[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]



 
 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


                                


                      U.S. GOVERNMENT PRINTING OFFICE
 57-910 CC                   WASHINGTON : 1999
------------------------------------------------------------------------------
                   For sale by the U.S. Government Printing Office
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                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        BARBARA B. KENNELLY, Connecticut
JIM BUNNING, Kentucky                WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri

                     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.



                            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



 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:]

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 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 
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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/WAYS__MEANS/'.
      

     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.
      

                                


    Chairman Archer. The Committee will come to order. Today 
marks the first of several hearings on the revenue proposals in 
the 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 
out-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:]

Opening Statement of Hon. Bill Archer, a Representative in Congress 
from the State of Texas
[GRAPHIC] [TIFF OMITTED] T7910.001

      

                                


    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.
    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:]
    [GRAPHIC] [TIFF OMITTED] T7910.002
    
      

                                


    Chairman Archer. Our first witness is Hon. Charles Rangel, 
the Ranking Democrat on the Committee. We are happy to have you 
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. 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.
    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.
    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.
    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 in-state 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.
    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.
    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.
    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 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 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.]
    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 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 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 current 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 Archer. Thank you, Congressman Price.
    Congressman Etheridge, you may proceed.

 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 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 opportunity 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.
      

                                


    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 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.
    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 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.
    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 
infrastructure 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 
comments 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 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 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.
    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 run-
through 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:]

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\
---------------------------------------------------------------------------
    \1\ The 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.
---------------------------------------------------------------------------
    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 
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 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 tax-free 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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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 
contributions 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 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.
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
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 non-means 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.
---------------------------------------------------------------------------
    \4\ The 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.
---------------------------------------------------------------------------

                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.
[GRAPHIC] [TIFF OMITTED] T7910.003

      

                                


    Chairman Archer. Mr. Lubick, thank you for summarizing what 
we realize is a complex and comprehensive proposal. I am sure 
the 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?
    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 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.
    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 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.
    [The following was subsequently received:]

    
    
    [GRAPHIC] [TIFF OMITTED] T7910.024
    
      

                                


    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. Ninety-five 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.
    As a result, most part-time students--and the majority of 
part-time 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.
    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 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 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?
    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.
    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 tax-free 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?
    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.
    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 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 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.
    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.
    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:]
[GRAPHIC] [TIFF OMITTED] T7910.025

      

                                


    [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.
    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 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.
    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 second-semester 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 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 
recommends 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. Ramstad. Thank you--Mr. or Dr. Gladieux.
    Mr. Gladieux. Mister.
    Mr. Ramstad. I don't want to handout Ph.D.s gratuitously 
here.
    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 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 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 four-year 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 college-age 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\
    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 
means-tested 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 need-based 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.

                     The Administration's Proposal

    The President has proposed two major changes to the way we 
finance higher education: 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 non-refundable 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 ``half-time'' 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'' 
requirement 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.

                                 Equity

    Many have criticized the plan for providing large subsidies 
to middle and higher-income 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 long-standing 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 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 means-testing. Most of our current 
financial aid programs are provided on a ``backward-looking'' 
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, forward-looking 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--in-
school 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 reconsidered 
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
----------------------------------------------------------------------------------------------------------------
                                                                                               Total Benefit:
                                                             Add'l                         ---------------------
                Unadjusted Family Income:                     Pell       Tax        Tax      First 2     Later
                                                             Grant:    Credit:    Deduct:      Yrs       Years
                                                                                             College:   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.
    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. Ramstad. Thank you, Mr. Kane.
    Dr. Schapiro.

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.
    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 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 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 benefits. 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 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 non-economic 
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.
      

                                


    Mr. Ramstad. Thank you, Dr. McPherson. And also I just 
wanted to say that we're very, very pleased we were able to 
lure you from Williams College to accept the presidency of 
Macalester last summer. 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 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 
direct, $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 
these programs. Indeed, I will argue that the result of this 
legislation will be increased 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 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.
---------------------------------------------------------------------------
    \1\ On 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.
---------------------------------------------------------------------------
    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.
    Thank you for giving me the opportunity to share these 
thoughts with you.
      

                                


    Mr. Ramstad. Thank you, Dean Breneman, and again, to all 
the witnesses, our gratitude for being here today.
    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.
    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?
    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.
    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 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 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 administration'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 guess in this case, are you saying the Pell 
grant operates differently 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.
    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 
students 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.
    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 4\1/2\ percent real. They're now 2\1/2\ 
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, 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 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. 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 
low-income 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.
    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.
    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 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 low-income 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.
    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 
student aid programs, particularly to alleviate the financing 
burdens of the middle-class 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 program, 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 need-based 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 regard 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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   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

    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.
    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 feeling 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.
    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, non-profit 
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.
                           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 eligible 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, off-again 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 identical 
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.
[GRAPHIC] [TIFF OMITTED] T7910.026


Importance of Need-Based Financial Aid Programs

    Finally, I would like to touch briefly upon the importance 
of the traditional need-based student aid programs found in 
Title IV of the Higher Education Act. Since 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. 
[GRAPHIC] [TIFF OMITTED] T7910.020

[GRAPHIC] [TIFF OMITTED] T7910.021

      

                                


    STATEMENT OF OMER E. WADDLES, PRESIDENT, CAREER COLLEGE 
                          ASSOCIATION

    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.
    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 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 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 institutions 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 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 affluent 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 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.
      

                                

                             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 
[GRAPHIC] [TIFF OMITTED] T7910.022

      

                                


    Mr. Hulshof. Mr. Waddles, thanks for your perspective from 
the Career College Association.
    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.
    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.
    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 well-being. 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 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.
    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 low- and 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.
     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 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 middle-income 
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 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 non-refundability 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.
      

                                


    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.
    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 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 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 
on-again 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 part-time 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 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.
    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 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 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 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.
    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 critical 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 drug-related 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 extending 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 low- and 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 middle-
income 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 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 
need-based 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 low- and 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 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.
      

                                


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 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 non-refundable 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.

                 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

    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 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 one-
fourth 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 four-year, 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 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.
      

                                


Statement of Computing Technology Industry Association

    The Computing Technology Industry Association (CompTIA) 
congratulates the House Ways and Means Committee for holding 
hearings on incentives to encourage 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 important 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 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.
      

                                


Statement of Section 127 Coalition

    The Section 127 Coalition is a diverse group of business, 
labor, and education organizations 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.
    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 on-again, 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 Congress 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 Graduate-Professional 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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