The Washington PostDemocracy Dies in Darkness

Last-minute change to GOP endowment tax ensnares a college that Republicans uphold as a model for affordability

House Speaker Paul Ryan (R-Wis.) on Tuesday led Republicans as they passed a sweeping tax overhaul. (Susan Walsh/AP)

Berea College in Kentucky uses a $1 billion endowment to cover tuition for all of its roughly 1,600 students. Because of that mission, Senate Republicans exempted the school from a proposal to tax the endowments of dozens of private schools. But that exemption was one of three provisions removed Tuesday from the federal tax overhaul because they violated congressional rules.

So, Berea will once again join the list of schools seeing their tax burden rise under the GOP plan.

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Democrats flagged the provisions to the Senate parliamentarian, hoping to delay the legislation. One provision would have allowed families to use 529 college savings accounts for home-schooling expenses, while the other involved the abbreviated name of the legislation. Though Democrats lacked the votes to stop the bill, they did force the House to hold a second vote on the sweeping tax overhaul.

Higher education leaders have campaigned against the endowment tax and succeeded in narrowing its scope. House Republicans sought to levy a 1.4 percent excise tax on investment income at private schools with endowments worth at least $250,000 per student, but the Senate bill doubled the threshold and cut the list of affected schools to about 30. Senate Republicans also revised the definition of “applicable educational institutions” from those with at least 500 students to ones with at least 500 tuition-paying students. Adding those two words — tuition-paying — automatically exempted Berea.

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For decades, the liberal arts school has used its hefty endowment to ensure no student pays tuition, with all unrestricted donations committed to long-term investment. In exchange for having their tuition covered, students agree to work up to 15 hours a week on campus or in the local community.

More than four-fifths of Berea students have sufficient financial need to qualify for federal Pell grants. All of them, according to Berea, receive enough in grants from federal, state and Berea College sources to pay for an average 92 percent of the $34,380 total cost of attendance, including tuition, housing, books and transportation. The college estimates it will have to pay the federal government about $1 million a year because of the excise tax, enough to cover tuition for about 30 students.

“We are very disappointed with the latest developments on the Hill,” Berea president Lyle Roelofs said. “It seems so unfortunate that the political strife over tax reform in our country will result in greater difficulty for colleges seeking to serve low-income students.”

Terry W. Hartle, senior vice president of the American Council on Education, said Berea appears to be one of three schools affected by the removal of the exemption from the final tax bill. He suspects Principia College in Illinois and Princeton Theological Seminary, which each enroll about 500 students, would also have benefited from the exemption.

“This is like trying to take off in an airplane with all of the overhead bins open, things are bound to fall out,” said Hartle, whose organization represents colleges and universities. “These sort of unintentional consequences are what happens when you hastily rush legislation for the sake of corporate tax cuts.”

Universities maintain endowments, a collection of tax-exempt donations and investments, to pay for salaries, research, financial aid and other expenses. A tax on endowment investment earnings could be especially painful for private universities that are heavily reliant on the income for operations, said Susan I. Fitzgerald, associate managing director at Moody’s Investors Service.

“It really adds budgetary pressure to those schools that are dependent on endowment income,” she said. The question becomes, she said, “how will those schools make up the difference? Would they raise tuition? Cut spending?”

Berea draws about 45 percent of its revenue from endowment earnings, according to Moody’s.

Congress digs into issue of colleges using endowments to lower students’ costs

The Berea tuition model has been highlighted by Republicans as an example for other universities to follow. A House Ways and Means subcommittee invited leaders from the college last year to testify during a hearing on universities that use their endowments to lower student expenses.

On Tuesday, Ways and Means Committee staff said chairman Kevin Brady (R-Tex.) will work to restore the endowment exemption and the 529 plan expansion in a future tax bill.