[Senate Hearing 112-803]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 112-803
 
                EDUCATION TAX INCENTIVES AND TAX REFORM 

=======================================================================

                                HEARING

                               before the

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 25, 2012

                               __________
                                    

            Printed for the use of the Committee on Finance

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                          COMMITTEE ON FINANCE

                     MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West         ORRIN G. HATCH, Utah
Virginia                             CHUCK GRASSLEY, Iowa
KENT CONRAD, North Dakota            OLYMPIA J. SNOWE, Maine
JEFF BINGAMAN, New Mexico            JON KYL, Arizona
JOHN F. KERRY, Massachusetts         MIKE CRAPO, Idaho
RON WYDEN, Oregon                    PAT ROBERTS, Kansas
CHARLES E. SCHUMER, New York         MICHAEL B. ENZI, Wyoming
DEBBIE STABENOW, Michigan            JOHN CORNYN, Texas
MARIA CANTWELL, Washington           TOM COBURN, Oklahoma
BILL NELSON, Florida                 JOHN THUNE, South Dakota
ROBERT MENENDEZ, New Jersey          RICHARD BURR, North Carolina
THOMAS R. CARPER, Delaware
BENJAMIN L. CARDIN, Maryland

                    Russell Sullivan, Staff Director

               Chris Campbell, Republican Staff Director

                                  (ii)



                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

                                                                   Page
Baucus, Hon. Max, a U.S. Senator from Montana, chairman, 
  Committee on Finance...........................................     1
Hatch, Hon. Orrin G., a U.S. Senator from Utah...................     3

                               WITNESSES

Cruzado, Dr. Waded, president, Montana State University, Bozeman, 
  MT.............................................................     5
Munson, Lynne, president and executive director, Common Core, 
  Washington, DC.................................................     8
Dynarski, Dr. Susan, professor of public policy and education, 
  University of Michigan, Ann Arbor, MI..........................    10
Hodge, Scott, president, Tax Foundation, Washington, DC..........    11
White, James, Director, Tax Issues, Government Accountability 
  Office, Washington, DC.........................................    13

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:
    Opening statement............................................     1
    Prepared statement...........................................    33
Cruzado, Dr. Waded:
    Testimony....................................................     5
    Prepared statement...........................................    35
Dynarski, Dr. Susan:
    Testimony....................................................    10
    Prepared statement...........................................    39
Grassley, Hon. Chuck:
    ``Who Benefits from Student Aid? The Economic Incidence of 
      Tax-Based Federal Student Aid,'' by Nicholas Turner, 
      University of California, San Diego, October 20, 2010......    51
    ``Administrators Ate My Tuition,'' by Benjamin Ginsberg, 
      Washington Monthly, September/October 2011.................   100
    ``Tax Arbitrage by Colleges and Universities,'' CBO Study, 
      April 2010.................................................   110
Hatch, Hon. Orrin G.:
    Opening statement............................................     3
    Prepared statement...........................................   131
Hodge, Scott:
    Testimony....................................................    11
    Prepared statement...........................................   133
Munson, Lynne:
    Testimony....................................................     8
    Prepared statement...........................................   144
White, James:
    Testimony....................................................    13
    Prepared statement...........................................   152

                             Communications

American Council on Education (ACE)..............................   161
American Institute of Certified Public Accountants (AICPA).......   168
Center for Fiscal Equity.........................................   175
Coalition to Preserve Employer Provided Education Assistance.....   177
College Savings Foundation.......................................   181
College Savings Plans Network (CSPN).............................   185
National Association of Home Builders............................   195
National Education Association (NEA).............................   203
Rebuild America's Schools........................................   206
United Technologies Corporation..................................   207


                       EDUCATION TAX INCENTIVES 
                             AND TAX REFORM

                              ----------                              


                        WEDNESDAY, JULY 25, 2012

                                       U.S. Senate,
                                      Committee on Finance,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 10:10 
a.m., in room SD-215, Dirksen Senate Office Building, Hon. Max 
Baucus (chairman of the committee) presiding.
    Present: Senators Bingaman, Wyden, Hatch, Grassley, Snowe, 
and Thune.
    Also present: Democratic Staff: Russ Sullivan, Staff 
Director; Tiffany Smith, Tax Counsel; and Lily Batchelder, 
Chief Tax Counsel. Republican Staff: Chris Campbell, Staff 
Director; Jim Lyons, Tax Counsel; and Chris Hanna, Senior Tax 
Policy Advisor.

   OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR FROM 
            MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

    The Chairman. The hearing will come to order.
    Benjamin Franklin once said, ``An investment in knowledge 
always pays the best interest.''
    For more than a century, America has invested in education, 
and this investment has paid ample dividends. For older 
generations, up to age 64, the United States ranks second in 
the world in college graduation rates. But for younger 
generations, the United States is slipping. For those ages 24 
to 35, the United States has fallen to 16th in the world. And 
in today's global economy, an education is even more important 
than ever.
    In these tough economic times, as job markets get even more 
competitive, this is even more apparent. And yet, American 
families face skyrocketing college costs. In the last 2 
decades, the price of higher education has grown at 19 percent 
a year, 4 times faster than inflation. College costs are 
growing at twice the pace of medical care.
    These rising costs hit low-income families especially hard. 
A low-income family has to spend the equivalent of 72 percent 
of its income to send a child to college. Compare that to 14 
percent for a higher-income family.
    This debt burden often deters young people from going to 
college at all and has harmful ripple effects throughout our 
economy. Differences exist even for students with similar high 
test scores. Students from high-income backgrounds were about 
32 percent more likely than those with the same test scores but 
from low-income backgrounds to enroll in college.
    That means some of our best and brightest students never 
have the opportunity to develop their talents. This leads to 
fewer scientific breakthroughs, fewer innovative companies, and 
a weaker overall economy.
    Since 1954, Congress has provided tax cuts for families 
with children pursuing a college education. These provisions 
help families cover past, present, and future expenses. The 
student loan interest deduction provides students a tax 
deduction for interest paid on a student loan.
    The tax code also encourages families to save for future 
education expenses by providing tax-free savings vehicles. 
Five-twenty-nine programs and Coverdell accounts allow families 
to save for college without paying taxes on the earnings. 
Distributions from these accounts can be used to pay education 
expenses.
    The tax system provides the most tax benefits for current 
expenses. Under our current tax system, there are helpful 
provisions that exclude certain financial assistance from 
income. For example, scholarships and fellowships that cover 
qualifying education expenses are excluded from income of the 
student. The tax code also contains credits and deductions to 
help students pay for current expenses.
    The code cannot solve our educational challenges on its 
own, but it plays an important role. In 2009, taxpayers claimed 
almost $30 billion in education tax cuts, making college more 
affordable. This equates to about 22 percent of the assistance 
received through Federal grants and loan assistance.
    That same year, 2009, we expanded these education tax 
benefits by passing the American Opportunity Tax Credit. As a 
result, 4.8 million more lower-income students and families had 
access to college subsidies.
    These expansions are critical to ensuring that American 
families can afford college. This is particularly true in my 
home State of Montana. Montana has a higher proportion of 
lower-income students than other States. As a result, many 
Montanans only benefit from tax benefits that are partially 
refundable, like the American Opportunity Tax Credit. In 2010, 
Montanans claimed nearly $105 million in education tax credits 
and deductions to help offset the cost of college.
    But the multitude of education tax benefits can result in 
complexity and confusion for American families. Under current 
law, there are eight separate tax expenditures--that is, 
deductions and credits and so forth--eight separate tax 
expenditures related to higher education, and these benefits 
use five different definitions of ``eligible expenses.''
    The chart to my right, behind me, gives an example of the 
complexity and the questions asked of taxpayers when they are 
trying to calculate what provisions qualify. And I might say, 
at this point, this is IRS Publication 970. It is entitled Tax 
Benefits for Education for Use in Preparing 2011 Returns. This 
is just with respect to tax provisions. I do not think 
anybody--very few people read it.
    Taxpayers must calculate their taxes using each tax cut to 
determine which one works best. It is a little bit like the 
AMT--you have to figure which one works best here.
    Behind me on this chart is an actual IRS questionnaire--I 
just referred to it--that families need to fill out to 
determine if they are eligible for an education tax credit. 
This is just one page from an 87-page IRS guide for obtaining 
education tax credits.
    Based on the complexity of this guide, one would think the 
IRS expected all of America's future students to want to major 
in accounting. The Government Accountability Office will tell 
us today how this complexity affects families. They have found 
that many families often pick the wrong benefit and leave money 
on the table.
    Kelly McInerney is a CPA in Fairfield, MT. Kelly is the 
mother of four college-aged kids and knows firsthand how 
complicated these tax benefits can be. Kelly says many families 
she works with do not realize that they can claim credits for 
tuition paid for with student loans. As a result, they get less 
help than they are eligible for. This can make the difference 
between being able to send a kid to college or not.
    We obviously need to make the system simpler for families. 
We should improve these benefits for the students. Through tax 
reform, we need to look at how we can achieve the greatest bang 
for our buck. Our system has to work a lot better to make sure 
we do not lose our competitive edge. Let us listen to Ben 
Franklin's advice that investment in knowledge will pay the 
best interest.*
---------------------------------------------------------------------------
    *For more information, see also, ``Background and Present Law 
Relating to Tax Benefits for Education,'' Joint Committee on Taxation 
staff report, July 23, 2012 (JCX-62-12), https://www.jct.gov/
publications.html?func=startdown&id=4474.
---------------------------------------------------------------------------
    [The prepared statement of Chairman Baucus appears in the 
appendix.]
    Senator Hatch?

