delivering new federal resources in

support of higher education. The President has identified a new means, i.e, the use

of the tax code, to realize a worthy goal, broader access to college. AASCU members

enthusiastically support not only the President’s stated goals, but his proposal that

tax credits would be a powerful means to that end.

At the same time, however, we share the concerns of our colleagues regarding the

details of the proposed tax credits.

• AASCU views the decision to turn what was originally a refundable tax credit

into a non-refundable one as a step in the wrong direction. This change specifically

channels the benefits of Hope tax credits from Americans for whom it could do the

most good in terms of access. The difference between refundability and nonrefundability is that the dollar amount of a family’s tax liability becomes the de

facto cap on its eligibility for benefits. If our goal is to open the doors of college to

more Americans, our national self-interest would argue for the inclusion of our

neediest citizens.

• As is also the case with the proposed deductibility of tuition, the Hope tax credit

would also be reduced in a dollar-for-dollar fashion by the amount of other federal

grant aid received. Ironically, the effects of this ‘‘netting’’ of federal grants against

Hope credits is even more drastic than would be the case for tax-deductibility. Netting against a deduction results in a loss of eligibility equal to the applicable marginal tax rate. Netting against a tax credit, on the other hand, results in a loss of

eligibility equal to the amount netted. In the case of the example I used earlier, if

the student were a freshman, the family’s loss would equal $1,500, because the receipt of $2,000 of Pell would completely eliminate all eligibility for Hope tax credits.

This family would therefore have no option but to take the deduction, which, as we

saw, generates $113 in benefits. The student from the family with the $73,000 annual income would be eligible for the full Hope tax credit of $1,500. Such a student’s

family would fare better with the Hope scholarship while deductibility is capped at

$5,000, but could do better still once the proposed maximum of $10,000 is reached.

• The use of the B average is troubling because it further magnifies the overall

regressivity of the proposal, and because it would promote outcomes other than

what it is apparently intended to promote. First, students from at-risk backgrounds

tend not to be as academically well-prepared as those from upper-income backgrounds. This is also generally true of first-generation college students and students

who were raised in non-traditional families. Second, needier students, fearing loss

of Hope eligibility, would be more likely to avoid more difficult courses in favor of

less challenging work, intended solely to ensure a second year of Hope eligibility.

Much better results would ensue if the current federal eligibility standard of ‘‘satisfactory academic progress’’ were substituted for the proposed grade requirement.

These concerns can be addressed by the Committee in a manner that would fully

realize our common goal of greater educational opportunity for all Americans. A refundable Hope tax credit, without the federal grants offset contained in the proposed

version, would be giant step in the right direction. Mr. Chairman, we stand ready

to work with you and the Committee in any way we can to assist you with the historic task before you.

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Mr. HULSHOF. Let me begin the questions. Mr. Appleberry, you

hit upon a point about which we had much discussion with Secretary Rubin when he was in front of us on February 11.

Concern was expressed that, first of all, the $10,000 deduction

probably would be most used by higher income families. Is that

consistent with your testimony and your belief?

Mr. APPLEBERRY. Yes, sir.

Mr. HULSHOF. And in addition, that the $10,000 deduction,

which did not have a corresponding grade requirement, which we

will get a chance to visit about in a moment, but that this seemed

to be a discriminatory imposition in that the $1,500 credit, which

would be used by low-income families, has such a requirement.

Is that also your belief, that——

Mr. APPLEBERRY. There is no current requirement of B average

for the deductibility proposal. In fact even if there were, the probability would be that its impact would not be as regressive in the

deductibility proposal because that proposal would likely affect

more highly supported students anyway. They are usually more

prepared to go to college.

Mr. HULSHOF. Mr. Ikenberry, in your written statement—and I

think each of you in either your testimony or your written statements, talked about the B average, which we will talk about a little

bit.

But in addition to your statement, Mr. Ikenberry, you talk about

the confidentiality of student records.

It is my understanding that in order to protect student confidentiality, that schools, colleges, universities are not allowed or permitted to disclose grades to their parents, is that true?

Mr. IKENBERRY. Yes, that is not only institutional policy, but that

is Federal law. But I think just as a matter of philosophy, it is of

concern to us to link confidential student records, including academic performance, and a Federal definition thereof, because ultimately I think we would be led toward a Federal definition of what

constitutes a B average in the first place.

I think that beginning to move down that line causes all of us

here at the table, and virtually all of our institutions across the

country a great deal of discomfort, and concern as to where we

would be headed and what the implications of that would be.

Mr. WADDLES. Mr. Chairman, if I could add to that.

Mr. HULSHOF. Yes. Mr. Waddles.

Mr. WADDLES. The concern that we have is some of the testimony you have heard today concerning the variety of situations

that schools find themselves in on grading, on no grades, on whatever the situation is, that overlay that must take place to decide

who is making satisfactory progress.

Ironically, today, I have had a report given to me that there was

testimony given over on the Education and Workforce Committee

concerning that very issue and there was additional talk from the

Department of Education concerning other ways, whether it is

going to a C or whether it is going to a satisfactory progress measure or other things that Members were putting on the table.

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All of that I think adds to the complexity of this matter. Given

the fact that this regulation will come from not only the Department of Education but also the Department of the Treasury, and

maybe it was only myself that was taken aback a little today—and

I am supportive of many provisions that we are moving forward

with—but the fact that it was Treasury at the table, then Education came to the table later, giving testimony today. There are

symbols that we look for, and I have been in that position of trying

to deal and negotiate with that.

But it is something I think that gives us pause as we would wait

to see what kind of regulation would come forward.

Mr. HULSHOF. Anyone else on that issue?

I have tossed this one out to each panel so far and would welcome each of you to respond as far as additional administrative

costs, assuming that the grade requirement or the drug-free policy,

tags along with these proposals into passage.

Are there going to be administrative costs? If so, are they going

to be significant? And if so—I guess a three part question—who is

going to bear the costs of those additional administrative costs?

Any of you.

Mr. Ikenberry.

Mr. IKENBERRY. I might take a pass at that. I think that if the

B average requirement were eliminated or modified simply to be

the normal academic progress rule that is generally applied for all

other student aid—if that single provision could be eliminated from

the proposal, it would reduce very, very substantially the amount

of administrative burden that would fall on most of our institutions.

I think as colleges and universities across the country work to

hold down costs and at the same time improve quality and access,

the impact of Federal regulations is an increasingly significant

problem, and here I think we have an opportunity to look at that

in advance and try to minimize that burden.

Mr. APPLEBERRY. Let me try and answer as well because I have

been here and heard the question raised with other panels as well.

Part of the difficulty we have in being directly responsive to requests is, we do not know what they are going to try to do to implement the program, and it is difficult to assess costs unless you

know who is going to be responsible for enforcement, what the provisions or processes are going to be and how that is going to be

handled, both in terms of timing and in terms of who is responsible.

When we push on that, we cannot get a good answer.

Right now they tell us, well, we really do not know yet, but trust

us—we are going to reduce that burden.

It could go all the way from being an extremely expensive and

not very well-timed, in terms of delivery of services kind of program, to one that might not involve colleges and universities in the

verification at all, and it could range anywhere along those channels and we simply will not know until they tell us what they plan

to do by way of enforcing the regulations.

Mr. WADDLES. I think there is an additional administrative burden that we may be overlooking a bit and that is, if the B average

is there, there will be the administrative burdens that come with

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the complexities of the regulations and how we follow through with

that. And today there was a comment that it would be a big pencil,

at one point there was a comment made. But the other is that if

it goes forward, and that is part of the tools that we will be using

to help finance education for individuals, there will be an administrative burden on the schools and the communities at large to educate the individuals about how to use that tool, about how to follow

through with it, about using the tax system to make sure that they

are aware that this is available, and that will carry with it its own

administrative challenge, because it is something that, as the numbers reflect, not as many people will use as we anticipate.

And if it is the tool that is left, it is our burden, our challenge

to make sure that we get as many people using it as we can so that

they can have the hope for the education.

Mr. HULSHOF. Mr. DeNardis, you wish to weigh in on this,

please.

