Higher Education Reforms Could Finance Half a Trillion Dollars in a Reconciliation Bill

With the elections in November giving Republicans small majorities in the House and Senate, there is considerable attention on potential reconciliation bills with pros and cons relative to regular legislation for the new Republican majorities.

On the bright side, reconciliation bills cannot be filibustered, which means that they only need 51 votes rather than the typical 60 votes in the Senate, meaning a bill could pass with just Republican support—Republicans have 53 seats in the Senate. The downside is that the bill can only cover fiscal matters like spending and taxes, which means other Republican priorities, such as reversing the woke takeover of higher education or accreditation reform, likely couldn’t be included. Reconciliation bills also cannot raise the deficit after 10 years, which is why the first Trump administration’s tax cuts expire in 2025. Finding revenue to extend those cuts is a priority for Republicans.

As luck would have it, higher education provides many opportunities for Republicans looking for ways to pay for tax cuts or other spending in a reconciliation bill while simultaneously improving higher education by reducing inappropriate government interference and distortions. Indeed, higher education is a veritable gold mine of ideas that would be beneficial—regardless of their budgetary impact—while cutting spending or raising revenue. Implementing the ideas listed below would provide Congress with up to a half trillion dollars to spend on other priorities or tax cuts while also improving higher education.Don’t Let

[RELATED: Colleges Keep Ducking Accountability on Student Loans]

Cutting Higher Education Spending

Cutting federal spending for higher education could save hundreds of billions of dollars. The main spending areas that would both benefit from reform and reduce federal spending are student loans and campus-based aid programs.

Student Loans ($212+ billion over ten years)

The juiciest target for cuts are student loans. The government is currently projected to lose around $0.19 for every dollar it lends, so a natural choice would be to eliminate the government’s lending programs. As I document in a forthcoming Cato Institute report, this would save around $212 billion over the next ten years. And transitioning to a private lending marketplace would also help students and strengthen higher education by unleashing the power of market prices in higher education.

But if scrapping all government lending is a bridge too far, there are a handful of beneficial changes that could still be included.

Eliminate “Subsidized” loans ($14 billion over ten years)

Eliminating the “Subsidized” loan program and making all loans “Unsubsidized” going forward could reduce spending by about $14 billion over the next ten years. The terminology is a bit confusing here because while almost all government lending is heavily subsidized, there is a type of loan referred to as “Subsidized” which waives interest while students are enrolled—as opposed to “Unsubsidized” loans, which confusingly are still subsidized. This feature of “Subsidized” loans is quite expensive, and there is little reason to think it has any influence on student decisions. We ceased offering “Subsidized” loans to graduate students a few years ago, and hardly anyone even noticed. There is also no movement pushing for “Subsidized” loans to be reinstated for graduate students. And since all formerly “Subsidized” loans would now just be “Unsubsidized” loans, this change is immune from the criticism that it is taking away students’ ability to borrow.

Eliminate Grad PLUS loans ($47 billion over ten years, $25 billion if Parent PLUS is scrapped too)

Grad PLUS is the worst-designed student loan program. To begin with, it is redundant since graduate students can already borrow up to $20,500 per year and $138,500 in aggregate—including undergraduate debt—from the Stafford loan program. And it lacks the safeguards, however ineffective, of other programs like caps on borrowing. The lack of borrower protections, such as annual or aggregate borrowing limits, allows for over-borrowing, with extreme cases topping $1 million dollars. Eliminating this program would save up to $47 billion over ten years, but I would recommend eliminating Parent PLUS loans as well, which suffer from even worse problems. The government projects that Parent PLUS is the only profitable lending program, since parents aren’t eligible for many of the generous loan forgiveness plans. So, eliminating both Grad and Parent PLUS would save about $25 billion.

Beyond eliminating specific loan programs, there are several other methods to reduce federal spending on student loans.

• Eliminate the SAVE repayment plan. SAVE modified a student loan repayment program to make it much more generous, costing taxpayers hundreds of billions of dollars. It is paused by the courts for now, but Congress could legislatively end SAVE and pocket hundreds of billions in savings.
• Eliminate or cap Public Sector Loan Forgiveness (PSLF). PSLF distorts labor markets and results in windfalls for well-compensated government employees. Eliminating PSLF or capping the amount that can be forgiven as, say, the maximum Pell Grant over four years could save billions of dollars.
• Modify loan forgiveness for existing income-driven repayment plans. Significant revenue could be raised by increasing the number of years of repayment required before loan forgiveness or eliminating the forgiveness provisions altogether. Since income-driven repayment plans already ensure that payments are always affordable, there is no need for these plans to include explicit loan forgiveness.