           OPENING STATEMENT OF HON. ORRIN G. HATCH, 
                    A U.S. SENATOR FROM UTAH

    Senator Hatch. Thank you, Mr. Chairman.
    The focus of today's hearing is narrow, but it is a very 
important one: the role of education incentives in our tax 
code. Traditionally, the Federal Government has supported 
millions of individuals seeking higher education through grants 
and loans. Over the last 15 years, however, Federal support for 
higher education has increasingly relied on incentives in the 
tax code. These education tax incentives can generally be 
classified into one of three categories.
    The first category includes tax incentives for current 
expenditures for higher education. These incentives include the 
Hope, American Opportunity, and Lifetime Learning credits; a 
deduction for higher education expenses; and the exclusion for 
scholarships and fellowships.
    The second category includes tax incentives for student 
loans. These incentives include the deduction for interest paid 
on student loans and the exclusion from income for certain 
student loans that have been forgiven.
    The third category includes tax incentives for savings for 
college. These incentives include qualified tuition plans, 
generally referred to as 529 plans; Coverdell plans; education 
savings bonds; and IRA withdrawals to pay for college expenses 
without penalty.
    Generally, two reasons have been given for the various 
education tax incentives. First, college education costs are 
increasing and are a barrier to entry for those who cannot 
afford the costs. Second, college education is a good 
investment that produces external benefits, sometimes referred 
to as positive externalities.
    According to the National Center for Education Statistics, 
the cost of college education for the 2009-2010 academic year--
annual prices for undergraduate tuition, room, and board--were 
estimated to be $12,804 at public institutions and $32,184 at 
private institutions.
    Between 1999-2000 and 2009-2010, costs for undergraduate 
tuition, room, and board at public institutions rose 37 
percent, and costs at private institutions rose 25 percent, 
after adjustment for inflation.
    The high cost of a college education does create a barrier 
to entry. However, some portion of the barrier is alleviated by 
the U.S. Department of Education's direct loan programs, such 
as Stafford loans, Federal Perkins loans, Federal Work Study, 
Federal Supplemental Educational Opportunity Grants, and the 
Federal grant programs, such as Pell Grants, for lower-income 
students.
    In fact, according to the John William Pope Center for 
Higher Education Policy, of the 16.4 million undergraduate 
students enrolled in college in the United States in 2010, 
approximately 58 percent, or 9.6 million students, received 
Pell Grants.
    As to the external benefits of a college education, some 
benefits from higher education may benefit not just the 
individual student in the form of higher wages, but also, 
society as a whole. Since these external benefits may not be 
considered by individual students when considering higher 
education, individuals may invest less in higher education than 
is optimal for society. Providing educational tax incentives 
may induce potential students to enroll in higher education, 
increasing investments in education and thereby creating 
external benefits.
    A frank conversation about these incentives must also 
consider whether Congress is encouraging a higher-education 
bubble. Are these incentives encouraging students to take on 
more debt and degrees than is warranted by the economic and 
professional gain these students are likely to realize from 
their educational achievements?
    In evaluating the education tax incentives, we use the same 
three factors that are used in evaluating all tax incentives--
equity, efficiency, and simplicity. Some crucial questions in 
evaluating education tax incentives are whether Federal 
subsidization of higher education is good policy and whether a 
tax subsidy would be provided more efficiently by direct 
spending.
    In 1987, then Secretary of Education William Bennett stated 
that, in the long run, Federal financial aid programs lead to 
higher tuition as colleges capture some of the Federal aid to 
students. Some studies have shown some evidence of the Bennett 
hypothesis. I would be interested to hear from our witnesses if 
they believe the Bennett hypothesis applies to Federal student 
aid in the form of education incentives in the tax code. In 
other words, do colleges and universities capture the financial 
benefits of education tax incentives at the expense of eligible 
students and families? One recent economic paper indicates that 
this is the case.
    As to simplicity, one noted tax scholar, Michael Graetz, 
has said, ``The education tax incentives represent the greatest 
increase in Federal funding for higher education since the GI 
Bill. But no one can tell you what they are, how they work, or 
how they interact. Planning to pay for college around these tax 
breaks is essentially impossible for middle-income families.''
    I think there is a lot of agreement that the education tax 
incentives are very complex and, at a minimum, should be 
consolidated and reformed.
    Now, we have a very distinguished panel with us today, and 
I look forward to hearing what they have to say.
    I want to congratulate you, Mr. Chairman, for this hearing 
and looking at this matter.
    [The prepared statement of Senator Hatch appears in the 
appendix.]
    The Chairman. Thank you, Senator.
    I would like to introduce the panel. The first witness is 
Dr. Waded Cruzado. Dr. Cruzado is the president of Montana 
State University in Bozeman, MT. Welcome, Doctor.
    Next, Ms. Munson. Ms. Lynne Munson is president and 
executive director of Common Core.
    The third witness is Dr. Susan Dynarski. Dr. Dynarski is a 
professor of public policy and education at the University of 
Michigan.
    Our fourth witness is Mr. Scott Hodge. Mr. Hodge is the 
president of the Tax Foundation.
    And the last witness is Mr. Jim White. Mr. White is the 
Director of Tax Issues at the Government Accountability Office.
    Thank you all for coming. I would ask each of you to speak 
about 5 minutes and submit your statement for the record.
    Dr. Cruzado, welcome. Good to have you here. Why don't you 
go ahead?

          STATEMENT OF DR. WADED CRUZADO, PRESIDENT, 
             MONTANA STATE UNIVERSITY, BOZEMAN, MT

    Dr. Cruzado. Thank you very much. Good morning, Mr. 
Chairman and Ranking Member Hatch and members of the committee. 
I am Waded Cruzado, president of Montana State University.
    Thank you for the opportunity to appear before you to 
discuss tax policy as it relates to higher education, a topic 
that affects millions of students and their families.
    Montana State University is one of more than 100 land grant 
universities created by the Morrill Act of 1862, a brave piece 
of legislation that opened the doors of higher education to the 
sons and daughters of the working families of America.
    The Morrill Act, proposed by a former chairman of this 
committee, I should add, was approved by Congress in the midst 
of the Civil War. This month, we celebrated the courage of 
those elected officials who, 150 years ago, envisioned a better 
and brighter future by focusing on education as the key to 
social mobility and the strengthening of American democracy.
    More than 48,000 students attend the Montana State 
University system, with almost half of them enrolled in the 
four campuses of MSU. Even in this day, many of our students 
are the first in their family to attend college. Unfortunately, 
we see that it is becoming increasingly difficult for students 
and their families to pay for their education. At MSU, faculty, 
students, staff, and alumni are committed to improving the 
situation by working together to maximize efficiency in 
administration without sacrificing access or excellence in 
academics.
    I want to propose how, by reforming the tax code, you too 
can make a difference. Federal financial aid and tax credits 
related to higher education are crucial to students and their 
families as they confront serious challenges. According to the 
Department of Education, between 2006 and 2011, the percentage 
of first-time full-time undergraduates receiving financial aid 
increased from 75 to 85 percent at all 4-year colleges. There 
is evidence students are assuming more costs and borrowing 
more.
    According to a recent Sallie Mae report, parents reduced 
their spending on college, both in terms of current income and 
savings. The report also notes that scholarship awards were 
down. To compensate, students assume more costs on their own 
and borrow more.
    For a student from a low-income family or with a limited 
family contribution, a package of aid is usually required to 
finance a college education. But complex paperwork accompanies 
applications for Federal financial aid. Furthermore, how 
students stack aid may affect the amount they ultimately 
qualify for or, in some sad, but not all together infrequent 
choice of fate, make a student ineligible outright.
    A first-time student in his or her family must understand 
the tax code and master the 1098-T form and another form known 
as a FAFSA, which stands for Free--not simple--Application for 
Federal Student Aid.
    Based on national data, we know that thousands of Montana 
State students and their families are utilizing at least some 
of the tax deductions and exemptions available. But we also 
know that not all of them take full advantage of the tax code 
provisions. Even tax accountants find the tax credits and 
deductions for higher education confusing.
    For students confronting such a steep learning curve, 
especially for the first time, this complexity translates into 
insurmountable obstacles, and many of them simply will give up. 
To describe the situation at MSU, a school with one of the 
lowest student loan default rates in the Nation, let me start 
with two data points--FAFSA applications and Pell Grant awards.
    The number of FAFSA forms received by MSU has grown 43 
percent in just the last 3 years, and that tremendous growth 
rate shows no signs of slowing down. The number of students 
receiving Pell Grants has jumped by 66 percent in the same 
period. Currently, a third of our entire undergraduate student 
body is deemed by Federal standards to have the greatest 
financial need.
    This aid is particularly important for our Native American, 
adult, and Hispanic students, with about 67 percent of these 
groups receiving Pell Grants. That is twice the utilization of 
the student body as a whole.
    Another disturbing trend is the amount of debt students 
have when they graduate. Up until 2007, the average amount of 
debt MSU students graduated with remained relatively flat at 
$17,000. Once we entered the recession, that debt grew by 
almost 36 percent, so that now, 66 percent of our graduates are 
living with an average debt of about $26,000.
    Anecdotally, I am meeting more parents who are sending 
their children to college while they are still trying to pay 
off their own college debts. Recent data from the New York 
Federal Reserve indicates this is a real national trend.
    And I know about a family who, confronting a difficult 
financial situation, had to sit at the kitchen table to decide 
which of their twins was sent off to college and which would 
stay behind, knowingly impacting their lives forever.
    American families deserve better than this. And here are 
some recommendations. One, commit to protect Federal financial 
aid. There is no way a large portion of our students could 
afford to attend college without it. There is a compelling 
national interest in providing assistance for students to 
attend college. Studies suggest that the U.S. is projected to 
produce 3 million fewer college graduates than needed in the 
next decade. This will happen while other nations are making 
significant investments in higher education as a strategic 
element of their economic development and advantage.
    Two, simplify the tax code as it relates to higher 
education expenses. The tax code can play a vital role in 
assisting students and their families with the cost of higher 
education, but its complexity discourages many from even 
considering its use. Simplifying it and following up with an 
intrusive, almost fanatical communications campaign would alert 
students and their families to take advantage of these 
provisions.
    Third, clarify and coordinate the various Federal aid 
programs so that students and their families fully understand 
their options and utilize the available resources. The current 
collection of Federal aid programs, while well-meaning, is 
difficult to understand and navigate. You will not be surprised 
to learn that this derives from the split jurisdiction between 
the Department of Education and the Department of the Treasury, 
and the individuality of the programs themselves.
    And finally, number four, continue support for deductions 
for college savings plans. Such deductions offer an important 
incentive for students and families to plan ahead, save for 
college, and, importantly, help students avoid indebtedness.
    In closing, I would like to emphasize that, just like it 
was 150 years ago, a college degree results in benefits to the 
individual and to the Nation as a whole. The Morrill Act had it 
right. Providing the opportunity for our Nation's citizens to 
attend and succeed in college is crucial to the future economic 
prosperity of our Nation and the strength of our democracy.
    Thanks for your leadership.
    [The prepared statement of Dr. Cruzado appears in the 
appendix.]
    The Chairman. Thank you very much, Doctor.
    Ms. Munson?