Mr. DENARDIS. Yes, with one additional point.

With respect to the B average, the biggest issue is not administrative cost. Clearly, there will be some, to what extent, hard to determine at this point.

I think the other issues that have been discussed today are really

the critical issues, and let me underscore one that may or may not

have been touched on before I got here, and that is the question

of equity. In my formal testimony I cite U.S. Department of Education data with respect to academic performance by race and ethnicity, and it shows, and I will not go through it—but it shows that

there are wide variances.

The National Postsecondary Student Aid Study shows that a

high proportion of students earning a 3.0 cumulative grade point

average, or higher, ranged significantly between the various racial

and ethnic groups.

Clearly, an indication, at least at the start of the college years,

that background and familial experience, quality of schools, and so

on, up to that point have an impact on academic performance, at

least in the first year or two.

I can tell you, from an institution that has a growing number of

minority students, and students of color, that many of them who

have come in from high school years where they were uncertain

about what their future would be after graduation, if graduation,

and once they make a decision to go to college and choose the local

college, they do so hesitantly, and not confidently.

Their first year is difficult, in some cases; not in all cases. But

in many cases. The transformation, however, from the first year to

the upper class years and graduation is phenomenal, and while

some of these students may have come in and are performing at

a 2.4, 2.5, 2.6, 2.7 level in year one and two, many of them, most

of them, in my experience, improved dramatically, and by the time

they are juniors and seniors are doing significantly better.

They have found focus in their lives, they have found a mission,

and a major, which they hope will bring them a successful career,

and it makes all the difference in the world. So it is unwise to

judge them, in my view, in the freshman year.

Mr. HULSHOF. Mr. DeNardis, let me shift gears just a little because you spoke very eloquently and passionately about section

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127, and I want to ask you, are you concerned about investing limited resources to implement, say, this program to the year 2000, or

December 31, 2000, only to see it terminate at that time? Is that

a concern you have?

Mr. DENARDIS. Oh, it has been one of the banes of my existence

for the last 6 or 7 years, not knowing how to plan from an institutional point of view. You know, we have 6,000 students at our university. More of them are part-time students than full-time students. Many of them are working professionals at the graduate

level.

There is much uncertainty in their lives about 127 being onagain and off-again, and I can tell you, this raises havoc with our

budgets as we plan from 1 year to the next.

Let me tell you, quite frankly, what havoc was rained upon us

last year, with first, the gridlock and then the extended period of

time before this issue was resolved.

We had a large exodus of students in the spring, and the summer, because they felt that this impasse, that is, last year’s, was

different from the impasses of previous episodes, and they weren’t

quite sure how it was going to play out.

Now, a lot of them have been going to school for 6, 7, 8, 10, 15

years, and they have been through a couple of cycles of this, and

they have seen it expire. They know that the word is that it will

be reinstated and they get reasonably good word from, I hope their

institutions, and in our case, from my office, about when this might

occur.

But I must tell you, last year, I could not speak confidently about

what was going to transpire here and I say that as someone who

formerly served here. So we had, at that particular level, the parttime level, and particularly in the graduate school, since our graduate school is 80 percent part-time working professionals, problems

that we had to deal with.

And fortunately, we did deal with them. But it is not our problems at an institutional level, that I am concerned about. It is the

uncertainty in their lives, and, you know, they go very diligently

at the graduate level, trimester by trimester. They are on a target

to get a master’s degree by a date certain.

They have complications in their working lives. They have complications in their family lives, and this is just another complication that sometimes makes it quite unbearable.

Mr. HULSHOF. Thanks, Mr. DeNardis.

I have some additional questions, but I want to defer to my colleague from Florida, Mrs. Thurman.

Mrs. THURMAN. Thanks, Mr. Chairman.

Mr. Ikenberry and Mr. DeNardis, one of the things that I heard

in your testimony was we have a lot of different kinds of students

out there, and the way they are having to participate in higher

education, with a lot of different other programs that are going on

out there. And I think that is true. I think that is one of the reasons why some of these proposals are getting shot at on occasion,

because it is hard to put a one kind of size fits all, and I think that

is a problem we have here.

And to Mr. Waddles as well, you have a group of students out

there that are not going to participate in what we might consider

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to be a regular institutional setting, but certainly provide an opportunity into the workplace that is critical in this day and age.

But with that all in mind, unfortunately, we have to come up to

some final conclusions here. So, in light of what you have heard in

testimony as well, earlier, and I did not mean to leave you out, Mr.

Appleberry, I am sorry. If you had to choose, I mean, you heard the

last panel that only talked about how we have to expand Pell

grants. That is it. You know, that seemed to be the real need out

there.

I do not want to get into a situation where we do a piece of legislation that then also leaves out a whole bunch of people out there.

So if you could give us some guidance. If you were going to craft this and you had $40 billion and you wanted to make sure—I know

what you are going to say, Mr. Waddles—‘‘Just include us.’’

If you had that money, and you as the institutions who serve

those students, what would be your best recommendation? Forget

the President. Forget all of the other speakers. What would you do?

Mr. IKENBERRY. Well, you premise your question with a very,

very important point that all of us need to continue to remember,

and that is the great strength of higher education in this country

is the tremendous range and diversity of opportunity that is out

there, and that one size will not fit all, and one single solution will

not fit all.

Let me see if I could respond. I think the first priority is to maintain the strength of the system of student aid that has served us

so well in the past, and I would join with the panel that commented earlier this morning about the Pell grant.

But I think also it is important to increase the diversity of options that are available to students and families, and that is basically the proposal that you have before you, not just in the Hope

Scholarship Program, but in terms of section 127 and the deductibility of student interest in several other proposals that are there,

that I think are very appropriately, now, for, really, the first time

in front of this Committee in a significant way, that really is precedent setting.

I would encourage you to continue to work with these proposals

and to refine them. They are not perfect proposals. I think even

those who advance them suggest that refinement is possible, and

you have heard, I think, several suggestions from those of us on

this panel.

I think the proposals can be improved, but I think we should not

lose this opportunity to diversify the range of solutions that are

available to students and families, and this will, I think, provide

increasing opportunities for students and families to pick and

choose, really, the precise financial solution that fits their circumstance and fits their academic objective.

Mr. DENARDIS. Representative Thurman, it is an excellent question. The main theme of my opening remarks, as you will recall,

was to build upon the need-based aid programs as the cornerstone.

But I think it is time, now, to range beyond those programs and

to broaden the diversity of options as Dr. Ikenberry has indicated.

The Pell grant is, of course, enormously important. There is not

a college president in the United States that would not attest to

that.

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Nearly a quarter of my full-time students have a Pell grant. But

let us face it: Pell grants are limited. And you may say, ‘‘Well, let

us take the wraps off the limits.’’

But you have got to understand what that will cost. I mean, right

now, the limits are, for all intents and purposes, for a family of

four, earning at about $27,000 or $28,000, as they go beyond that

they are out of the range. OK. So if you are earning $30,000, which

is not a princely sum of money, you are beyond the Pell grant

range.

All right. So what do we do to expand and strengthen Pell? Very

costly. The President has recommended a good and important step.

I believe that to go much beyond that, there are practical legislative and budgetary problems that must be confronted. For every $100 increase in the Pell, we are talking about $300 million. If we were to bring it up to $5,000, as was suggested by

someone on the prior panel, we are talking about $6 billion more—

$6 billion more. Can it be done? Well, as a matter of fact it cannot

be done.

It cannot be done unless you change the caps. You have committed yourselves to caps in 1993. Those caps extend through, I think,

fiscal 1998. There are fixed caps on domestic discretionary spending. So you could not do it anyway under those caps.

You may not even be able to do the President’s proposal under

those caps until you renegotiate them.

So, from a practical point of view, the talk about significant expansion of Pell beyond what the President has already suggested

is probably out of the question.

Therefore, I think you have to look practically at other ways to

deal with the problem, and I think basically, the administration

has done that. They have found another way to increase and expand the options.

Mrs. THURMAN. Thank you. Mr. Appleberry.

Mr. APPLEBERRY. Mrs. Thurman, fortunately, the choice really is

not there with this Committee, between the Pell and the Tax Code.

