Tuition Containment: A New Approach

By Richard Vedder

It is business as usual at American universities when it comes to tuition charges according to the latest reports released by the College Board, and it is infuriating for many. I have long opposed full blown price controls where markets operate freely, although this is clearly not the case in higher education. There is, however, an intermediate approach to full blown controls worthy of market.

Colleges and universities that increase their tuition fees in any given year by more than the three year moving average growth in median family income (maybe median household income), will start losing their federal tax exemption. When I say "lose their exemption" I mean: some endowment income including capital gains would be subject to taxation; annual gifts to universities would lose some tax deductibility to the donor; bequests upon death would be taxable and, possibly, even, universities would become subject to corporate income taxes.

Here is how it would work. Suppose the 3 year moving average of median family income is rising 4 percent a year. Colleges could raise their fees 4 percent or less without penalty. They would pay penalties for bigger increases. Say they lose 2.5 percent of their exemption for each 0.1 percentage point tuition increases exceed the family income threshold (4 percent in this example). If a school raises tuition 5 percent, it loses 25 percent of its exemption; 7 percent, it loses 75 percent; 8 percent it loses the entire exemption.

Are there some problems with this approach? There are literally dozens of them. Are they resolvable? I think the answer is yes. Universities seeking privileged tax status would have to play by the rules. A school wanting to raise tuition fees 15 percent could do so –but only at a high price.