 STATEMENT OF LYNNE MUNSON, PRESIDENT AND EXECUTIVE DIRECTOR, 
                  COMMON CORE, WASHINGTON, DC

    Ms. Munson. Chairman Baucus, Ranking Member Hatch, thank 
you for inviting me back to testify on the issue of college 
affordability.
    For the record, I want to point out that I am actually not 
here in my capacity as president of Common Core, which is a 
nonprofit that I run that looks out for the quality of K-12 
public education. Rather, I am here as a former Deputy Chairman 
of the National Endowment for the Humanities, as an independent 
scholar who has researched and published on college 
affordability since 2007, and as a mother of two precocious 
toddlers whose college education is going to cost $1 million if 
current trends continue.
    When you asked me here 5 years ago, I shared some tuition 
cost analyses that many found surprising. I took the prices of 
milk and of gas in 1980, and I told you how much those goods 
would cost at that time--this was in 2007--if their prices had 
gone up as rapidly as had in-State tuition at 4-year public 
institutions.
    I have now updated those prices. Back in 2007, the tuition-
adjusted price of a gallon of gasoline was $9.15. Today, it 
stands at $13, just 5 years later. The tuition-adjusted price 
of milk is up from $15 for a gallon 5 years ago to $22 today.
    For decades, we have been accommodating the problem of 
runaway tuition instead of holding schools accountable for the 
price that they put on American education. As former committee 
staffer Dean Zerbe has written, ``Colleges and universities 
have been raising tuition faster than a monkey can shell nuts. 
And of course, Washington's response has been to throw a lot 
more peanuts their way.''
    The most popular accommodation is to increase the number 
and size of Federal student loans and grants, but, as Senator 
Hatch asked about, Bill Bennett's hypothesis has indeed held 
true. This only incentivizes colleges to deliver students 
bigger bills. And please, do not for a moment entertain the 
illusion that education tax credits end up in the bank accounts 
of families. Every subsidy simply ups the footing upon which 
tuition continues to grow.
    Let us remember that higher education's take on the public 
purse is not limited to these subsidies. There are the billions 
in research dollars the government provides and the fact that 
schools pay no taxes on bonds, donations, real estate, sports 
revenues, and on their endowments.
    Further, remember that our colleges and universities are 
sitting on more wealth than had been amassed by any nonprofit 
institution in the history of our Nation, including private 
foundations. Now, I should not say they are sitting on these 
billions, because they are actually very busy investing them in 
some of the most complicated and illiquid, long-term, 
experimental investments that man has ever created. My point is 
that the focus is on amassing this wealth, not on spending it.
    Today, 143 colleges and universities have endowments larger 
than $500 million; 74 have endowments over $1 billion. One-
third of those schools with $1 billion-plus endowments are 
public institutions, including the Universities of Michigan, 
Texas, Oklahoma, Nebraska, Minnesota, and Florida.
    Keeping in mind this wealth and these subsidies and the tax 
freedom our colleges and universities enjoy, tuition 
accountability is long overdue. Here are a couple of ideas to 
get the ball rolling. First, require colleges and universities 
to do what private foundations must: spend a certain percentage 
of the value of their endowments every year. Foundations must 
spend 5 percent, which is an old number that likely needs to be 
revised upwards. Even a very conservative minimum payout 
requirement would let loose more than $1 billion, which could 
be spent on decreasing the cost of college.
    Second, make colleges and universities publicly disclose 
the amount and purpose of every endowment expenditure, as 
private foundations must do in annual reports. You want higher 
education endowment spending to bring down tuition, not to fuel 
more opulent fundraisers or more climbing walls in the 
gymnasium.
    When this committee focused its attention on the issue of 
college affordability 5 years ago, there were some very good 
effects. Unfortunately, they were short-lived. A few schools 
instituted ``no loan'' policies, allowing students from low-
income families to attend college without taking out any loans. 
But most of these programs, including at Williams and Dartmouth 
Colleges, were cancelled just 2 years after they were created. 
No one who had enrolled under the program even had a chance to 
graduate.
    Some schools also increased scholarship and grant 
expenditures 5 years ago. But according to Sallie Mae, college 
and university grants and scholarships fell 15 percent during 
the last academic year. That is more than $1,000 per student.
    Also, in 2008, the IRS sent 400 colleges and universities 
questionnaires to inform work on a new schedule to the 990 on 
endowments. The schedule never appeared.
    I suggest, Chairman Baucus and Ranking Member Hatch, that 
you write to the IRS and ask them what happened.
    Our colleges and universities have been given every 
opportunity for decades to do the right thing with regard to 
controlling the cost of college. They have not done it, and 
there is abundant proof that they will never deliver American 
families a fair and honest tuition bill unless our Nation's 
political leaders join the public and insist on it.
    Thank you very much.
    [The prepared statement of Ms. Munson appears in the 
appendix.]
    The Chairman. Thank you very much. I appreciate that.
    Senator Hatch. Mr. Chairman, before you go to the next 
witness, I am going to have to go to the floor. So I want to 
apologize to all of you. This has been extremely interesting to 
me, and I will read the transcripts, and we will see what we 
can do. Forgive me for that.
    The Chairman. Thank you, Senator.
    Dr. Dynarski, you are next.

STATEMENT OF DR. SUSAN DYNARSKI, PROFESSOR OF PUBLIC POLICY AND 
        EDUCATION, UNIVERSITY OF MICHIGAN, ANN ARBOR, MI

    Dr. Dynarski. Chairman Baucus, Senator Hatch, members of 
the committee, I am honored to testify before you today.
    The goal of student aid and the education tax incentives is 
to open the doors of college to those who have the ability, but 
not the means to attend.
    Through some simple reforms, the government can serve this 
goal more effectively and efficiently. The current education 
tax benefits do little to get more people into college. We 
should simplify and focus the tax incentives and coordinate 
them with the student aid programs.
    A college education is one of the best investments a young 
person can make. Even with record-high tuition prices, a 
bachelor's degree pays for itself several times over. Everyone 
has been hammered by the recession, but college graduates have 
been buffered from the worst of it. Those without a degree are 
twice as likely to be unemployed and earn much, much less.
    As college has grown more valuable, it has grown more 
unequal. Only 9 percent of children born in the poorest quarter 
of families earn a BA. The figure is 54 percent, 6 times 
larger, for those with the highest incomes. This gap is much 
larger than it was 20 years ago.
    Education has long been a vehicle for opportunity in our 
country, a path to prosperity for every class. Growing 
education gaps between the children of the rich and the poor 
threaten this vision of economic mobility. We are in danger of 
devolving into a rigid caste society in which the children of 
the poor are destined to low levels of education and menial 
jobs.
    There is a role for post-secondary policy in shrinking 
these disturbing gaps. These gaps can be eliminated only with 
improvements at every level of education. Inequality builds 
along the entire educational pipeline. Half the gap between the 
rich and poor and college attendance is explained by the gap in 
high school graduation.
    The Pell Grants and the American Opportunity Tax Credit are 
the flagships of the student aid and tax incentive programs. 
The Pell is squarely focused on low-income students. Just 15 
percent of Pell recipients have household incomes above $40,000 
a year, and just 3 percent of them have $60,000. The AOTC, by 
contrast, is less focused, extending to families with incomes 
as high as $180,000 a year.
    The AOTC, while not as well-targeted as the Pell, does a 
better job getting money to poor families than did its 
predecessor of Hope Credit. This is because the AOTC is partly 
refundable and covers some non-tuition costs.
    Both of these programs have doubled in size in the past few 
years. We now have two full-scale systems of aid for college in 
this country, one run by the Department of Education and one 
run by the Department of the Treasury. This is double the 
trouble, because both of these well-meaning bureaucracies 
generate complexity, paperwork, and administrative headaches 
that burden families, colleges, and taxpayers.
    Complexity in these programs is undermining their 
effectiveness. How? It is very simple. Families cannot respond 
to a price subsidy if they do not know about it. Information 
about both the Pell Grant and the tax incentives is hidden 
behind a thicket of paperwork. Students do not find out about 
how much help they can get until a few months before college 
entry. This is simply too late to affect the decision to 
prepare for, apply to, and attend college.
    Here are some concrete suggestions for focusing, 
simplifying, and coordinating the tax credits and aid to make 
them more effective.
    First, deliver the tax credits at the time of college 
enrollment. Families need the credit when the tuition bill 
arrives, not months or years later. The refundable portion of 
the AOTC could be delivered to students through the aid system 
along with the Pell.
    Second, create a single simple application for aid and for 
the tax credits. Families currently have to wade through two 
long duplicative forms, the 1040 and the FAFSA. The FAFSA alone 
has 100 questions. Research shows that most of these questions 
could be eliminated and still target aid in the same way as we 
do now.
    The data already collected on the 1040, in fact, could be 
used to define financial aid eligibility. We have moved a step 
towards this goal by allowing some aid applicants to 
automatically transfer their IRS data into their FAFSA 
application.
    A single simple application would reduce fraud and error 
and save citizens millions of hours spent filling out 
duplicative forms. Best of all, it would boost college 
enrollment. A recent experiment showed that college attendance 
rose significantly when low-income families were allowed to use 
a vastly simplified aid application process.
    You asked that I address whether aid for college students 
drives up college prices. The best economic evidence indicates 
no, at least for the 91 percent of students who attend public 
and nonprofit institutions. We do have evidence that prices at 
the for-profit schools do increase when the Pell does. While 
these schools teach only 9 percent of students, they account 
for 24 percent of Pell expenditures.
    I stress that this problem is limited to the for-profit 
sector, and any remedies should, therefore, be focused on this 
sector.
    The Federal Government can do better with its aid and tax 
incentives for college. Simplifying, focusing, and coordinating 
the tax and aid programs will allow them to serve their goal: 
opening the doors of college to those who have the ability, but 
not the means to further their education.
    Thank you.
    [The prepared statement of Dr. Dynarski appears in the 
appendix.]
    The Chairman. Thank you very much, Dr. Dynarski.
    Mr. Hodge?