One of the things that I mentioned in my testimony was commending the President and the Congress for looking at the Tax Code as

an additional opportunity to provide access to education on the part

of many of our citizens.

So this Committee is, indeed, dealing with the Tax Code and is

not in a position to deal with Pell. So I do not see that as a tradeoff

in terms of a decision before the Committee.

But even if that were to be the case, and you all interact with

the Committees that are dealing with the Pell, the facts are that

the proposals before the Congress now would increase Pell by $300

per student, eligibility, and the cost is $4 billion.

That would help primarily people, $27,000 family income, and

below. We have $36 billion in the proposal before this Committee

in tax forgiveness that would hit primarily people in the $45,000

tax range, and above.

Those tradeoffs seem to be somewhere inappropriate, if we are

really trying to magnify access for students in American higher

education.

Mr. WADDLES. And if I could. I appreciate the inclusion reference, but I think the issue really comes to this Committee, this

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Congress, the administration setting the priority as to what that

audience, that targeted audience is.

This is the same debate that we went through in the last reauthorization of the higher education, and the one before that. The

last time, going through, we debated the issue of having a Pell entitlement, and we actually succeeded, through the Committee, of

having a Pell entitlement because of the critical nature of that population.

Here we have before us in the testimony that we heard today,

there seems to be an appearance of a balancing act. It is attempting to be placated in this process. Having the tax credits and deductions that gives a broader array of tools and a broader array of

issues for a higher income level, but will also do as the administration has proposed, a higher Pell grant maximum, whether it goes

to 3,000, or somewhere higher.

This, again, as Dean Breneman referred, back to 1978, was the

paradox that the Committee and the Congress placed itself in at

that time. A Democratic-controlled House moved the tax credit

issues. A Republican-controlled Senate moved an increase in Pell

and a broader loan program.

A President put forward the idea of a middle-income student loan

program, which was later brought back again in the 1992 amendments of higher education.

All of that was laid on the table, everything was moving forward,

we wanted to do it all because we wanted to address the entire

population. We were unable to do it. It is ironic that we are in the

shadow of the balanced budget debate that goes on while we are

doing this, and the amounts of money that we are talking about.

But my fear is that as you set priorities here today, and in the next

few months, that at the end of the day, at the end of that budget

cycle and that budget process, and Chairman Kasich and Chairman

Domenici are negotiating those final days, that one of these provisions is lost, and that balancing act that we have attempted to create fails.

And so, again, it falls to what is the audience we want to target

with this, and then zero in on that. If it is the most at risk, the

most at need, then there are ways to do it, and some of those are

the section 127, and other elements, that can access that doorway

for them.

If it is not, if it is a broader array of tools, then let us go after

that. Let us just not try to paint it all ways, for everybody.

Mrs. THURMAN. I, quite frankly, think that those that want to go

should have that opportunity and that is why I bring up that issue.

I think that that is what this is about, and if we can provide that

opportunity, whatever that broad-based tax incentives, Pell grants,

scholarships, whatever it might be.

Quickly let me ask you this. Mr. DeNardis made a statement

within his testimony. As the availability of Federal student grant

aid has decreased, the rate of tuition growth has increased. And

then vice versa. As the Federal student grant aid increases, tuitions either remain the same. Do you all agree with that statement?

Mr. IKENBERRY. Yes, I do. The data that I have seen supports

that, and I think for those of us who have actually worked on a

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campus, we actually experience that in real terms. When the Federal Government either has to cut back, or the growth in student

aid does not keep pace, it obviously puts more pressure on institutions to increase institutional aid, or State budgets to increase

State aid. Either way, that directly or indirectly has an upward

pressure on tuition.

So yes, I think that increased student aid from the Federal Government is the friend, the ally, in terms of moderating tuition increases at the campus level.

Mrs. THURMAN. I found interesting the dialog on the cost-shifting

issue. I was not sure that I totally understood cost shifting in the

educational institution as you might think of it in health care, because generally speaking, you have tuition that is set, you have financial aid, you have people basically pay the same fees. Everything else.

But the biggest cost shifting I have seen over the years has been

the difference between an in-state student and an out-of-state student as being the real difference in tuitions within a school system.

But I bring all this up because I am very concerned. We see the

dollars, not only here, but also in our State legislatures. Florida

and California are the first States, in the last year or so, that are

now spending more on prisons than they are on higher education.

That is a very sad number for this country, and for our two

States to have reached. That magnitude, where we are actually

spending less dollars on educating students. And that is why I

would hope that what we do is offer more opportunity to those that

want to, no matter what it is they are looking for. I think that is

extremely important.

Mr. DENARDIS. The cost-shifting discussion that you heard by the

prior panel of economists—and I am not an economist although I

think my bachelor’s degree was in economics.

Mrs. THURMAN. Well, mine was a middle school math teacher,

so——[Laughter.]

Mr. DENARDIS. The medical marketplace is decidedly different

from any other marketplace in the United States, although it is beginning to change with managed care. I do not want to get into a

debate here on managed care.

Mrs. THURMAN. Let us not do that. [Laughter.]

Mr. DENARDIS. But the old medical marketplace that gave rise

to cost shifting was a marketplace where the laws of supply and

demand were upside down. They operated in an inverse relationship, unlike the rest of the marketplaces of the United States.

Therefore, cost shifting was not only possible, but highly likely as

a result of that.

I do not think you can transfer that into any other marketplace.

You cannot do it in the marketplace of higher education.

Mrs. THURMAN. Last comment. I agree with you on the B issue.

I think that we have so many scholarships, local communities that

give out to the highest students. There are actually hundreds of

thousands of dollars, millions of dollars that are being given by private organizations today, that go to the top 5 percent, top 10 percent of our student population. Who we actually lose are those that

potentially do not have the computers at home. They have the ability, have everything going for them, but just have not been given

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the opportunity. They maybe have to work and so do not have that

extra hour to do an extra report, or whatever it might be to keep

that A up.

And the second thing I would say is be careful for what we wish

for. We see it as they leave their senior year. They are not always

taking the highest level courses. They are looking to bring their

grade average up, and by that, we actually bring their course levels

down.

And we have to be extremely careful in that debate, and not to

pull students down into a situation where they do it for a grade

and not for an education.

Mr. HULSHOF. Thanks, Mrs. Thurman.

The hour is late. Let me just finish with just a couple of quick

questions.

Mr. Appleberry, hopefully one of these questions will touch on

your last comment.

Mr. Ikenberry, you mentioned, and recognized in your testimony

the significant expansion that the Federal Government, particularly within the Tax Code, or with the administration’s proposals,

and there has been a lot of discussion about the Georgia Hope

scholarships. In fact in the State of Missouri, our Governor has just

proposed Challenge scholarships.

Do any of you happen to know how many similar type scholarship programs there are across the country?

Mr. IKENBERRY. I cannot speak authoritatively to that. Maybe

my colleagues can. I did visit the Georgia program and I know that

there are several other proposals, I believe even maybe in the State

of Maryland, and elsewhere around the country. But I believe, to

the best of my knowledge, the only one that is really operative

right now is in Georgia.

Mr. HULSHOF. How is that going to work, or is that something

that will be incumbent upon State legislatures to decide? If the administration’s proposals are to be enacted, then are we going to

have duplication, or——

Mr. IKENBERRY. Well, there is a fundamental difference with the

Georgia program, with all of its strengths, that I think needs to be

brought out here. That is, the Georgia program is really not a tax

program, either a tax credit or a tax deduction. It is an outright

direct grant from the State of Georgia to the students.

Therefore, I am sure that if this program were adopted, federally,

it would likely cause some reexamination of the Georgia program.

But it is not as if we had a Federal tax incentive program laid on

top of a State tax program.

I think the Georgia program is quite different in that respect.

Mr. WADDLES. And there is the exclusionary language that, if

you are receiving other grant money, that is offset against what

you are receiving on the tax side. So that is where, in effect, they

are trying to recognize the Georgia situation.

Mr. HULSHOF. Mr. Appleberry, I will give you the last word, because you wanted to comment, I think, as Mrs. Thurman was concluding.

