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The underlying assertion is that universities must provide financial assistance to the majority of their students to be considered tax exempt. No citation is pr

The underlying assertion is that universities must provide financial assistance to the majority of their students to be considered tax exempt. No citation is provided. 26 USC 501(c)(3) explicitly lists an organization operated exclusively for educational purposes as being tax exempt. Charitable organization is listed as a separate type. Also worth considering is the example of Cooper Union: It charged no tuition and therefore offered no financial aid for most of its history. While one could argue that that is a form of aid so too would any other tuition reduction enabled by an endowment. This further suggests that universities do not set tuition in order to maintain tax exempt status.

elliekelly 8y ago
I believe the post is referring to the 501(c)3 status of the endowment, which is basically a trust fund, and is not operated exclusively for educational purposes.
- absherwin 8y ago
  Two thoughts: Funds are explicitly mentioned as acceptable entities in 501(c)(3). For what non-educational purpose are endowments used? While some uses may seem tenuously connected to a given observer, all are determined to further the university’s mission in some way.
  - elliekelly 8y ago
    > For what non-educational purpose are endowments used? Most of the money is used to make more money tax free. i.e., it's invested & managed by Wall Street. Edit to add I wasn't suggesting the type of entity mattered re: 501(c)3 status but rather was pointing out that the endowment fund is an entity separate and apart from the educational institution.
    - absherwin 8y ago
      The point you’re raising is that an endowment could simply exist to make money for its own sake. The IRS combats this by requiring a minimum distribution of 2/3 of the endowment’s minimum return (which tends to be lower than actual). See https://www.irs.gov/charities-non-profits/private-foundations/private-operating-foundation-endowment-test https://www.irs.gov/charities-non-profits/private-foundation... for details.
      - elliekelly 8y ago
        ... yes, exactly. Let's review: I pointed out it's not the university, but the endowment that needs to spend a certain amount to maintain tax-exempt status and that most of it is invested to make more money, which is not an educational purpose. You've just pointed out that the IRS requires the endowment to make certain distributions. And you've even noted that the IRS required distribution is often much lower than the actual investment income earned. What does this mean? It means even after making the qualified distributions the endowment grows. Let's say the investment pot has $100 principal and earns 8% a year. At the end of the first year the endowment has $108. Most endowments FBO educational institutions distribute 5% of the total assets[1]: Year Prin. Int. Dist. ---- ------- ---- ---- 1 $100.00 $8.00 $5.40 2 $102.60 $8.21 $5.54 3* $105.27 $8.42 $5.68 4 $108.00 $8.64 $5.83 5 $110.81 $8.87 $5.99 As you can see as the endowment grows the amount of money that needs to be distributed grows as well. It's interesting to note that the specific rule you've cited came into effect in 1970 precisely because endowments were reaping the benefits of tax-free earnings without actually using the money for the benefit of any of the tax-exempt activities.[2] When did college tuition start skyrocketing? The mid-1970's. [1] Professional experience: I'm a securities & investment attorney. [2] https://www.irs.gov/irm/part7/irm_07-027-016 https://www.irs.gov/irm/part7/irm_07-027-016 *Edit: Skipped a year's worth of numbers