             STATEMENT OF SCOTT HODGE, PRESIDENT, 
                 TAX FOUNDATION, WASHINGTON, DC

    Mr. Hodge. Thank you, Mr. Chairman and members of the 
committee. I appreciate the opportunity to talk about this 
important issue.
    As you all know, inequality is in the news these days, and 
it is commonly thought that tax policies, in particular low tax 
rates, are the principal cause of inequality. But the reality 
is very different.
    One of the biggest contributors to inequality in America is 
the growing earnings gulf between workers with college degrees 
and those without. Indeed, median income for a worker with a 
college degree is $76,000 a year, while the median income for a 
worker with a high school diploma is about half as much. And 
there is even greater income disparity between those with a 
high school diploma and those with advanced degrees.
    America's income gap is really an education gap. At the 
bottom end of the income scale, about 70 percent of low-income 
Americans have a high school degree or less, whereas at the 
other end of the extreme, 80 percent of those earning over 
$250,000 a year have a college education or better.
    And there has been a clear shift in recent years in 
education policy away from traditional loan programs and direct 
subsidy programs toward the use of various tax credits and 
deductions. So really, the question here before the Finance 
Committee today is, is the tax code the proper tool to increase 
access to higher education and make education more affordable? 
And generally speaking, the answer should be ``no.'' At the 
highest level, these education credits and deductions violate 
the principles of sound tax policy by greatly increasing the 
complexity and distortions in the tax code.
    But there are serious practical reasons we should be very 
wary of using such policies. The first is that tax credits and 
subsidies undermine the market forces that deliver quality 
goods at low prices for everything from toasters to 
automobiles. It should be no surprise that the sectors 
suffering the biggest financial crises today--health care, 
housing, and, now, higher education--all receive the most 
government intervention through the tax code and other 
mechanisms, such as subsidized loans. This intervention is 
actually causing the price inflation for the very things that 
they are intended to make more affordable.
    Subsidized student loans and education credits are helping 
to fuel higher education costs by disconnecting student 
consumers from the true cost of higher education, and, in turn, 
the benefits of these programs get capitalized into the price 
of tuition because universities can boost tuition costs without 
suffering the normal backlash that you see in the marketplace.
    Another reason to avoid using the tax code in this way is 
that the extensive use of tax credits has already knocked 58 
million Americans off the tax rolls. Today, some 41 percent of 
all tax filers have no income tax liability because of the 
generosity of credits and deductions in the tax code. And many 
of these people, about half of them, actually receive 
refundable tax credits because of the expansion of these types 
of programs. We have not had such a large share of Americans 
off the tax rolls since 1940, when the income tax system became 
a mass tax.
    In addition to the lost revenues from having so may 
Americans off the tax rolls and the social cost of having so 
many Americans with no skin in the game, our research suggests 
that the 20-year growth in the non-payers is associated with 
more than $215 billion in higher transfer spending this year. 
And there is also a very strong statistical correlation between 
the growth in non-payers and increases in the national debt. 
And as we heard, on the distributional level, education credits 
and deductions tend to benefit high-income families, not low-
income families. They are simply becoming middle-class 
entitlements.
    But lastly, the overuse of tax credits has turned the IRS 
into an extension of and, in some cases, a substitute for other 
government agencies, and the IRS is simply not equipped to be a 
social welfare agency. And as a result, these credits tend to 
be abused, and fraud rates are very high.
    Treasury's Inspector General has raised many red flags 
about taxpayers improperly claiming the Hope Credit and 
billions of dollars in improper payments of the American 
Opportunity Tax Credits. And we should not be surprised by 
these kinds of abuses. In fact, we are simply asking the IRS to 
do more than just be a tax collection agency.
    And let me just conclude, Mr. Chairman, that, while we all 
understand the value and financial benefit of getting a college 
degree, using the tax code to make college more affordable not 
only violates the principles of sound tax policy, but also 
produces unintended consequences. And these education tax 
programs, for lack of a better term, are likely contributing to 
the rising cost of higher education, while helping to knock 
millions of people off the tax rolls. And this, in turn, is 
disconnecting millions of people from the basic costs of 
government and transforming the IRS into an extension of the 
Department of Education and the welfare system.
    These are not the kind of consequences that can be cured by 
a simple reform of tax credits, but by a wholesale reform of 
the entire tax code.
    Thank you very much for the opportunity to address you 
today, and I appreciate any questions that you may have.
    [The prepared statement of Mr. Hodge appears in the 
appendix.]
    The Chairman. Well, you gave us a lot to think about. Thank 
you, Mr. Hodge. We appreciate that.
    Mr. White?