Mr. APPLEBERRY. Yes, and I am sorry she has left, because I

wanted to correct what might be a misimpression on the Committee’s part.

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The cost pressures related to financial aid do not operate at the

public universities. That is primarily in the private sector because

that is where the cost shifting occurs.

The tuition levels that are set in the public sector are usually

more related to the amount of appropriation that we get from the

legislatures in the State, and not in terms of source or availability

of student financial aid, and I think that needs to be made clear.

One last comment on your last question.

Mr. HULSHOF. Yes, sir.

Mr. APPLEBERRY. Georgia is the only one that has such a program operative now. It is interesting that in a recent meeting of

university presidents that I conducted, where we were looking

ahead, that there were about seven of the presidents there who

said that their Governors were asking them for ideas of what they

could do to be known as the Education Governor, so they could be

like Governor Miller in Georgia.

The problem is funding that scholarship. Georgia took a one-time

tax lottery situation and made it guaranteed to help their students.

That opportunity is not available to very many States.

Mr. HULSHOF. With that, gentlemen, and if there are no other

questions by any Members of the Committee, we thank you for

your testimony. This hearing stands adjourned.

[Whereupon, at 4:23 p.m., the hearing was adjourned.]

[Submissions for the record follow:]

Statement of Hon. David A. Longanecker, Assistant Secretary,

Postsecondary Education, U.S. Department of Education

Mr. Chairman and Members of the Committee:

I am pleased to submit this testimony to you on the Administration’s postsecondary education tax initiatives. Our discussion comes at a time when, more than ever

before in our history, education is the fault line between those who will prosper in

the new economy and those who will be left behind. We know that most of today’s

good jobs require more skills and training than a high school diploma affords. Effective and accessible postsecondary education is critically important both for individuals and for the strength of America’s economy and democracy. That is why President Clinton made excellence in education our national mission in his State of the

Union address, and why he has issued a bold ‘‘Call to Action for American Education in the 21st Century.’’

Our Nation faces great challenges when we strive to ensure access to effective

education. In the next decade, increasing numbers of high school graduates will significantly expand demand for postsecondary education. More and more older students will return to college to get the education they need to succeed in the new

economy. And a growing population of disadvantaged students will need financial

and other kinds of support.

Over the past several decades, the Federal government has firmly established its

commitment to ensuring access to effective postsecondary education—but we have

an unfinished agenda. We must do more in order to meet the challenges of the twenty-first century.

We believe that we can best address our commitment to higher education and the

challenges we face with a comprehensive, three-pronged agenda made up of our tax

initiatives, fiscal year 1998 budget proposals, and our proposals to reauthorize the

Higher Education Act. The tax and budget proposals have been described in our

budget documents, and our proposed bill language will be provided shortly. We hope

to share the HEA proposals with Congress this spring. These three components,

which we propose in the context of a balanced Federal budget, form our coordinated

higher education strategy for the twenty-first century.

TAX PROPOSALS

Our tax initiatives are designed to assist students and families and to encourage

postsecondary education. We believe that these proposals will effectively complement the traditional student financial aid programs. The tax proposals are critiVerDate 11-SEP-98 10:34 Oct 05, 1999 Jkt 057910 PO 00000 Frm 00156 Fmt 6621 Sfmt 6602 D:57910 W&M3 PsN: W&M3
154

cal to our goal of establishing a national ethic of learning to high standards and

a national expectation that at least two years of education after high school is the

norm for which all students should strive. We want to make at least 14 years of

education the standard in America.

Our HOPE Scholarship proposal, modeled after a successful program in Georgia,

would provide students who are enrolled at least half-time and have no prior drugrelated felony convictions with a maximum $1,500 tax credit for tuition and required fees for their first year of postsecondary education. Students would receive

another $1,500 for the second year if they stayed drug-free and earned at least a

B minus grade point average. This credit would put $18.6 billion in the hands of

students and their parents over the next five years. It would help 4.2 million students in 1998 alone, allowing them to pay the equivalent of the full cost of tuition

at a typical community college and encouraging them to work hard and achieve excellence.

In 1998, 8.1 million other students would have available to them a $5,000 tax deduction for higher education expenses. The deduction would increase to $10,000 beginning in 1999. Families would save $17.6 billion over the next five years with this

deduction. Because the credit and the deduction are designed to help middle-income

families pay for college, eligibility would be phased out for families with incomes between $80,000 and $100,000, and for individuals with incomes between $50,000 and

$70,000.

We must also do more to encourage families to save for their children’s education.

That is why we have proposed greater flexibility in using Individual Retirement Accounts so that funds saved in these accounts can be used for postsecondary education expenses, free from early withdrawal tax penalties. In addition, we have proposed an expansion in eligibility for tax-deductible IRA contributions. From 1997

through 1999, eligibility would be phased-out for families with incomes between

$70,000 to $90,000 and for individuals with incomes between $45,000 and $65,000.

Beginning in 2000, the phase-out ranges would match the ranges of the proposed

tax credit and deduction. This expansion would double the previous eligible income

levels. Families who save through an expanded IRA and then use the savings for

higher education could deduct up to $10,000 of their withdrawals a year, making

savings for college virtually tax free.

We also suggest several smaller but important tax incentives. We propose extend- ing the tax exclusion for employer-provided education assistance of up to $5,250 for

both undergraduate and graduate students. In addition, for 1998–2000, small businesses would be given a new incentive to provide educational assistance to their employees. Employers would receive a ten-percent tax credit for amounts paid under

an employer-provided educational assistance program for education provided by a

third party. The President’s budget also provides tax relief for loan forgiveness so

that students whose loans are forgiven by charitable or educational institutions in

return for a community or public service commitment, and borrowers whose Direct

Loans are forgiven after 25 years in the Income Contingent Repayment plan, are

not taxed on the forgiven loan amount.

Our tax initiatives are designed to benefit working families who are struggling to

pay for college. Since 1979, the bottom three quintiles (fully sixty percent) have seen

only modest growth in their real incomes. Over that same period, college costs increased by 165 percent. It is no wonder that so many middle-income families are

worried about their financial circumstances and wondering how they are going to

pay for college.

Moreover, evidence tells us that we need to improve access to college for both lowand middle-income students, who have much lower rates of participation in postsecondary education than higher-income students. In 1994, only 45 percent of high

school graduates from low-income families and 58 percent from middle-income families went directly to college, compared to 77 percent of students from high-income

families.

We also believe that our tax initiatives will improve college completion rates, as

grants do. Ensuring initial access to postsecondary education is not enough. We

want students to complete their education. Our data show that low- and middleincome students are less likely than higher-income students to earn bachelor’s degrees within five years, and one of the main reasons that students drop out of college is lack of money. By putting more resources in the hands of students and families, we can help to increase degree attainment. In addition, many adult workers

could be expected to return to school on a part-time basis in order to improve their

job skills and credentials.

One often overlooked benefit of using tax incentives to provide educational assistance is their predictability. Students are more likely to pursue and complete postsecondary education when they are aware early in their schooling of predictable and

155

consistent financial aid. Taxpayers who see a specific line item reference to the

HOPE tax credit and the deduction on their tax forms year after year will be well

aware of these sources of college financing. As a result, we expect to see increases

in the participation and completion rates of low- and middle-income families.

Thus, the tax proposals will help working families who are struggling to pay for

college. They will improve both access and college completion among middle-income

students. They will reward savings and help reduce the need to borrow. And they

will encourage adult workers to pursue re-training and life-long learning.

FISCAL YEAR 1998 BUDGET PROPOSALS

We know, however, that the tax code may not be the best vehicle for helping the

neediest students, who often do not have significant tax liabilities. That is why we

have dedicated ourselves to doing all we can to increase the availability of needbased grants, as well. Our fiscal year 1998 budget proposals are important for this

reason. I would like to address them briefly since they complement our tax initiatives. The tax and budget proposals together are integral to our commitment to accessible and effective higher education for all students.

Our budget request would make an unprecedented $47 billion in student financial

aid available to some eight million students in fiscal year 1998, with a particular

focus on the programs that help the neediest students.

