Ivy League Tax Problems
Ernie Neve, CPA
November 22, 2017
They say that "what goes up must come down." But that's not true when it comes to college costs. U.S. News reports the average private college tuition stood at $16,233 back in 1997-98 — roughly $24,973 in 2017 dollars. But the same tuition today costs $41,727. And that's before pricing in luxuries like, you know, meals, and a place to sleep. In-state college costs are rising even faster as legislatures cut budgets for higher education. That means colleges are increasingly turning to alternate funding sources, including their endowments.
In academia, though, as in so many other parts of our "winner take all" society, there's the 1%, and there's everyone else. America's richest 800 colleges and universities hold over $500 billion in endowments, which sounds like there should be plenty to help supplement tuition and fees. But the top 1% of schools hold over $10 billion each, and 11% of schools hog 74% of those assets. That leaves the Faber Colleges of the world essentially fighting over scraps. ("Knowledge is good.")
Now, the Phi Beta Kappas who write our tax code have turned their green eyeshades towards those mammoth pools of tax-free wealth. Both the House and Senate tax bills working through Congress would impose a 1.4% excise tax on net investment income of private colleges holding more than $250,000 per student. That group includes about 70 schools, including obvious targets like Harvard, Yale, and Princeton. At the same time, the proposal spares public school systems with big endowments like the Universities of Texas ($25.4 billion), Michigan ($9.7 billion), and California ($7.4 billion).
It's true that if any schools have "too much money" (LOL), it's the top-shelf Ivies. Harvard's endowment started in 1638 with £779 and 400 books. Over the next 379 years, it's grown to over $37 billion (and 16 million books), leading critics to call it a hedge fund with a university attached. In 2015 that fund grew by just 5.8%, compared to rival Yale's 11.5%. But Harvard Management Company paid its chief executive a whopping $14.9 million, with his deputy taking home $11.6 million. (And you thought college football coaches were overpaid!)
Academic endowments have grown so large that they're starting to use some of the same tax strategies as the richest individuals. The New York Times recently exposed how colleges use offshore entities to boost earnings, including "blocker corporations" that let them avoid tax on debt-financed "unrelated business taxable income." (Trust us, those UBTI rules are even more boring and technical than they sound.)
But naturally, academics are irate at the proposal, rolling up their leather-patched tweed sleeves and prepping for a (genteel) fight. "Endowments support substantial student aid and student service programs, and provide funding for instruction, research, and for building and maintaining classrooms, labs, libraries, and other facilities," said the Association of American Universities. At Princeton (the #1 target with $2.5 million per student), undergraduates from families earning under $56,000 pay no tuition, room, or board, while those from families earning under $160,000 pay no tuition.
Here's the good news. You don't have to be an Ivy League university — or even have an Ivy League education — to save big on your tax bill. You just need a proactive plan. So call us when you're ready for some real-world lessons on how to pay less!