  STATEMENT OF JAMES WHITE, DIRECTOR, TAX ISSUES, GOVERNMENT 
             ACCOUNTABILITY OFFICE, WASHINGTON, DC

    Mr. White. Chairman Baucus, Ranking Member Hatch, and 
members of the committee, on behalf of my colleague, George 
Scott, and myself, I am pleased to be here to discuss Federal 
assistance for higher education provided through a variety of 
tax and spending programs.
    By way of background, figure 1 on page 2 of my statement 
shows large title IV grants, loans, and work-study programs run 
by the Department of Education. It also shows the large tax 
deductions, credits, and exemptions administered by IRS.
    Several things are noteworthy about the programs in figure 
1: first, the number of students and families getting 
assistance. In 2009, almost 13 million students received title 
IV aid; 18 million tax filers claimed one of the higher 
education tax benefits.
    Second, the cost of the programs. In 2010, the Department 
of Education provided $38 billion in grants and billions more 
in interest subsidies on student loans. For the tax programs, 
the foregone revenue was an estimated $25 billion.
    Third, the programs provide assistance through a student's 
entire life. Before a student attends college, the qualified 
tuition and Coverdell savings programs allow for tax-free 
buildup in savings accounts. While in college, a variety of 
grant, loan, and work-study tax credit and deduction programs 
help pay tuition and other expenses. After college, interest on 
student loans may be tax deductible.
    Now, I want to summarize the results of our analysis 
regarding the distribution of these benefits across families, 
the extent to which eligible families are using the benefits, 
and what is known about the effects of these programs on 
college attendance.
    The various programs tend to benefit different types of 
families. Title IV grants tend to benefit families below the 
national median income of about $52,000. Loan and work-study 
programs benefit a broader income range, as do most of the tax 
credits. The tuition and fees deduction and parental exemption 
for students generally went to families with incomes above the 
median.
    When we looked at whether families are claiming benefits 
for which they are eligible, we found they were not always 
doing so. We had data to analyze tax filers who were eligible 
for either the Lifetime Learning Credit or the tuition and fees 
deduction. They could claim one or the other, but not both. We 
estimated that 1.5 million tax filers, 14 percent of those 
eligible, failed to claim either one, giving up an average of 
almost $500 in benefits. Furthermore, we found another quarter 
of a million filers who made the wrong choice. They claimed one 
benefit, but would have gained an average of $300 by claiming 
the other one instead.
    Why did so many taxpayers make wrong choices? The answer, 
at least in part, may be due to the complexity of the 
provisions. For example, the IRS lists 12 separate higher 
education assistance provisions in its guidance. What 
constitutes academic eligibility can be difficult to figure out 
for students who do not follow the traditional path of 4 years 
of college. Some of the provisions are similar, making it hard 
to figure out which one is best. For example, there are four 
different tax breaks for educational savings, each with 
different requirements and benefits to the taxpayer. What 
counts as a qualified expense varies across the provisions.
    Although educational institutions must send the form 1098-T 
to taxpayers about their qualifying educational expenses, the 
different program rules mean that what is reported on the form 
may not match what taxpayers are allowed to claim on a tax 
return.
    In addition, the number of education-related tax provisions 
has led to so-called ``anti-double-dipping rules.'' While 
important protections, these rules add yet more complexity for 
families trying to figure out their best option.
    IRS and the Department of Education have taken steps to 
inform students and their families about tax benefits, but 
further actions, such as more research on the characteristics 
of non-claimants, could help develop a coordinated and 
comprehensive strategy. An example of this is the new financial 
aid shopping sheet just developed by the Department of 
Education and others. We have not evaluated this sheet, which 
is voluntary, but it appears to provide information that could 
help students plan for college costs. However, I would also 
note that it does not mention any tax benefits.
    My final point is that we do not know as much as we should 
about the effectiveness of the many tens of billions of dollars 
we invest annually in higher education assistance. Has Federal 
spending increased college attendance? Has it improved 
graduation rates? Some good research has been done on these 
questions, but it is incomplete.
    Education's efforts to sponsor and conduct research are an 
important step, but we still lack evaluative information on the 
effects of Federal assistance. Tax information that might be 
useful for research is not readily available to most 
researchers. Evaluative research can help policymakers build on 
successful programs and make changes to less effective 
programs. This is especially important in today's tight budget 
environment.
    Mr. Chairman, this concludes my statement. I would be happy 
to answer any questions.
    [The prepared statement of Mr. White appears in the 
appendix.]
    The Chairman. Thank you very much, Mr. White. I appreciate 
that.
    Dr. Cruzado, I would like to ask you your thoughts on the 
remarks of a couple panelists that a lot of these increases, 
whether it is direct aid, Pell Grants, for example, or 
increases in tax benefits, are just absorbed by the 
institution, and the benefits are not passed on to the 
students. I think Ms. Munson makes the point that colleges and 
universities in America are getting bigger. There is no 
requirement that they pay out any percent of their endowment. 
Tuition rates have gone up pretty rapidly. Costs are going up, 
and so forth.
    You are the only president here of a university. So why 
don't you tell us what you think about all of that?
    Dr. Cruzado. At Montana State University, we pay special 
attention, and we really make it almost a philosophy that 
dollars will follow students and their needs.
    But start with the realization that running a university 
nowadays is a far more complex business than what it was 20 
years ago. Twenty years ago, we did not have the complexities 
of information technology nor the requirements of compliance, 
not accreditation requirements, but the whole host of student 
services that our students need and deserve, particularly 
mentoring and counseling for those with additional learning 
disabilities whom we encounter.
    Having said that, though, as I said in my testimony, we at 
Montana State University are paying close attention to reducing 
the cost of administration. I started that 2\1/2\ years ago 
when I reduced the number of vice presidents from eight to 
five, and that established a tone.
    We are now taking a look at all our administrative efforts 
and trying to reduce the cost of payroll and human resources 
and finance and accounting so that those dollars can be freed 
up and redirected back to the students.
    And finally, we are encouraging our students to finish 
their degree as soon as possible. That is the best way in which 
we can reduce cost at the university.
    One of the best examples has to do with some courses that 
students need to take over and over again. How can we make sure 
that, without diluting course content, we give students the 
tools to be successful so that they only need to take those 
courses once and accelerate the time to graduation, which 
results in a gain for families, for the students, and for the 
institution as well?
    The Chairman. A legitimate question could be asked of, why 
are college expenses rising at such a rapid rate, much more 
rapidly than health care costs? I assume my statistic of 19 
percent annual is not too far off the mark. But whether it is a 
little bit off or not, still, college costs are going up at a 
very rapid rate.
    Why is that? What is the cause of all that?
    Dr. Cruzado. That is a fair question, Mr. Chairman and 
members of the committee. And again, at Montana State 
University, what we have observed is just that the cost of 
operations has increased rapidly.
    For example, information technology, as you know, is a huge 
investment in colleges and universities, and it is a necessary 
one. We need to provide for students and the faculty members 
the information technology that they need, and those are 
additional costs that were not with us 20 years ago.
    As I mentioned also, the cost of student services has 
skyrocketed in colleges and universities. For example, we are 
observing a great need for additional counseling services in 
all our colleges and universities. Student disabilities, 
learning disabilities, put an additional burden on colleges and 
universities, and we want to make sure that students have the 
resources that they need in order to be successful in the 
classroom.
    New, additional compliance efforts that have added--for 
example, institutional data that we need to provide for some 
Federal agencies--those are costs that were not with us 20 
years ago and have resulted in additional tuition expenses.
    Having said that, though, I need to say, in the State of 
Montana, we were able to keep tuition flat for almost a decade. 
We have not increased tuition since 2007, and we only did that 
last year, but only after the State further reduced the State 
appropriation that will support students.
    So it is a combination, also, of the erosion of the State 
support that has affected almost every State. Let me just give 
you this example. When you and I went to school, and almost 
until 20 years ago, the State would subsidize our studies by 
almost 80 percent. Today, that is a complete reversal. The 
State provides between 20 and 30 percent of the cost of 
education and asks students and their families to shoulder the 
remaining 80 percent.
    That is the biggest cost, and that is why tuition has 
increased so rapidly in America.
    The Chairman. My time is up, but very briefly, would that 
apply to private schools as well?
    Dr. Cruzado. I am sorry?
    The Chairman. That would not apply to private schools. Why 
has private school tuition gone up so rapidly? Maybe they have 
State aid.
    Dr. Cruzado. Well, Mr. Chairman, I cannot speak for private 
institutions. They have additional resources and a different 
set of priorities than public institutions. I can speak for 
public institutions who are not part of some of the goals of 
private universities.
    The Chairman. Thank you very much. I appreciate that.
    Dr. Cruzado. Thank you.
    The Chairman. Senator Bingaman, you are next.
    Senator Bingaman. All right. Thank you very much. Thank you 
all for being here.
    Let me ask Mr. White to comment on some of the 
recommendations that Dr. Dynarski has made in her comments. She 
recommended that we merge the AOTC and the Lifetime Learning 
Credit into a single credit. Is that something that makes 
sense?
    Mr. White. Senator, we have developed a framework for 
thinking about questions like that. And one issue is thinking 
about the purpose of the provisions. And you have some 
provisions, such as the grant programs, the tax credits, and 
some of the deductions, that have a very similar purpose of 
providing a lump of money to students or families to pay for 
current education costs.
    So that raises the question of whether we need so many 
different programs. Part of the answer to that question depends 
on whether the differences in these programs allow you to 
target different groups differently, more effectively, than you 
would otherwise.
    But I think it is a combination of thinking about the 
purpose of the program and whether you can do something 
different. If you cannot do something different with it, that 
does suggest some consolidation.
    Consolidating would allow you to save on administrative 
costs and provide the same amount of aid to families and 
students.
    Senator Bingaman. I am going to take that as a qualified 
``yes.''
    Mr. White. It is a qualified ``yes.''
    Senator Bingaman. Let me ask about--she also suggests we 
deliver the credit at the time of college enrollment rather 
than wait, having people wait to file tax returns and all of 
that. Does that make sense, from your perspective?
    Mr. White. That is one of the disadvantages of providing 
assistance through the tax code, that the money does not come 
in to families or students until the following year when they 
file their tax return.
    Senator Bingaman. So you think going ahead and providing 
that credit at the time of college enrollment makes good sense?
    Mr. White. Well, if you try to provide the credit up front, 
that creates more challenges for IRS, because then you are 
providing the money to taxpayers before they file the tax 
return. So it is harder--you are not determining eligibility 
then.
    There might be alternative ways to provide the money up 
front, not through a tax credit, but through an up-front grant.
    Senator Bingaman. Right. And is that what you are 
recommending, Dr. Dynarski?
    Dr. Dynarski. Yes, it is. An additional option is to use 
income data from an earlier year to establish eligibility for 
the tax credit. So, we could simply use a previous year's 
income to indicate somebody's need and use that to determine 
