The administration is gradually cutting back on student aid, in order to save the government some money. To help some of the stranded students, a number of states and colleges are stepping into the breach with extra funding of their own.
The irony is that some of these new plans involve tax-exempt funding, or tax-deductible ways of financing tuition payments.
Result: The federal government appears to save money by reducing student loans and grants. But the simultaneous growth in tax-exempt student aid may wind up costing the government as much as it saves.
The cost will be invisible. Instead of handing out more grants, the U.S. Treasury will take in less money. Either way, Uncle Sam pays the bill.
It is impossible to tell whether the rise in invisible, tax-favored funding will equal or exceed the decline in visible funding. (One of the attractions of invisible funding is that no one knows for sure how much money is being drained off.)
But this much is sure: Invisible funding is less even-handed than money paid outright. Some states will have tax-supported student-aid programs; others won't. Some colleges will help you tax-deduct tuition; others won't. The race will go to those most willing to use the tax code to their purpose.
Here are a couple of examples of what's going on:
Tax-exempt funding. The state of Illinois plans to raise money this summer in the tax-exempt bond market, and use it for loans to students attending private, nonprofit colleges and universities. The colleges are now in the process of deciding how much money to request. The state is creating an agency to oversee the program.
James J. Unland, of the investment banking firm William Blair and Co., says that if Illinois were to raise money today, it might have to pay investors 11 percent on their money, and charge students 12 percent on loans. Parents will have to sign, or co-sign, the loans. If both student and parent default, the college is obliged to make repayments to investors.
Illinois' student-loan bonds will run 10 years for undergraduate funding and 15 years for loans to students at graduate and professional schools. The loans will be made through the financial-aid offices of participating colleges.
A new law in Massachusetts will help both private and public colleges and universities use tax-exempt bonds to raise money for student loans. Unland thinks that four or five more states will soon have a similar program on the books.
Tax-angle scholarships. Beloit College in Wisconsin suggests that the way to pay for a liberal education today is to give a liberal reading to the U.S. tax code. Of course, that is not exactly the way the college puts it. Vice President Harold Wilde says, "Our idea was to be a positive response to the volunteerism called for by President Reagan."
Starting this fall, Beloit expects to offer students a "moral obligation scholarship." Money will be given, says Wilde, with "an explicit understanding" that it will be given back, preferably on a regular "gifting schedule." But because the student repays in the form of a gift, the repayments are tax-deductible, Wilde says. So it's a way of tax-deducting a part of your college tuition payments. Wilde thinks that it is no different from any other fund-raising appeal made to scholarship students.
Under the IRS code, a gift is deductible only if it is given without any expectation of getting benefits in return. In 1979, the IRS ruled that donations to a church were not deductible in cases where the donor's children were allowed to attend the church's school tuition-free. The IRS felt that the donations were merely a disguised form of tuition payment.
Immediately after this ruling, Congress attached a rider to an appropriations bill forbidding the IRS to enforce the tuition ruling. That rider is still in effect. Because of it, an IRS spokesman says, "we would probably not be able to rule" on the Beloit situation.
Hear that, schools and colleges? Congress says that you are free to reconstruct your loans or tuition-payments plans into tax-deductible gifts. Your only risk is that while you are using the tax code to attract students, your savvy students will, in return, make use of you--by refusing to pay their "scholarships" back.