The Pell Grant program is one of our highest priorities, and our proposal would

provide nearly $7.8 billion in Pell Grants to four million needy students in fiscal

year 1998—and at least $40 billion over the next five years. We would increase the

maximum award to $3,000 in fiscal year 1998 and expand the eligibility of independent students. This kind of federal commitment to need-based grants is critical

to our goal of enhancing access, for grant support remains the most effective way

to ensure access and to encourage graduation among financially disadvantaged students.

Our budget will also make a number of changes in the Federal Family Education

Loan (FFEL) and Direct Loan programs that will help the increasing numbers of

students who borrow to finance their education. Our proposal would cut fees from

four to two percent for need-based loans, and to three percent for other loans—thus

saving four million low- and middle-income students $2.6 billion over five years.

These fee reductions will put more money in the hands of students when they are

paying tuition and other college costs. In addition, because lender costs during the

in-school, grace, and deferment periods are very low, our budget would reduce the

interest rate during those periods by one percentage point, thereby reducing both

Federal costs and borrower costs on unsubsidized loans. We would provide these

benefits to students while saving taxpayers $3.5 billion over five years by streamlining the guaranty agency system to make it more efficient and cost-effective and by

eliminating excess lender profits.

REAUTHORIZATION OF THE HIGHER EDUCATION ACT

Our tax and budget proposals are designed to work together to ensure that lowand middle-income students have the opportunity to go to college. They are complemented by the third piece of our higher education strategy, the reauthorization

of the Higher Education Act (HEA). Because these three pieces are part of a coordinated effort, I now would like to touch briefly on our strategy for reauthorizing the

HEA.

The HEA, which authorizes our postsecondary education programs, is scheduled

for reauthorization. We believe that the current HEA provides a strong foundation

of support for higher education. Its programs work well and have opened the doors

to college for millions of students over the last several decades. That is why we support these programs so strongly in our fiscal year 1998 budget. Our task now is to

consider how to make the HEA better and to ensure that it can address the challenges of the twenty-first century.

In developing our postsecondary education strategy, we are consulting the people

most affected by our programs. In December, we held a series of public meetings

in six cities across the country so that we could listen to and learn from all parts

of the higher education community. We have been very encouraged by the high level

of support we have heard both for our tax proposals and for the programs of the

HEA.

While we are in the process of developing our ideas and do not have complete reauthorization proposals yet, we do know that whatever decisions we make will be

designed to benefit students. We also know that our overall proposal will be aggressive, but realistic. We will identify priorities and suggest targeted program reforms

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rather than a ‘‘wish list’’ of new programs that we cannot fund in the context of

a balanced budget.

Let me share with you now the four principles, reinforced by our tax and budget

proposals, that guide the development of our reauthorization proposal.

The first principle is access—opportunity with responsibility. We must continue

our efforts to ensure that all students, including disabled and economically disadvantaged students, have access to higher education. At the same time, we must

help families and students take responsibility for their own education. Postsecondary institutions, too, have the responsibility to protect the value of their students’

access by providing high-quality programs, supporting students, restraining tuition

increases, and being fiscally responsible in their management of federal funds. And

States must take responsibility for investing in the education of their students in

spite of tight state budgets and limited resources. We are considering several

changes to the HEA that will enhance access.

For example, we will do our best to guarantee that the HEA provides a strong

Pell Grant program for years to come. We will complement our increased funding

for the program this year by authorizing future maximum awards that are ambitious but also paid for within our balanced budget proposal. Likewise, strong student loan programs are necessary to ensure access. Our proposal will continue our

commitment to both the FFEL and Direct Loan programs. We can best serve students by maintaining a healthy and fair competition between the two programs

while promoting efficiencies in the guaranty agency and lender systems.

Our second reauthorization principle is the support of effective education, high

standards, and high achievement. Federal programs should continue to promote and

enhance outstanding educational opportunities and encourage students to take advantage of those opportunities to the best of their abilities. We should also encourage the effective use of new technologies to meet the changing needs of students by

providing access to high quality postsecondary education.

For example, in promoting effective education and high standards, we will propose

changes to Title V of the HEA that focus on recruiting the next generation of teachers, preparing them well, and supporting them in their first few critical years.

Teaching is a key variable in students’ learning; without effective teaching, the

highest standards in the world will not ensure that our children are well educated.

We must give teachers the education and support that they need to teach to higher

standards.

The reauthorized HEA should simplify program delivery and improve management, and that is our third guiding principle for reauthorization. Students and postsecondary institutions should continue to receive outstanding customer service in a

predictable and seamless way so that they are assured of aid and can plan ahead.

Federal programs should be simplified and burden reduced as much as possible.

We have already begun efforts to simplify program delivery through initiatives

such as Easy Access for Students and Institutions (EASI). Students deserve a

friendly system when they seek information about financial aid and apply for it. We

are examining ways that the HEA could encourage a streamlined delivery system

for student financial aid.

And our fourth principle is that we must improve outreach to potential students

and ensure strong links among elementary and secondary education, postsecondary

education, and employment. As the President emphasized in his ‘‘Call to Action,’’

this principle is key to our goal of making college more accessible and more affordable for Americans. Too many young people lose their way between high school and

the world of work. We must reach out to potential students as part of our effort to

change the way that young people and their families participate in postsecondary

education—so that everyone places a high priority on continuing his or her education. With this in mind, we will strengthen the TRIO programs, which provide

students with needed information and support so that they will be ready to go to

college.

CONCLUSION

As this testimony indicates, our vision for higher education includes tax incentives

to help families pay for college, as well as major increases in funding for important

postsecondary education programs and a Higher Education Act that is even stronger

than it is today. This Administration is calling for a significant increase in our national commitment to postsecondary education, and I hope you will give strong consideration to our proposals.

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Statement of American Association of University Professors

The American Association of University Professors (AAUP) welcomes the emphasis on education in the President’s proposed budget for FY 1998. As faculty members

in this nation’s colleges and universities, our 45,500 members are key partners with

government and others in the higher education community in a commitment to the

future of higher education.

The AAUP pays close attention to the development of congressional and federal

policies because we recognize that education is not just a private and individual

matter. The nation as a whole relies on an educated populace to solve its problems,

to contribute to a vigorous and growing economy, to stretch the horizons of ideas

and expression, and to recreate democracy in each generation.

ISSUES OF ACCESS.

This nation has made important investments in higher education—helping students who attend both public and private institutions. As a result, we have one of

the finest higher education systems in the world. Providing access to education is

a particular challenge in times of rising costs and increasing demand. The AAUP

believes that college and university enrollment should be a reachable, affordable,

and realistic part of the lives of all those who have the ability and determination

to pursue higher education, and we support the President’s proposals to this end.

ISSUES OF QUALITY.

Students who have been educated in American colleges and universities should

be well prepared to encounter the world’s complexities and to contribute something

of worth in their chosen fields. The new technologies that touch every aspect of

higher education are both costly and necessary tools for the enterprise.

Quality postsecondary education not only conveys information, but also inspires

curiosity, encourages critical thinking, and elicits the most important questions—the

ones that, as of yet, have no answers. As our profession and our institutions try new

ways of communicating and new ways of teaching and learning, we seek to preserve

the essentials of higher education. We seek a future in education that protects openings for the unprogrammed question, the unanticipated insight, the unpredictable

experiment, and the depth and complexity of real learning. The AAUP supports high

quality education for all students, and we support the President’s proposals to this

end.

FEDERAL GOVERNMENT SUPPORT.

For decades, federal programs have supported quality education at the university

and college level, and have made education accessible to millions of students. Nearly

half of all students now attending college receive assistance from some type of federal programs. For many of them, federal assistance opened a previously closed door

to higher education.

We appreciate the attention that this committee is devoting to education-related

issues. We believe that the Ways and Means Committee will make an important

contribution as Congress explores ways to help middle-income families finance higher education for their children, and to open the doors of college to young people

whose families might never have considered higher education as an option for their

children’s future.

TAX-RELATED EDUCATION INITIATIVES.