their eligibility for a tax credit, which could then be 
delivered to the institutions through the same mechanism that 
the Department of Education uses to deliver the Pell Grants.
    Senator Bingaman. Let me ask any of the witnesses, but 
maybe, Mr. White, you would particularly know the answer to 
this.
    Has there been a proposal developed, an actual legislative 
proposal, to accomplish some of this simplification of these 
education-related tax provisions, or is this something that we 
just have hearings about?
    Has anybody put a piece of legislation on the table and 
said, ``Here is a way to do it''? Has the tax advocate done 
that, for example, or anybody else in the administration or in 
the Congress, as far as you are aware?
    Mr. White. I am not sure the extent to which actual 
legislation has been drafted to do this.
    Senator Bingaman. Do any of the rest of you know about 
that?
    Dr. Dynarski. There is legislation that has been crafted to 
simplify the aid programs in such a way that potentially we 
could establish eligibility for both the aid programs and the 
tax incentives using the same information.
    Essentially, if you were able to whittle down the aid 
application to include the same questions that are used to 
determine eligibility for the tax incentives, we could have a 
unified application.
    Senator Bingaman. Mr. Hodge, your basic point was that the 
tax code is not the right vehicle to be assisting people with 
the costs--covering the costs of their education. Is that an 
accurate statement?
    Mr. Hodge. That is accurate, yes.
    Senator Bingaman. You are not advocating that the Federal 
Government back off of supporting people in covering the costs 
of their education, you are just saying it should not be done 
in the tax code; is that right?
    Mr. Hodge. That is correct. I would rather see that 
assistance on the spending side of the budget rather than on 
the tax side. Perhaps even, rather than having duplicate 
programs, we could simply fold in any of the moneys dedicated 
to tax programs into, say, Pell Grants and what have you.
    Rather than having the IRS run this program, it should be 
run exactly where it is, at the Department of Education.
    Senator Bingaman. Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    Next, Senator Wyden?
    Senator Wyden. Thank you very much, Mr. Chairman. I know it 
has been a hectic morning trying to get in and out. I thank you 
for doing it.
    I would like to ask you all about the nature of Federal 
education policy and whether, particularly in the context of 
tax reform, there is an opportunity to make a break.
    What we historically have done in terms of Federal 
education policy is to focus on access to education. That is 
the magical word: access. And so we make available grants and 
loans and, through the tax code, interest subsidies and things 
of that nature. But it is all designed to make sure that people 
have access to education.
    I continue to think that that is hugely important, and I 
want to keep that focus. I think what I would like to ask you, 
Ms. Munson, and you, Dr. Dynarski, is whether there ought to be 
an effort to build on top of that focus on access a new 
emphasis on value--on value of various kinds of education 
offerings and whether we ought to start looking at that, as 
well, as part of the tax debate.
    Mr. Hodge knows that Senator Coats and I have the first 
bipartisan tax reform bill in a quarter-century. So we have 
provisions that relate to the tax code, trying, again, to 
reform it and look to the future.
    But apropos of this question of value, for you, Ms. Munson, 
and you, Dr. Dynarski, Senator Rubio and I--he is the 
Republican Senator from Florida--have introduced a bill called 
the Student Right to Know Before You Go Act. And this 
legislation would, for the first time, make it possible in one 
place to get information about graduation rates and debt levels 
and a lot of the essential information that students and 
parents need. But it would also make it possible for a student, 
for the first time, to get a sense of how much they would earn 
if they got a degree in a particular field from a particular 
school.
    So my question is, what are your thoughts on that, again, 
recognizing that I do not want to tamper at all with this 
historic focus on access? I have supported Pell Grants and 
Stafford Loans and all of the efforts that have provided 
assistance to students.
    The question is, can we go further and put a new focus on 
value as part of the tax reform debate? I also love the fact I 
was getting some nods there from our wonderful witness from 
Montana.
    So maybe we will start with you three and get your 
reaction, if time allows.
    Mr. Hodge, as you know, we always enjoy working with you, 
and your input would be welcomed.
    Doctor?
    Dr. Dynarski. More information is better. Families need 
good information if they are going to make smart choices about 
which institution to send their kids to. Prices vary wildly 
across schools, both sticker prices and prices net of 
scholarships. Success rates, graduation rates vary wildly 
across schools that are quite similar in the same missions.
    So I think it would be a great step forward to have uniform 
information about graduation rates, about prices, and about 
employment rates and earnings of graduates from institutions. 
The State of Florida has been doing this on its own using its 
own data systems, but seeing a more uniform set of information 
across the country would be a great step.
    We have been moving in this direction a bit with the 
gainful employment rules, which require that we gather this 
information for schools and programs that are focused on career 
preparation. These standards are pretty weak ones, and they do 
not apply across the board. So getting that information 
published for all schools, I think, would be a wonderful step 
forward.
    Senator Wyden. Great. Ms. Munson?
    Ms. Munson. I appreciate your dedication to the important 
agenda of maintaining access, and, as I said, I have two young 
toddlers. I look forward to----
    Senator Wyden. Me too.
    Ms. Munson. You do too.
    Senator Wyden. Another one on the way.
    Ms. Munson. Congratulations.
    Senator Wyden. Pictures available on my iPhone later. 
[Laughter.]
    Ms. Munson. I think though, when we think about tax policy, 
in particular with regard to education, we are often torn 
between our desire to help in the current day provide access 
now, but trying to do it in a way that maybe is not 
contributing to a larger problem of feeding this tuition 
machine.
    I think that part of the equation, the second part, is 
where our focus needs to be, and that is why I talk a lot about 
tuition honesty and full disclosure. I agree entirely with 
Professor Dynarski that more information is always better.
    One piece of valuable information: we have talked about 
graduation rates, but you realize that it actually, on average, 
takes students 6.2 years now to graduate from so-called 4-year 
public institutions of education. Only 27 percent of entrants 
to 4-year public institutions these days are actually 
graduating within 4 years.
    This is, obviously, contributing to the debt problem, to 
the tax burden, to the bankruptcies, and all of this.
    Senator Wyden. Dr. Cruzado?
    Dr. Cruzado. I could not agree more. I would welcome an 
opportunity to build on the layer of value. At Montana State 
University, perhaps because of our culture of being very 
prudent and very conservative in how we approach finances, we 
would be more than happy to show parents and families what are 
the programs that will result in higher wages or in additional 
opportunities for our students.
    And I think that, with the proper instruments, we can show 
the taxpayers exactly where is the money that they are 
investing in our university.
    Senator Wyden. I thank you. It is striking, Dr. Cruzado, 
your answer is very similar to what the president of Oregon 
State University, Ed Ray, said when I asked him about this. He 
said, ``We have an important story to tell. We like what you 
are talking about, Ron, with Senator Rubio, because we think 
disclosing this information at a school like ours''--and, 
obviously, a school like Montana State--``if anything, allows 
you to showcase the important work that you are doing.''
    So I am going to put you and Ed Ray from Oregon State down 
now as people whom we are going to call on.
    I think the other point I would mention--I know my time is 
up, and Chairman Baucus has been very gracious to give me the 
time. One of the things that has come up in discussion about 
this, Mr. Hodge, because you and I have talked a lot about 
markets over the years, and, as you know, I am a Democrat who 
believes strongly in trying to find a role for marketplace 
forces. Part of what I think this legislation can do, the 
Student Right to Know Before You Go Act, is, if you have a 
school over here and they are charging a lot more than the 
school over there, and the school over here is not producing as 
impressive a record in terms of graduation and employment 
prospects and the like, the school over here is going to say to 
themselves, apropos of Dr. Cruzado's comments, this is going to 
be out in the real world. This is going to be on line. It is 
going to be part of a market that families look at for purposes 
of education. And the school over here had better say to 
themselves, ``We better clean up our act in terms of graduation 
rates, prospects for careers,'' or the school over here is 
going to have problems.
    So I am going to want to talk to you some more about it, 
because I think what you and I have talked about in the past--
and you have been very helpful to us in the discussions with 
respect to tax reform--always comes back to, can you, under the 
tax code, find new ways to unleash marketplace forces and do it 
fairly so that there is opportunity for everybody, not just the 
people born on third base, but opportunity for everybody. And I 
am going to want to follow up with you.
    Thanks for the extra time, Mr. Chairman.
    The Chairman. You bet, Senator. You are very welcome.
    Senator Grassley?
    Senator Grassley. I would prefer to make a statement 
instead of asking questions, and I am going to refer to a 
Turner endowment study, a Ginsberg article, and a CBO report. 
And I would ask unanimous consent that those be put in the 
record.
    The Chairman. Without objection.
    [The publications referred to appear in the appendix 
beginning on p. 51]
    Senator Grassley. As we consider how tax incentives help 
students and families pay for college, we should consider 
whether and how these incentives also increase cost. This is 
something that Chairman Baucus referred to in his last 
question.
    We have a 2010 study by Nicholas Turner, University of 
California-San Diego, suggesting that schools are reducing 
financial aid awards by the amount of tax benefits a student or 
family may receive.
    In addition, a 2011 article in Washington Monthly by 
Benjamin Ginsberg exposes the explosion in spending on 
administrators and support staff who are not directly involved 
in instruction or research. Such spending includes hefty 
increases in executive compensation and benefits.
    Aside from getting a handle on the rising costs and tax 
incentives for students and families, it is also important to 
consider the tax benefits that tax-exempt colleges and 
universities receive. Just like tax-exempt hospitals, tax-
exempt colleges and universities are exempt from income taxes. 
They also have the ability to raise capital through tax-
deductible charitable contributions and the issuance of tax-
exempt bonds.
    The Joint Committee on Taxation, in a document prepared for 
today's hearing, indicates that the most expensive Federal tax 
expenditure for education is the charitable deduction, at more 
than $32 billion. The tax exemption for bonds is third most 
expensive at $18 billion.
    The charitable deduction for sure fuels the growth of 
multi-
billion-dollar college and university endowment funds. 
According to the most recent annual endowment study, endowments 
with more than $1 billion in assets had a 1-year rate of return 
of more than 20 percent and a 10-year rate of almost 7 percent.
    So, even though they had a couple of rough years, like 2007 
and 2008, they are also still doing well. Yet, despite their 
success and skyrocketing tuition, their payout rate hovers 
around 5 percent.
    Part of their success results from their investment 
strategies. The same endowment study tells us that these 
endowments with more than $1 billion are 60 percent invested in 
what is termed ``alternative strategies.'' Such investments 
include private equity; international private equity; mergers; 
acquisition funds; hedge funds; derivatives; and energy and 
natural resources, including oil, gas, timber, and commodities.
    Aside from their lack of spending on students, it is 
unclear whether such investments may also be contributing to 
the erosion of the tax base by sheltering otherwise taxable 
commercial activity in tax-exempt entities. Commodity 
speculation is another issue that I have been working on that 
concerns both me and Senator Wyden of this committee. When it 
comes to tax-exempt bonds, it seems that the ease of borrowing 
is causing a race to spend without considering whether such 
spending adds to student learning.
    In a May 1, 2012 CNBC report, the dean of admissions of 
Pomona College suggests a $53-million investment in student 
housing is very important because students are not making 
