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The sweeping budget deal signed into law by President Trump on Friday contains provisions that would exempt specific colleges from taxes and regulations governing higher education. As first reported by Politico, the deal protects Berea College from a tax on its endowment earnings and exempts Southeast Kentucky Community and Technical College from a minimum performance threshold prescribed by law. Both institutions are located in Kentucky, the home state of Senate Majority Leader Mitch McConnell.
No provision in the budget deal mentions Berea College or Southeast Kentucky Community and Technical College by name. Yet thanks to the incredibly complicated rules governing how American colleges are taxed and regulated, lawmakers were able to create narrowly-targeted exemptions for these schools anyways.
Under the tax reform bill passed last year, private nonprofit colleges are subject to a 1.4% excise tax on the net investment income of their endowments. However, the tax only affects schools which enroll more than 500 students, have endowment assets of over $500,000 per student, and enroll more than 50% of their students in the United States. Those parameters narrow the number of schools subject to the endowment tax to less than thirty.
In the budget deal, lawmakers simply added an item to this long list of qualifications: the school must enroll more than 500 tuition-paying students. Though it technically does not single out a particular school, in practice the new provision exempts just one institution from the tax: Berea College.
Lawmakers pulled a similar trick with a rule designed to shut poor-quality schools out of taxpayer-funded student aid programs. Under the law, no college with a student loan default rate above 30% for three consecutive years may continue to receive federal student aid funds. For the past three years, Southeast Kentucky Community and Technical College has had a default rate of at least 32%. This made the school one of just six institutions subject to a loss of federal funds for a high default rate this year.
Once again, the complexity of federal laws interferes. Schools with high default rates can maintain access to federal subsidies under certain “mitigating circumstances,” defined by a complex set of conditions. In the budget deal, lawmakers simply added a few more: colleges that are (1) publicly owned, (2) offer associate’s degrees, and (3) are located in counties in the bottom 5% of economic performance nationally can maintain eligibility for federal student aid despite high default rates. Again, there was no need to mention Southeast Kentucky Community and Technical College by name, but the carveout saved the school anyways.
As laws and regulations governing higher education grow more complex, it’s easy for lawmakers to squeeze in exemptions for politically favored institutions. To do higher education accountability right, rules should be simple. Policymakers should decide on a standard and apply it to everyone equally, without exemptions or differing performance floors. Otherwise, eleventh-hour budget deals will continue to reek of political favoritism.
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