The AAUP acknowledges that the tax code can be an efficient tool for distributing

benefits directed toward particular social purposes. Higher education serves a core

national purpose—the strengthening of our economic and democratic base through

the support of an educated citizenry. So it seems appropriate that tax benefits direct

resources toward this purpose.

THE HOPE SCHOLARSHIP TAX CREDIT.

The AAUP supports the basic concept of the President’s HOPE Scholarship Tax

Credit proposal, as a useful part of a complete higher education package that includes increases in the Pell Grant, work study, and TRIO programs, along with improvements in student loan programs and direct institutional aid. We have stressed

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to the Administration the importance of balance among these programs, so that, together, they would afford access to high quality higher education for all Americans

regardless of income or wealth.

We would like to work closely with Congress in the shaping of the details of the

HOPE Scholarship Tax Credit. Specifically, we urge Congress to make the following

modifications in the President’s proposal:

• The HOPE Scholarship tax credit should be refundable. Unless the credit is refundable, it is useless to low-income families and to many independent students,

who typically eke out a subsistence living during their college years. Those low income students and families who are fortunate enough to qualify for a Pell Grant

might benefit more from the grant than they would from the tax credit. But there

are two important differences:

(1) Not everyone who qualifies for a Pell Grant receives the maximum

level. Indeed, a low income working student is very likely to fall between

the lines of eligibility for a Pell Grant and the ability to make use of a nonrefundable tax credit. A single independent student scraping by on $10,000

of earnings annually from part-time work would benefit less from the credit

than a student earning significantly more. But because of the student’s

earnings, the Pell Grant is unlikely to fill in the gap. We urge the committee to look carefully at the impact on students who qualify for very small

Pell Grants, or whose earned incomes place them just above the eligibility

line for Pell Grants.

(2) The HOPE Scholarship Tax Credit operates like an entitlement, while

the Pell Grant depends on annual appropriations from the discretionary

budget. The full Tax Credit will be available to families earning up to

$80,000, whereas the full authorized level for the Pell Grant program is not

available to anyone. The proportion of the maximum grant that the most

needy students actually receive is adjusted year to year, depending on the

amount of money appropriated for the program.

• The HOPE Scholarship tax credit should not be considered an ‘‘asset’’ to be subtracted from the Pell Grant award, for students who qualify for both. Even with recent generous increases, the maximum Pell Grant award has not kept pace with inflation To meet 78% of a student’s expenses (as it did in the late ’70s), the Pell

Grant would have to offer a maximum grant of $4000 to $5000, instead of the $3000

offered in the President’s FY98 budget proposal. By adding the HOPE Scholarship

to the maximum Pell Grant, the ‘‘grant package’’ would just equal the authorized

(but never appropriated) maximum grant for the Pell grant program ($4500).

• We urge Congress to make the HOPE Scholarship tax credit available (proportionately) to less-than-half-time students who otherwise qualify for the credit. By offering the credit only to students attending college at least half time, the President’s

proposal withholds assistance from community college students who might be trying

to hold a life together with a part-time or full-time job, while taking a class or two

to improve their chances for future employment. Given the number of heads of families who will be required in the next few years to leave welfare and take a job—

any job—the need for community college level educational opportunities will be

great. These young families, supporting small children with (probably) just one

adult’s income, need greater flexibility. We urge the committee to consider inserting

more flexibility into the HOPE program.

• And finally, we urge Congress to eliminate the requirement that a student

maintain a ‘‘B’’ average in his or her first year, in order to qualify for a HOPE

Scholarship for the second year. The AAUP supports an emphasis on encouraging

students’ best performance. However, we caution against well-intentioned expectations that may result in overly burdensome requirements on the institutions and on

new students. We believe that the ‘‘merit’’ aspects of the HOPE Scholarship program

will be difficult to implement fairly and efficiently. Professors already experience

substantial pressures to enhance the grades of students who ‘‘need’’ better grades

for sports, scholarship, or other reasons. The HOPE Scholarship would add to the

unwieldy burden.

In addition, the HOPE scholarship is designed to open college doors (for the first

year) to all students. It seems ironic and perhaps cruel to require not just that the

student succeed in the college environment, but that the student excel. If the HOPE

Scholarship is offering a first chance to a student who has had little financial or

educational support from home, that student succeeds—and the program succeeds—

when the student ‘‘makes satisfactory progress’’ on his or her courses in that first

exploratory year. We urge Congress to align the ‘‘merit’’ requirements of the HOPE

Scholarship program with the ‘‘merit’’ requirements of other financial aid programs.

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OTHER EDUCATION TAX BENEFIT PROPOSALS.

AAUP welcomes the additional proposals in the President’s budget that will assist

middle-income families in providing higher education for their children. We recognize that an education expense tax deduction, and the proposed penalty-free withdrawals from Individual Retirement Accounts will be most useful to relatively higher income families. Yet for many of these families, these provisions will enable them

to finance education through savings rather than through debt.

We urge Congress to pay close attention to principles of tax equity in considering

these proposals. In some details, the tax deduction, as proposed, may offer greater

benefits to higher income families than to middle income families who, presumably,

need assistance more. For a family in the 15% tax bracket, the $10,000 per year

tax deduction would be equivalent in value to the $1500 tax credit. For families in

the 28% bracket (beginning at $75,000 taxable income) the tax deduction would be

worth $2800, almost twice the value of the tax credit, and nearly as much as the

very lowest income student might receive through a maximum Pell Grant. As a matter of equity, the AAUP recommends that the tax deduction be designed to offer no

more benefit to high income families than to middle income families.

We support the President’s education-related tax proposals, with the recommended modifications, as a part of a complete package of education assistance

designed to enhance the quality of higher education as well as access to higher education regardless of wealth or income. The generalized distribution of education dollars through the tax code is useful as an additional device to help families and students pay education costs.

But we urge Congress to continue providing full support for the higher education

programs funded through the discretionary portion of the budget. Many of them are

carefully targeted to meet certain challenges—distributing resources to colleges that

enroll disadvantaged students, supporting low and middle-income students with

grants and subsidized loans, and offering assistance to graduate students and institutions taking on special projects.

The purpose of the HOPE scholarship program and the other tax-related education programs would be defeated if their adoption meant that higher education

institutions would lose other government support, causing a compromise in quality,

or that student aid would be less available to low-income students, causing a restriction in access to higher education. Supporting higher education is a tall order, and

one with many aspects. We appreciate the support of this committee.

Statement of Willie C. Brown, Jr., President, American Student Association

of Community Colleges

f Mr. Chairman, it was my pleasure to testify before you in the last Congress on

behalf of the higher education community, in support of employee educational assistance. At that time I was ASACC Vice President for the Southeast Region. I am

now ASACC President, and I am asked by ASACC to speak for community college

students on several priorities.

As younger Americans who must bear the brunt of carrying the national debt and

the interest on it for at least the next generation, if not longer, we understand all

too clearly the magnitude of this challenge. We also know that it can be met only

if we work hard, at good jobs. We must have workplace skills at the cutting edge

of global competition. And, we must have lifelong access, as President Clinton has

repeatedly observed, to the education, training, and retraining that develop those

skills. Only high skills with high wages will get us through! We have no other

choice. In this spirit, we want to concentrate our testimony on two priorities.

I. EMPLOYEE EDUCATIONAL ASSISTANCE

First, we reaffirm our wholehearted support for permanent reenactment of tax

code Section 127, to cover both undergraduate and graduate courses. Employee educational assistance (EEA), alongside Pell Grants, represents in our view the best

competitiveness strategy Congress has yet devised. We do not say this idly, because

we see these federal landmarks at work in students’ lives every day.

EEA is federalism at its best. It leverages private investment and promotes individual initiative, with very real dividends for both the economy and society, with

a minimum of governmental regulation and paperwork. It also resonates with capitalism. More and more business leaders, as well as economists, are recognizing that

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the long-term success of most ventures is chiefly dependent on the quality of the

human capital.