choices based on whether they are going to get a good 
education. The same report highlights other California colleges 
offering perks such as dorm rooms with oceanfront views and 
cafeterias with gourmet food.
    In addition, an April 30, 2010 Congressional Budget Office 
study suggests that colleges and universities may benefit from 
indirect tax arbitrage by using tax-exempt bonds to fund 
buildings and equipment while hoarding money to invest in 
assets such as I just mentioned that provide a higher rate of 
return.
    So I get to the bottom line. The incentives for students 
and families are not the only ones that should be reviewed in 
the context of tax reform. All education-related tax 
expenditures should be examined to ensure that students and 
families, in addition to taxpayers, are getting the most bang 
for their buck.
    Thank you.
    The Chairman. Thank you, Senator.
    I would just like to focus a little bit on what works here. 
I also tend to think--this is from my perspective--there is 
still not a sufficient sense of urgency about what needs to be 
done to address America's education needs.
    Let me start this way. A few years ago, I took several 
Montana business people to Asia, China, India, and other 
countries. Near the end of the trip, we were in Bangalore, 
India, one of General Electric's major research facilities. 
They have a big one there in Bangalore. It is called the Jack 
Welch Research Facility.
    We went through it, spent half a day there, all the ``gee 
whiz'' stuff. And at the end of the day, I walked up to the 
manager, Dr. Guillermo Willie is his name. He is not Indian. He 
is half German and Portuguese. But most everybody else working 
there are all Indians. They are from Bangalore.
    And I said to him, ``Why are you located here in Bangalore? 
Why is your facility here?'' He said, without batting an 
eyelash, without skipping a beat, ``Greatest talent pool.'' So 
I asked, ``What country has the next greatest talent pool?'' 
``China,'' he said. ``Where are we?'' I asked. ``What about our 
talent pool?'' ``Well, you're kind of down there pretty far.'' 
I asked, ``What do we have to do to get up there?'' Again, 
without skipping a beat, this is just his view, he looked 
straight at me and said, ``Two things. One, health care. Second 
is education.'' He said, ``You've got to educate your people 
better, and, second, your health care system tends to 
discriminate against--makes it more difficult for your 
companies to compete compared with other companies in other 
countries.''
    Now, I am not going to say this fellow had all the answers, 
but I do think he had a kernel of truth in what he was talking 
about, both, including education. And I believe strongly, 
because we see all the data, how competitive this world is 
becoming, that we have to focus a lot more on how we get better 
bang for our buck in education.
    It is all levels. It is elementary, it is K-12, it is 
community colleges, it is votech schools, it is higher ed, and 
so forth.
    But the hearing today is focused a little more on higher 
ed. Community colleges and other similar forms of education 
would qualify here. But I am just trying to get a sense here 
of, what do we do to cut through all this stuff?
    So what works? Let us just take, for the sake of discussion 
right now, only the tax provisions. And there are a lot of 
them, and they are complex, and they are very difficult for 
people to understand.
    So I would just like you, whoever wants to take a crack at 
this, to tell us which ones work the best, which ones do we 
pare back and perhaps even eliminate. We have 529 plans, 
Coverdells, the American Opportunity Tax Credit, a couple 
others.
    What works for students, and what really does not work that 
much, just candidly? And, if you want to change some of these, 
tell us how they should be changed. It sort of begs the 
question, though. Should there be any tax provisions?
    Mr. Hodge is basically saying, no, we do not need any. Let 
this all be handled on the spending side, Pell Grants, et 
cetera. Well, there are some people who do not qualify for a 
Pell. And education costs are different in different parts of 
the country. It is a pretty big country we have here.
    So let us just say, first, which tax provisions work? How 
should they be modified? And should we even think about tax 
provisions or just forget them and say, ``Department of Ed, 
it's up to you. You take care of students. The Finance 
Committee, we are just going to wash our hands of it, from a 
tax perspective.''
    Who wants to tell us what works?
    Dr. Dynarski. I would say that if the tax credits could be 
made refundable, delivered up front, if they are targeted, made 
simpler to understand, then families are going to find them 
indistinguishable from a grant. If we cannot get to that goal, 
then they are not useful.
    The Chairman. You say refundable and up-front.
    Dr. Dynarski. Delivered up front when people pay a tuition.
    The Chairman. Advanced refundability.
    Dr. Dynarski. Indeed. So, if people need the money to go to 
school, they need it when they need to pay the tuition bill. 
They do not need it 18 months later. If we could achieve those 
goals with the tax provisions, then as far as the families are 
concerned, they are going to be a grant. So, if we can make the 
tax credits look like a grant, great. If we cannot get to that 
goal, then we are probably better off just running things 
through the traditional systems and with one program in 
particular.
    No matter how we are delivering them, whether it is through 
the tax system, through the Ed system, I think we need a 
unified system so that we have a single application for 
families, so they can understand clearly what their eligibility 
is, and so we--so you, as policymakers, can understand clearly 
who is getting how much money.
    The Chairman. What is the importance of incentives to save, 
like 529 plans? We have several options--incentives for saving. 
Second is assistance while you are in college. Third is paying 
off loans. Maybe it is a combination. What do you think?
    Dr. Dynarski. The low-income families that we are trying to 
get into college, whose attendance rates are low, they are not 
using the 529 and the Coverdell.
    The Chairman. Sorry. Say again.
    Dr. Dynarski. They are not using the 529 and Coverdell.
    The Chairman. Who is not? I am sorry.
    Dr. Dynarski. Low-income families. So the people who save 
the most and who benefit most from the savings protections are 
going to be upper-income families. They are the ones who save 
more.
    So I would say we do not have any evidence at all that the 
savings incentives increase college attendance.
    The Chairman. Who else? Ms. Munson?
    Ms. Munson. I think you are chasing a runaway train. I 
think that tuition--unless you can find a way to disconnect the 
relationship between tuition increase and providing more 
subsidies, you are going to be in the business of just 
continually providing more subsidies.
    The Chairman. All right. Now, give me one or two ways you 
would do that.
    Ms. Munson. I am not sure. One idea would be to make 
universities and colleges get some skin in the game and worry 
about themselves being taxed, for example, if they are not 
spending from their endowment.
    The only way you can start getting to some evaluative 
information about the use of endowments and their potential to 
truly bring down the cost of college is to shine really some 
very bright sunshine on them.
    The Chairman. You gave us two proposals.
    Dr. Cruzado, what do you think of those two ideas that Ms. 
Munson has? Number one, you have to spend a certain percent of 
your endowment. Number two, you have to disclose your 
expenditures, as, apparently, private foundations do, and I am 
not that knowledgeable about private foundations.
    Dr. Cruzado. I am always in favor of more transparency 
rather than less. So in that sense, I would not be opposed.
    I have been thinking about whether there can be some type 
of provision where we say, the tax code benefits will be 
available for a fixed number of years, because whatever 
incentive we put out there, we will incentivize a particular 
type of behavior.
    And what we really want to do is to reduce that. The best 
way is to make sure that students get in school, get in school 
full-time, if possible, and graduate as soon as possible.
    The Chairman. On the requirement about a certain percent of 
endowment being paid, what is your thought about that?
    Dr. Cruzado. Well, again, let us talk about which 
percentage, and I think that we would be open to have a 
conversation. For example, at Montana State University, the 
endowment of the ASMSU Foundation is about $125 million, of 
which only 79 percent is permanently restricted.
    Yet, every year--last year, for example, our students 
received more than $2.5 million in scholarships. Those are 
dollars that would not have been there had it not been for 
those donors and benefactors who decided to invest in Montana 
State students.
    The Chairman. Dr. Dynarski, you gave me an answer to my 
question of what works.
    Does anybody else have an idea of what works? We are going 
to put runaway train aside for a moment. What works?
    Mr. Hodge. I think, Senator, that we need to get the 
government as much out of this as possible, because we do not 
have an efficient marketplace in higher education.
    This is the only market that I know of in which the seller 
of a good has complete financial information about the buyer. 
If I go into a store to buy a pair of shoes, the seller has no 
idea of what my income is or what my assets are. If I go to buy 
an airline ticket, the seller has no idea what my assets are or 
what my income is.
    And yet, in this marketplace, the seller of the good has 
complete information about my finances and can cherry-pick and 
design a financial package or a price that I can pay based on 
all of that.
    That is not an efficient market. That is a backwards 
market.
    The Chairman. That is going to occur, also, with respect to 
spending only; the seller is going to have more information.
    Mr. Hodge. The problem here is that we have all of these 
dollars which are forcing up cost. This is exactly the kind of 
bubble that was created in the housing market, where all of 
that cheap lending caused a bubble in the housing market.
    This is exactly what we are seeing in health care, where 
such things as the exclusion for employer-provided health 
insurance creates a third-party payer problem in which the 
actual consumer of the good has no real market power, because 
the seller of the good, the doctors and hospitals, are dealing 
with the insurers and the employers.
    And the more that we can try to make this a functioning 
market, that is the only way to get these costs under control 
and put the consumers back in the driver's seat. Right now, 
they are not. They are simply victims or pawns in this whole 
system.
    The Chairman. How do we get there from here?
    Mr. White, go ahead. What works?
    Mr. White. Mr. Chairman, the fact that you have to ask that 
question is part of the problem here.
    The Chairman. Yes.
    Mr. White. We do not know the answer. There is a debate 
among the panelists here about the effect of Federal assistance 
on tuition. Well, the flipside of that is the effect of Federal 
assistance on the quantity of students attending college. Price 
and quantity are just flipsides of the same thing in a market.
    And we do not know the effect on price, nor do we 
understand very well the effect on students' access to 
education, the extent to which these programs affect that.
    So what is needed here is some--part of what is needed to 
get you to the answer to the questions you are asking about is 
some better research by the Department of Education about the 
effects of these different programs on students' access to 
education, their persistence, the extent to which they follow 
through and graduate, what the ultimate outcome is from the 
billions of dollars that are being spent on these programs 
right now.
    The Chairman. You have somewhat answered the question. But 
what are some of the questions you want to have answered?
    Mr. White. What is the increase--what is the effect of all 
of the tens of billions of dollars that are being spent, at the 
margin, on the number of students attending college and 
finishing college?
    The Chairman. Does the Department have that data?
    Mr. White. Right now, the answer to that question is not 
very well understood. Part of the job of the Department ought 
to be to figure out what data is needed to answer that question 
and work with, for example, the IRS to obtain the data to 
answer that question.
    The Chairman. I did not realize Senator Thune was here. I 
am sorry, John.
    Senator Thune. Thank you, Mr. Chairman. I just kind of 
blend in down here.
    I am interested in that data as well. If there is a way--I 
think that would be really important information to have in 
order to make informed judgments about what works and what does 
not work and what is cost-effective.
    I think we all understand the critical role that education 
plays in our modern society and how important it is that we 
continue to expand the opportunity for more Americans. I think 
the tax code can and has played a role in that.
    I think the question is if the tax system is the 
appropriate place from which to expand access to education, and 
if these subsidies are really truly benefitting students or are 