Eliminate or Modify the Campus-Based Aid Programs ($21 billion over ten years)

Campus-based aid programs allocate federal funding to colleges, which then add some of their own funding and decide which students get the aid.

Eliminate Federal Supplemental Educational Opportunity Grants (Up to $9 billion over ten years)

 The Federal Supplemental Educational Opportunity Grants (FSEOG) is redundant and corrupt. FSEOG grants are available to low-income students, but we already have a program that does this. It’s called Pell Grants. FSEOG funding is also not distributed to colleges based on how many needy students they have, but rather is largely driven by their historical funding, which in practice means that rich and politically connected colleges have a disproportionate share of FSEOG funding. FSEOG costs about $900 million per year, so eliminating it would save about $9 billion over ten years. However, I would argue that, politically, it might be beneficial to allocate this money to the Pell Grant program.

Eliminate or Reduce the Federal Contribution to Federal Work Study (Up to $12 billion over ten years)

Colleges use work-study funding to pay students for on-campus jobs like staffing computer labs. Like FSEOG, work-study is corrupt because rich and politically powerful colleges receive a disproportionate share of work-study funding. I also wonder whether promoting the existence of low-effort, government-subsidized jobs is an expectation that conservatives should be encouraging among the young. Eliminating the program would save $12 billion over the next ten years. The federal share of work study paychecks—typically around 75percent—could also be reduced to generate partial savings.

Raising More Revenue

The other source of funding that higher education can provide in a reconciliation bill would be reforms that increase revenue. Again, I focus only on reforms that should be pursued anyway, which also happen to raise revenue. The main revenue sources are tax credits and deductions and a university endowment tax.

Eliminate or Modify Higher Education Tax Credits and Deductions ($208+ billion over ten years)

There are tons of tax credits and deductions for higher education, but there shouldn’t be. As earlier research of mine concluded,

while the best justification for tax credits is to improve college affordability for the middle class, tax credits utterly fail at achieving this goal. The higher education tax credits therefore lack a compelling justification for continued existence. Much of the aid is mistargeted, going to high-income students due to universal rather than selective targeting. Tax benefits also operate more as delayed reimbursement than as financial aid. And even the aid that does make it to the middle class is largely captured by the colleges because many colleges strategically respond to the tax credits by raising tuition or reducing institutional aid, leaving colleges richer but the middle class unassisted. Therefore, higher education tax credits should be eliminated.

[RELATED: State Disinvestment in Higher Education is Still a Myth]

I would therefore recommend eliminating the higher education tax credits and deductions regardless of their revenue impact. But as fate would have it eliminating them would raise massive amounts of revenue. Recommendations include—revenue estimates extrapolated from Joint Committee on Taxation data with the caveat that the figures are based on tax expenditures and not the revenue from repeal, which could differ:

• Eliminate postsecondary credits like the American Opportunity Tax Credit and Lifetime Learning Credit. (Up to $148 billion over ten years);
• Eliminate deduction for interest on student loans. ($29 billion over ten years);
• Treat student loan forgiveness as taxable income. ($12 billion over ten years);
• Treat employer-provided tuition and assistance as income. ($19 billion over ten years);
• Limit deductions for charitable donations to colleges. The forgone revenue from all charitable contributions to educational institutions total $137 billion over ten years, but this includes K-12 schools as well. Limiting deductibility for higher education or colleges that meet certain criteria (e.g., are subject to the endowment tax) could raise some fraction of that amount.

Tax University Endowments

Taxing university endowment revenue is another source of additional revenue. The current tax is quite low (1.4 percent) and only applies to a handful of colleges. Increasing the tax rate or expanding the colleges it applies to could raise more revenue.

As the new Congress settles into office, higher education provides fertile ground for reforms that would improve the quality of higher education while also providing up to half a trillion dollars that could be used in a reconciliation bill to finance other spending or tax cuts.

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