It seems obvious to us that EEA deserves a large share of credit for the exceptional performance and productivity of the American workforce in the 1980s and

90s, in the face of intense labor cost pressures from the Pacific Rim and Latin America, and in spite of glaring deficiencies in our school systems as gauged by the global

rank of our students in math and science. This simply underscores the importance

of access to lifelong learning, at which the U.S. easily ranks first. EEA is the touchstone of that access. Thanks to EEA and Pell Grants, the American Dream is still

open to nearly all who are willing to assert themselves. Of course, we should not

overlook the contributions that vocational rehabilitation, special education, and vocational education also make to such access.

Some may wonder why our community college student network supports EEA for

graduate students. Again the answer is lifelong learning. It will be women and older

workers who will be hurt most if workers with bachelor or higher degrees are denied

EEA. Career-wise, college degrees have far less staying power than they once had.

Because women so frequently interrupt their careers to fulfill family agendas, they

have become the majority of workers using EEA. Mothers should not be penalized

because their bachelor’s degree lost job value while they were raising children.

Critics who believe EEA is widely abused by high-paid employees pursuing professional degrees are not supported by the facts. As the Department of Education demonstrated in the 1993 NPSAS study, EEA reimbursements averaged only about onefourth the annual limit of $5,250. Such an average suggests that the reimbursement

in most cases covered a single course within the tax year—hardly a fast track to

any professional degree. NPSAS also showed that reimbursements ran higher averages among workers of the 24–33 age groups—those most often struggling to solidify

their careers, one course at a time.

The employer’s self interest is a reliable safeguard against abuse. Only the

courses that bear directly on the employee’s productivity are likely to be approved

by profit-minded bosses. Courses that merely feed personal ambition are much less

likely to be funded, at least in the private sector.

Career longevity may well be the most compelling argument of all for Section 127.

It was shown years ago that workers with a college degree, either two-year or fouryear, typically stayed four to five years longer on the job, or in self-employment,

than workers with only a high school education. Without even factoring in the higher earning power of the college education over the high school education, when tax

revenue is computed from the extra years in the workforce, the relatively modest

federal investment in EEA is repaid a hundred-fold, or more. More—because the

added years in the workforce cut significantly the prospective federal burden of such

social costs as welfare, unemployment insurance, Social Security and Medicaid.

II. TUITION TAX CREDITS

Middle-income families and students are losing ground steadily in the struggle to

meet college costs, and the best remedy is tax relief. We strongly support the proposed $1,500 federal tax credit, the so called Hope Scholarships, for the first two

years of college.

ASACC takes this stand with two qualifications: Safegaurds must be enacted both

to keep the IRS from more heavily policing the lives of students, families and institutions involved in the tax credit process, and to ensure that the value of the tax

credits is not nullified by more escalation of college costs beyond the general rate

of inflation. The original intent of Pell Grants and student loans, i.e., to universalize

access to postsecondary learning, has been largely eroded by the steady escalation

of college costs in excess of the general rate of inflation. The higher education community has a responsibility to the national interest to do more to rein in costs to

students, and to make their programs still more accessible and convenient to their

job-holding clientele, which is now the dominant population in higher education. As

a national average, 80 percent of the students in community colleges hold full-time

or part-time jobs, and a growing number are taxpayers with college degrees who are

pursuing new job skills. This underscores again the significance of employee educational assistance.

Because there is a growing gap between the college participation of students from

high-income homes and those lower on the income scale, the tax credit should be

targeted toward students and families at the middle and lower incomes. For this

reason, the credit should not be offset by Pell Grants, SEOG, or state assistance,

but should be limited only by total cost of attendance. For community college students, the cost of books for a term often exceeds the cost of tuition and fees. This

is another issue that deserves close scrutiny by the Congress. The credit should be

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available to students doing three credit hours or more per term at an accredited institution, who meets institutional standards of academic progress. Restricting eligibility to those with a B grade-point average poses an administrative nightmare for

institutions and government alike. Federal regulation and paperwork must be held

to the absolute minimum if the program is to succeed.

Our appreciation, Mr. Chairman, for making our views part of the Committee

record on tax reform. Our thanks also to Frank Mensel, ASACC National Policy Advisor, for his assistance in the preparation of this testimony.

House Ways and Means Committee for holding hearings on incentives to encourage

The Computing Technology Industry Association (CompTIA) congratulates the

Statement of Computing Technology Industry Association

f education and training. CompTIA believes that productive investment in education

and training are critical to maintaining US economic strength. While it is also important to encourage investment in research and development and investment in

other productive assets, our nation’s most important asset is our people. Your hearings will help focus national attention on a variety of proposals, all of them constructive, intended to encourage investment in education and training both directly

and indirectly. Both thoughtful Republican members and Democratic members deserve the thanks of business and voters for their thoughtful focus on the issue.

The Administration deserves much credit for drawing public attention to this im- portant priority. President Clinton’s proposed $1,500 student tuition training tax

credit would facilitate the training of technicians in the computing technology sector. It could strengthen training programs available through public and private

schools, colleges, universities, companies and associations. The proposed $10,000 college tuition deductions would also help train needed engineers and other skilled professionals for our industry.

CompTIA suggests that continuously updated objective rating criteria be applied

to the many constructive proposals that have been offered and to additional proposals that will be suggested. That criteria should be return on the taxpayer’s investment in education and training. As important as education and training incentives

and tax credits may be, we do not believe that they should be exempted from from

the same scrutiny that both federal spending and other tax incentives face in an

era of budget austerity.

During the legislative process the many proposed education and training incentives will face budgetary challenges. If revenue losses must be reduced because of

budget priorities, we urge the committee to restrict the education incentives and

training tax credit eligibility to job categories where the wages are highest and the

supply of workers the lowest. Eligibility should be limited to training for those skills

for only so long as the shortage exists but should not be arbitrarily limited by who

pays or the provider.

There is a growing shortage of workers at the doctoral level and as well as at the

technician level in the computing technology industry. Compensation is excellent at

all levels. The objective should be to provide the appropriate type of education or

training required to relieve the shortage. As an example the Computing Technology

Industry Association sponsors the A+ voluntary computer technician certification

program, which has become the U.S. core skills standard and is rapidly becoming

the international standard. Standards are set and continuously upgraded by a committee of industry training leaders, other trade associations, training companies,

service providers, industry consultants, and academia. Many major computer manufacturers require that all technicians providing their warranty work possess this

certification. The cost of training which prepares workers to pass this rigid certification examination should be eligible for training credits. Individuals and businesses should both be eligible for credits and deductions.

Organizations demonstrating that they have in place the type of training to teach

these needed skills should be recognized as eligible for the credit whether they be

a university, community college, private school, trade association, or a company.

This would result in the expeditious reduction of the worker shortages and recovery

of the investment in education and training through increased personal and corporate income taxes generated as a result of the programs. Once this or any other

skill shortage has been eliminated, the additional educational tax incentives for that

skill should be terminated. As new shortages develop they would become eligible for

the educational incentives and training credits once they reach the trigger level.

Some educational investments meet the return on investment criteria by their

very nature. For example when an employer invests in an employees education or

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training it is almost certainly done because there is a demand for the newly acquired skills which result. For that reason we believe that the extension of section

127, the employee educational assistance exclusion, should be a part of any education and training package. A balance of educational investment incentives and

capital investment incentives such as the R&D tax credit coupled with fiscal spending restraint, will form three legs of a balanced platform need to propel the US

economy into the next millennium.

Founded in 1984, the Computing Technology Industry Association represents over

6,300 microcomputer resellers, distributors, manufacturers, software publishers and

service companies. CompTIA is a growing vertically integrated computing sector

trade association focused on training and education, technical standards, and on

promoting public policy that will contribute to US technological leadership.

The Section 127 Coalition is a diverse group of business, labor, and education orStatement of Section 127 Coalition

f ganizations that are committed to making the exclusion for employer-provided educational assistance found in section 127 a permanent part of the tax code. The Coalition appreciates the opportunity to submit this written statement as the House

Committee on Ways and Means considers the education and training provisions contained in the Administration’s Fiscal Year 1998 budget proposal to Congress.

Section 127 allows workers to exclude up to $5,250 a year in reimbursements or

direct payments for tuition, fees, and books for certain courses. Section 127 was last

extended, retroactively, for the period January 1, 1995 to July 1, 1997 in the Small

Business Job Protection Act of 1996 (P.L. 104–188). After July 1, 1996, however,

graduate courses can no longer be excluded from taxable income under section 127.