        AnthonyMouse 8y ago
        > And you've even noted that the IRS required distribution is often much lower than the actual investment income earned. What does this mean? It means even after making the qualified distributions the endowment grows. Not in real terms it doesn't. When was the last time typical moderate risk investments had long-term returns more than 5% above inflation? If you had $1000 1970 dollars in 1970 and it increased by nominal 3% annually until last year, you would have $4012 in 2017 dollars. That isn't a real >$3000 gain, it's a >$2400 loss (in 2017 dollars), because $1000 1970 dollars is $6418 2017 dollars. > When did college tuition start skyrocketing? The mid-1970's. This is also just after the Higher Education Act was passed, giving out low interest student loans.
hn_throwaway_99 8y ago
They author has commented below, which I needed to read a few times to understand his justification. He's not really saying that there is some "50%" magic number in tax law. What he is saying is that, imagine a situation where the price of admission was much more reasonable (i.e. hadn't gone up 300+% in the last generation) so that only, say, 10% of students needed aid. This means 90% of students would be paying full price. Well, if 90% are paying full price, he imagines the political pressure would come to say "Why the fuck are these absolutely gigantic, small country-sized endowments able to earn all this profit, and compound it, tax-free, and still 90% of students are paying full price!" Thus, he argues that the large universities play this fuzzy-math shell game to consistently jack up the price of tuition so that the majority of students require aid. That way they can argue their endowment profits should remain tax-free because they are going to subsidize the students' education. That's just my summary, but all-in-all I think the whole essay is powerfully argued. In my mind (and I say this as an Ivy league grad) I agree that getting an Ivy league degree 25 years ago is basically like buying real estate in SF 25 years ago. The overall supply has remained artificially constrained which has made prices go through the roof, with the social signalling and economic benefits accruing to those who graduated when admission rates were higher and tuition was lower.
- peteretep 8y ago
  Most elite private high schools in the UK are charities, and only about 10% of students there receive some form of financial aid. There’s some political impetus to remove that, sure, but it hasn’t happened yet and it isn’t overwhelming.
- cjmb 8y ago
  This is absolutely spot on, and I just wanted to comment to say thank you for articulating my point more succinctly than I did. The comparison to artificially-constrained SF housing is very apt (as a current SF resident, I know it well).
- absherwin 8y ago
  I agree wholeheartedly with the larger point that we have a higher education bubble. I’m skeptical both that: Lower tuition would make taxing endowments more likely and that universities believe that that’s the case. In a world with lower tuition, endowments grow somewhat more slowly and are easier to justify because they are the thing that enables low tuition. For a more direct set of examples of how much inertia we have, consider the way wealthy individuals use foundations to avoid taxes. I haven’t heard people crying out to tax the Gates Foundation despite its endowment growing over time because it can’t keep up with its contributions. Nor is there a massive uproar about donor advised funds which (particularly in CA) can be 80%+ taxpayer funded while effectively lacking minimum disbursement requirements as part of a larger organization.