they just structured primarily to benefit the educational 
institutions. It seems, to me at least, given the critical 
importance of education, that these are questions that really 
need to be explored, certainly, as part of fundamental tax 
reform, if we ever get there.
    I am interested in asking the question the chairman was 
asking maybe a slightly different way. But, between these 
various incentives that exist in the tax code today to help 
Americans afford higher education, you have provisions to help 
Americans save for college, provisions to help Americans deal 
with the debt associated with a college education, and some 
incentives to help Americans afford higher education.
    I am interested in drilling down a little bit more on the 
question of which of these categories of tax benefits are most 
cost-effective to the Federal Government. And again, that gets 
maybe back to the previous question that really needs more of 
an analysis of the data to come to that conclusion.
    But, if we could only choose one of these incentives, which 
is the one that you think would be the one that we would want 
to put our resources and our effort behind, and why? I just 
throw that question open.
    Mr. White?
    Mr. White. I will start. And I think part of the problem 
here is that we are spending tens of billions of dollars on 
these programs and we do not know the answer to the question 
you are asking.
    Some of these programs do serve different purposes. Some 
are effectively grants. The credits and deductions are 
providing money right now to pay for current expenses. Other 
programs are assisting with paying off loans, which is a 
different sort of assistance. But we do not know what the 
effect of these different kinds of programs is. We do not 
adequately understand--there is some research that has been 
done, but it is limited. We do not understand how effective 
those programs are at things that we want to accomplish, such 
as increasing college attendance by students who would not 
otherwise have gone to college.
    Senator Thune. Mr. Chairman, is that something that we 
could ask the GAO to do?
    The Chairman. We can ask them to do whatever we want. 
[Laughter.]
    Senator Thune. Good.
    Dr. Dynarski. I would like to point out, actually, that the 
Department of Education is right now fielding two experiments 
that will answer some of these questions. They are about to 
start some experiments that would look at the effect of the 
Pell Grant, as well as the education savings incentives.
    So at least we are moving in the direction of getting 
answers to some of these questions.
    Senator Thune. Let me ask Mr. Hodge. There are a number of 
us on this committee, I think, who have been surprised to learn 
that roughly half of all Americans do not pay Federal income 
tax at all, because they do not have an income tax liability.
    What are your thoughts and your opinion as to what extent 
the tax benefits in the code for education contribute to that?
    Mr. Hodge. Well, it has not been the driving force. 
Obviously, the child credit, the Earned Income Tax Credit, 
Making Work Pay, all these others are the bigger factors, but 
this is certainly a factor. And certainly, the American 
Opportunity Tax Credit has been a big part of that.
    I was troubled to read the Inspector General report which 
found as much as $3.2 billion in erroneous payments under the 
American Opportunity Tax Credit in the last year. So these 
programs are ripe for fraud, in addition to the fact that they 
are knocking people off the tax rolls.
    But to answer your previous question, I would say the only 
provisions that we are talking about here that are consistent 
with fundamental tax reform are the savings provisions, the 529 
plans and the IRAs, because, even under fundamental tax reform, 
we would want to encourage savings.
    I would not try to pigeonhole savings into various buckets 
that we choose, such as health insurance or housing or so 
forth, but to encourage savings for whatever a family's needs 
may be, but certainly, education would be a big part of that.
    And so all of these other credits do violate the basic 
principles of fundamental tax reform and the basic principles 
of tax policy. But on the other hand, the savings provisions 
are fully consistent with that and are things that we would 
want to encourage.
    It is better to encourage people to save for college rather 
than to mortgage their future with all of these loans, which 
too many Americans now--I think the outstanding loan debt in 
America is now over $1 trillion, which is greater than all of 
the consumer debt that is out there.
    We are facing the same kind of bubble in student loans that 
we have seen in housing, and that is a very troubling turn of 
events.
    Dr. Dynarski. I would just like to add to that that I agree 
it is important to encourage savings, but I think we should be 
clear about that savings policy and not call it education 
policy. We basically do not have any evidence that these 
programs increase 
college-going.
    The people who take up the 529 plan, the Coverdell, are 
very high-income families. Their children go to college at 
rates well north of 90 percent. And providing tax savings 
incentives for them is not going to increase education levels.
    Senator Thune. Final question, and I guess maybe this was 
addressed earlier. But did we sort of establish, in response to 
some of the questions that were raised earlier, that some of 
these subsidies for education are contributing to the higher 
cost of college education? Was that a sort of agreed-upon 
point?
    Dr. Dynarski. No.
    The Chairman. It was discussed.
    Senator Thune. Good. Well, I will go back and read the 
transcript and figure out who agreed and who disagreed.
    But anyway, this is--if we get to fundamental tax reform--
obviously something that will be hopefully included, an element 
of that, and, hopefully, by then we will have some of the 
information that will give greater clarity at least to what 
works, what does not work, what is a good return for the 
taxpayer. And so I look forward to that.
    Thank you, Mr. Chairman. Thank you all.
    The Chairman. Thank you, Senator.
    Don't financial aid directors have some sense of what works 
and what does not work? Surely, we need some data, but we can 
be chasing data until the cows come home, and I am guessing 
that some financial aid directors have some sense--they are 
going through the applications--what works and what does not 
work and so forth.
    Dr. Dynarski. We actually do have evidence that simple, 
well-
designed, easy-to-communicate aid programs increase college 
attendance quite a bit. This evidence comes from State programs 
that have those characteristics.
    We also have evidence that simplifying the Federal programs 
would have a large impact on college-going. There was a recent 
experiment run by economists at the National Bureau of Economic 
Research where they randomly assigned families to get a vastly 
simplified aid application process, and it boosted college 
enrollment rates substantially.
    So we have very strong evidence that if we were able to 
streamline and simplify the process for applying for aid, we 
would get a large boost to college attendance right away.
    The Chairman. Given the number of potential grants and the 
number of potential tax provisions, is it possible to design a 
simple form, or do we just have so many different alternatives 
here that it is pretty hard to design one?
    Dr. Dynarski. It can be complicated on the back end, but 
simple on the front end for the student who is applying. So, if 
we want to have aid coming from lots of different funding 
streams, that is fine. But as long as the student who is 
applying sees a transparent and simple answer to how much does 
college cost and how much does the government help me, then 
that can have a real impact.
    The Chairman. I think we are going to have both spending 
and tax provisions. That is just reality here. So it seems to 
me we have to simplify and streamline both the law and, second, 
the forms. And I am trying to figure out how we make that 
happen.
    You have two departments here. You have IRS and you have 
the Department of Education, and it is a problem.
    But while I am thinking about that, you raised your hand, 
Mr. White.
    Mr. White. Well, we have been discussing the merits of 
grants versus tax programs. One of the advantages of tax 
programs that gets at your point is that IRS has information 
off of tax returns suitable for making decisions about means-
tested programs. If you are going to target people based on 
income, IRS has that information off of tax returns. So that 
information is already there.
    The Chairman. That is a good point.
    Mr. Hodge?
    Mr. Hodge. Senator, I should point out that 73 percent of 
people who get the Earned Income Tax Credit have to pay a 
professional preparer in order to get that credit. So even 
something like that, which is well-intended to try to assist 
low-income working Americans, people are then stuck with this 
highly complicated tax credit in which they have to pay someone 
else in order to fill out the form.
    The Chairman. That may be, but I would guess that the 
benefit outweighs the cost. I do not know.
    Mr. White. Well, it also has led to a lot of unscrupulous 
preparers. And so the fraud rates are between 23 and 28 percent 
of EITC.
    The Chairman. Are you suggesting we repeal the EITC?
    Mr. White. We have to consider whether or not--we have two 
programs. We have TANF and we have EITC. They are awfully 
similar. And which ones are most effective?
    The Chairman. No, they are not. They are very different. 
They are very different. One is work-related, the other is not. 
They are very different.
    Anyway, final thoughts. Has anybody said anything that 
needs to be addressed? Did somebody say something so outrageous 
that it has to be addressed?
    Ms. Munson. I simply think that you are not going to get to 
the honest truth about why tuition is going up so much unless 
colleges and universities are forced to have some skin in the 
game with regard to controlling those tuition costs and being 
honest with the public about how they are using their 
resources.
    I do not think that you are ever going to catch up with the 
runaway train unless universities really are forced to put 
themselves on the tracks. So just looking at the student side 
of the equation or, as Mr. Hodge would say, the buyer part of 
the equation, and providing all the information from the buyer 
and none from the seller, is never going to get us anywhere.
    The Chairman. Yes. Dr. Cruzado?
    Dr. Cruzado. Yes. Mr. Chairman, I could not agree more in 
terms of the need for transparency, but also with the need for 
building a platform of urgency here and in the end asking 
ourselves, so what type of a Nation do we want to build; what 
type of a Nation do we aspire to continue being or to be in the 
future? And the answer to that is in higher education.
    I need to say that many universities are doing the right 
thing, and perhaps sufficient credit has not been given, 
perhaps because the information is not there. But for example, 
at Montana State University, I discovered that our graduation 
rate, our 6-year graduation rate, was 42 percent, and I thought 
that was unacceptable. And we started to do some work, and 2 
years later it is 52 percent, a 10-percent increase in just 2 
years. Still, a lot needs to be done.
    One of the findings that I have made is that--why is it 
that it is taking so long for students to complete their 
degrees? And there are some exceptions in which students are 
head of household and have other obligations. The reality is, 
students across the Nation are taking far less credits than 
what we used to take when we went to college. Perhaps we 
enrolled in 15 or 18 credits.
    At Montana State University, we have a provision that we 
call the flat spot. That is, students will pay exactly the same 
tuition whether they enroll in 12 credits or 15 credits, up to 
18 credits. And what did I find? That 50 percent of our 
students are enrolled in 14 credits or less.
    So starting this year, we are doing things differently. We 
are starting financial literacy sessions with students and 
their families, and we are urging the new class of freshman to 
enroll in more credits. We call it Freshman 15. It is a new 
take at augmenting their academic workload.
    And in order to make it visual, at a meeting with the 
parents of all the freshman, I show them a voucher, and I say, 
``How many of you would like to have a voucher for $800 if you 
are an in-State student or for $2,400 if you are an out-of-
State student?'' And of course, all of the hands go up.
    And I say, ``Well, that is the equivalent of a 3-credit 
course over 12 credits if you were to enroll now. If you were 
to enroll in up to 18 credits, that is twice as much.'' And I 
finish up by telling them to not leave money on the table.
    So there are sound opportunities that colleges and 
universities are already improving and implementing today in 
order to make sure that families and students get to their 
objectives but, collectively, we build that Nation that we want 
to build.
    The Chairman. Thank you. That is a very good point to end 
on, a platform of urgency.
    Thanks, everybody, very, very much for attending. I know 
you have come great distances at great expense to come here, 
and we thank you very much for the hearing.
    [Whereupon, at 11:52 a.m., the hearing was concluded.]



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