H.R. 127 has been introduced in the 105th Congress by Representatives Clay Shaw

(R–FL), and Sander Levin (D–MI) and enjoys broad bipartisan support. This legislation would make section 127 a permanent part of the tax code and reinstate section

127 retroactively back to July 1, 1996 for graduate courses. President Clinton’s Fiscal Year 1998 budget proposal to Congress also contains an extension of section 127

through December 31, 2000 for both undergraduate and graduate courses.

Congressional action making section 127 a permanent part of the tax code would

remove the uncertainty and ambiguity that employees and employers now regularly

face, and would be consistent with the intent of Congress when the provision was

first enacted in 1978. At that time, supporters of employer-provided educational assistance hoped that the enactment of the provision would meet three broad goals:

(1) reduce the complexity of the tax code; (2) reduce possible inequities among taxpayers; and (3) remove disincentives to upward mobility. Several studies have been

conducted on section 127 reviewing the application, use, and effectiveness of the

benefits. The two most recent studies on employer-provided educational assistance

include a 1995 study conducted by the National Association of Independent Colleges

and Universities (NAICU), entitled ‘‘Who Benefits from Section 127,’’ and a Government Accounting Office (GAO) study completed in December of 1996 entitled, ‘‘Tax

Expenditures: Information on Employer-Provided Educational Assistance’’ (GAO/

GGD–97–28). Review of the information contained in these studies clearly demonstrates that the provision is meeting the original intent of Congress.

Reduce the Complexity of the Tax Code—Prior to 1978, only educational assistance provided by an employer to an employee that related to the individual’s job

was excluded from an employee’s gross taxable income (sections 62 and 132 of the

Internal Revenue Code). The ‘‘job-related’’ test contained in Treasury Regulation

1.162–5 was confusing to both employers and employees and resulted in both the

Internal Revenue Service and the courts making arbitrary decisions as to what type

of employer-provided educational assistance successfully met the test of job-relatedness. Unlike other code sections that govern educational assistance, section 127 does

not require either an employer or employee to make a distinction between job-related and non-job related educational assistance in order for the employee to receive

the assistance. Section 127 therefore ensures that administrative complexity is reduced and clarity is achieved for both the employer and employee. If Congress fails

to reinstate section 127, employers and employees again will be faced with the difficult task of determining whether educational assistance meets the ‘‘job-relatedness’’ test. As a result, the balance and equity among taxpayers that has been established through section 127 would be eliminated and the opportunities for less-educated and skilled employees to improve their skills with additional training would

be restricted significantly.

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Reduce Possible Inequities Among Taxpayers—This goal was especially important

to Congressional sponsors of section 127. Under the job-related test of sections 62

and 132, most entry-level employees are unable to claim an exclusion for an educational expense because their job descriptions and responsibilities are not broad

enough to meet the test. In effect, only highly skilled individuals are able to use

job-related educational assistance. The goal of section 127 is to allow employees in

lower-skilled positions the opportunity to receive educational assistance from their

employer and for these individuals to utilize the benefit without the worry of the

job-related test. According to the NAICU study, 43.6% of section 127 beneficiaries

were in clerical or secretarial positions.

Like any other benefit, employers are not required to provide section 127 benefits

to their employees. If an employer chooses to provide educational assistance benefits

to its employees, the employer must offer the benefits to all employees on a nondiscriminatory basis that does not favor the highly compensated. This requirement,

together with information from various studies, indicates that lower-skilled individuals are utilizing the benefit at a greater rate than those in more skill-intensive professions.

Remove Disincentives to Upward Mobility—While section 127 provides the opportunity for individuals to advance, it does not guarantee it. Recipients of section 127

are not traditional students: they are working, most of them in a full-time capacity.

They choose to return to school on a part-time basis to improve their skills and educational qualifications. Without their employer’s assistance, many of these individuals would not be able to pay for the education themselves. Each time the provision

expires and employers begin to withhold taxes on the benefit, individuals relying on

section 127 discontinue or scale back their undergraduate and graduate educational

pursuits because they cannot afford to even pay the taxes on the benefit. According

to the NAICU study, 33 percent of section 127 recipients were pursuing associate

degrees, 23 percent were in bachelor’s degree programs, and 13 percent were enrolled in programs that awarded undergraduate educational certificates. According

to this same study, nearly 85 percent of section 127 recipients earned less than

$50,000 and 50 percent of the recipients earned less than $32,000. Clearly those

who section 127 was intended to benefit are using this opportunity to upgrade their

skills, keep current in this rapidly changing technological environment, and potentially advance within their organization.

As Congress debates the role of the federal government in education, there are

some important points to consider when contemplating a permanent extension of

section 127:

Section 127 is Not a Government Program—This is a purely private sector initiative and the most significant provision encouraging employer investment in their

worker’s continuing education. There is no large bureaucracy to administer the program. Like any other benefit, employers are not required to provide section 127 benefits to their employees. Nevertheless, employers provide these benefits to their employees because they see value and a return on the investment in their employees’

education. Employees use section 127 benefits to keep current with changing trends

in rapidly advancing fields as well as to improve basic skills.

Section 127 Encourages Business Support and Partnership of Education Initiatives—This provision is a good proposal for employers and employees alike, encouraging partnerships between a company and its individual employees. Companies see

section 127 benefits as a prudent and an economically sound investment in its workforce because they receive, in return, a better educated and more technically skilled

worker. Employees view section 127 as a way to improve their work skills and advance up the ladder of success. These benefits also provide companies with additional flexibility when conducting a reengineering or downsizing effort since educational assistance may be offered through an outreach program to their laid-off

workers or be used to retrain employees for other positions.

Moreover, a recent survey of economists suggests that additional funding for education as well as research and development are the most significant policies needed

to boost the wages of lower-paid workers and increase the long-term economic

growth rate.

The Coalition applauds the bipartisan efforts to make section 127 permanent. The

Small Business Job Protection Act reinstated section 127 once again—the eighth

time that the provision has been extended since it was first enacted as part of the

Revenue Act of 1978. Every extension of section 127 has been retroactive. The onagain, off-again extension of section 127 causes uncertainty in the tax code, creates

administrative difficulties for employers, corrodes our system of voluntary compliance with the tax laws, and leaves employees with unanticipated tax liabilities.

The continued education and development of the U.S. worker are fundamental to

meeting the challenges of the international marketplace. The Coalition urges ConVerDate 11-SEP-98 10:34 Oct 05, 1999 Jkt 057910 PO 00000 Frm 00166 Fmt 6621 Sfmt 6602 D:57910 W&M3 PsN: W&M3
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gress to make a commitment to the continuing education of our work force by reinstating the exclusion for graduate courses and making section 127 permanent.

Thank you for this opportunity to express our support for the permanent extension of section 127.

This statement has been endorsed by the following organizations:

American Association of Community

Colleges

American Association of Engineering

Societies

American Association of University

Professors

American Council on Education

American Federation of State, County

and Municipal Employees

American Federation of Teachers

American Society of Civil Engineers

American Society for Engineering

Education

American Society for Payroll

Management

American Society for Training and

Development

American Society of Mechanical

Engineers

American Student Association of

Community Colleges

AMP Incorporated

Associated General Contractors of

America

Association of Community College

Trustees

California Institute of Technology

Caterpillar, Incorporated

Ceridian Corporation

College and University Personnel

Association

Council for Adult and Experiential

Learning

Council of Graduate Schools

Institute of Electrical and Electronics

Engineers-United States Activities

International Personnel Management

Association

Johns Hopkins University

Land O’ Lakes Corporation

Marymount University

National Alliance of Business

National Association of College and

University Business Officers

National Association of GraduateProfessional Students

National Association of Independent

Colleges and Universities

National Tooling and Machining

Association

New York University

NYNEX

Raytheon Company

Society for Human Resource

Development

Telephone and Data Systems, Inc.

The Women’s College, University of

Denver

United Technologies Corporation

University Continuing Education

Association

University of Miami

University of Michigan

U.S. Chamber of Commerce

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