elliekelly 8y ago

I believe the post is referring to the 501(c)3 status of the endowment, which is basically a trust fund, and is not operated exclusively for educational purposes.

absherwin 8y ago
Two thoughts: Funds are explicitly mentioned as acceptable entities in 501(c)(3). For what non-educational purpose are endowments used? While some uses may seem tenuously connected to a given observer, all are determined to further the university’s mission in some way.
- elliekelly 8y ago
  > For what non-educational purpose are endowments used? Most of the money is used to make more money tax free. i.e., it's invested & managed by Wall Street. Edit to add I wasn't suggesting the type of entity mattered re: 501(c)3 status but rather was pointing out that the endowment fund is an entity separate and apart from the educational institution.
  - absherwin 8y ago
    The point you’re raising is that an endowment could simply exist to make money for its own sake. The IRS combats this by requiring a minimum distribution of 2/3 of the endowment’s minimum return (which tends to be lower than actual). See https://www.irs.gov/charities-non-profits/private-foundations/private-operating-foundation-endowment-test https://www.irs.gov/charities-non-profits/private-foundation... for details.
    - elliekelly 8y ago
      ... yes, exactly. Let's review: I pointed out it's not the university, but the endowment that needs to spend a certain amount to maintain tax-exempt status and that most of it is invested to make more money, which is not an educational purpose. You've just pointed out that the IRS requires the endowment to make certain distributions. And you've even noted that the IRS required distribution is often much lower than the actual investment income earned. What does this mean? It means even after making the qualified distributions the endowment grows. Let's say the investment pot has $100 principal and earns 8% a year. At the end of the first year the endowment has $108. Most endowments FBO educational institutions distribute 5% of the total assets[1]: Year Prin. Int. Dist. ---- ------- ---- ---- 1 $100.00 $8.00 $5.40 2 $102.60 $8.21 $5.54 3* $105.27 $8.42 $5.68 4 $108.00 $8.64 $5.83 5 $110.81 $8.87 $5.99 As you can see as the endowment grows the amount of money that needs to be distributed grows as well. It's interesting to note that the specific rule you've cited came into effect in 1970 precisely because endowments were reaping the benefits of tax-free earnings without actually using the money for the benefit of any of the tax-exempt activities.[2] When did college tuition start skyrocketing? The mid-1970's. [1] Professional experience: I'm a securities & investment attorney. [2] https://www.irs.gov/irm/part7/irm_07-027-016 https://www.irs.gov/irm/part7/irm_07-027-016 *Edit: Skipped a year's worth of numbers
      - AnthonyMouse 8y ago
        > And you've even noted that the IRS required distribution is often much lower than the actual investment income earned. What does this mean? It means even after making the qualified distributions the endowment grows. Not in real terms it doesn't. When was the last time typical moderate risk investments had long-term returns more than 5% above inflation? If you had $1000 1970 dollars in 1970 and it increased by nominal 3% annually until last year, you would have $4012 in 2017 dollars. That isn't a real >$3000 gain, it's a >$2400 loss (in 2017 dollars), because $1000 1970 dollars is $6418 2017 dollars. > When did college tuition start skyrocketing? The mid-1970's. This is also just after the Higher Education Act was passed, giving out low interest student loans.

hn_throwaway_99 8y ago

They author has commented below, which I needed to read a few times to understand his justification. He's not really saying that there is some "50%" magic number in tax law. What he is saying is that, imagine a situation where the price of admission was much more reasonable (i.e. hadn't gone up 300+% in the last generation) so that only, say, 10% of students needed aid. This means 90% of students would be paying full price. Well, if 90% are paying full price, he imagines the political pressure would come to say "Why the fuck are these absolutely gigantic, small country-sized endowments able to earn all this profit, and compound it, tax-free, and still 90% of students are paying full price!" Thus, he argues that the large universities play this fuzzy-math shell game to consistently jack up the price of tuition so that the majority of students require aid. That way they can argue their endowment profits should remain tax-free because they are going to subsidize the students' education. That's just my summary, but all-in-all I think the whole essay is powerfully argued. In my mind (and I say this as an Ivy league grad) I agree that getting an Ivy league degree 25 years ago is basically like buying real estate in SF 25 years ago. The overall supply has remained artificially constrained which has made prices go through the roof, with the social signalling and economic benefits accruing to those who graduated when admission rates were higher and tuition was lower.

peteretep 8y ago
Most elite private high schools in the UK are charities, and only about 10% of students there receive some form of financial aid. There’s some political impetus to remove that, sure, but it hasn’t happened yet and it isn’t overwhelming.
cjmb 8y ago
This is absolutely spot on, and I just wanted to comment to say thank you for articulating my point more succinctly than I did. The comparison to artificially-constrained SF housing is very apt (as a current SF resident, I know it well).
absherwin 8y ago
I agree wholeheartedly with the larger point that we have a higher education bubble. I’m skeptical both that: Lower tuition would make taxing endowments more likely and that universities believe that that’s the case. In a world with lower tuition, endowments grow somewhat more slowly and are easier to justify because they are the thing that enables low tuition. For a more direct set of examples of how much inertia we have, consider the way wealthy individuals use foundations to avoid taxes. I haven’t heard people crying out to tax the Gates Foundation despite its endowment growing over time because it can’t keep up with its contributions. Nor is there a massive uproar about donor advised funds which (particularly in CA) can be 80%+ taxpayer funded while effectively lacking minimum disbursement requirements as part of a larger organization.