Expert Proposes Solution to Student Debt: Tax the Universities

The Harvard University campus on March 23, 2020 in Cambridge, Massachusetts. (Maddie Meyer/Getty Images)

Less than a month has passed since the Supreme Court struck down President Joe Biden’s 2022 student loan forgiveness plan as unconstitutional.

Yet, Inez Stepman of the Independent Women’s Forum points out, the commander-in-chief still got what he wanted that year. Young Americans seeking relief from their debt burden turned out to vote for a party that promised it.

“There’s pretty good polling showing that it did really help the Democrats in the midterms,” Ms. Stepman told The Epoch Times during a July 20 interview.

That political reality is one of multiple motivations for her recent proposal (pdf) to fund student loan forgiveness by taxing universities.

A Nuanced Problem

Ms. Stepman said it’s no surprise that the Left wants to deliver free college at taxpayer expense. The universities are one of their strongholds–and the Left is good at rewarding friends and punishing enemies, including any wealthy conservatives who still donate to institutions overtly hostile to their values.

“If you’re going to be a person of wealth or power in America, you have to sit through the indoctrination of the far-Left, provided by 99 percent of universities,” she said.

“On the other hand, though, the Right is wrong to talk about this issue of debt as though it is still 1983,” Ms. Stepman continued.

Tuition costs have climbed steeply in the past half century, rising at almost five times the rate of inflation since the early 1970s, according to a My eLearning World analysis of College Board data.

“It is functionally no longer possible for an 18-year-old to ‘work their way’ through most colleges and universities unless your parents can cough up the full tuition price or you get substantial financial aid from the university,” she said.

Ms. Stepman traces the distorted market for higher education back to the federal student loan programs that began as part of Johnson’s Great Society in the 1960s. Universities have been able to raise the price of tuition in step with rising student loan guarantees.

“Because government-backed loans exist, there’s no market mechanism to check [universities],” she said.

Meanwhile, more and more jobs demand a bachelor’s degree, including some that once only took a high school diploma. Young people graduating high school may see little alternative to higher education, especially if they’ve absorbed the lesson that college is a prerequisite for success and happiness in life.

“At the end of the day, these are adults who have signed out on loans, including myself. But I do think that the Right sometimes fails to account for how much the Left has changed the incentives and the policy structure and the way that this entire sector and business operates,” she said.

“This is not a free market,” she added.

Stepman’s Solutions

Even if the Biden debt cancellation plan had survived the Supreme Court, the status quo would have seen a rapid reaccumulation of debt.

A 2022 analysis from the Committee for a Responsible Federal Budget (CRFB) projected that student debt would return to its then-current levels in a little over half a decade. That’s under the cautious assumption that a bailout wouldn’t lead to more and riskier borrowing–one the CRFB acknowledged was unrealistic given how people respond to such incentives.

“Behavioral changes would mean the portfolio would return to its current size even faster,” they predicted.

Moreover, a University of Chicago study (pdf) found that student debt cancellation is economically regressive rather than progressive. In other words, it disproportionately benefits high-income households led by people who took out loans for expensive professional degrees.

“They take from the poor and give to the rich,” said Ms. Stepman, whose analysis referenced the University of Chicago study and CRFB projections.

Republicans, meanwhile, have not been eager to end the federal student loan program entirely, narrowing the range of politically achievable solutions.

Ms. Stepman’s plan would target the largely or entirely tax-free wealth and income enjoyed by universities. That financial power is partly the result of decades of government-guaranteed student loans.

One key proposal is to raise the 1.4 percent tax on many university endowments, first introduced in 2017 under the Tax Cuts and Jobs Act.

“The most money is in the endowments,” she said, noting that Harvard University alone has an endowment of more than $50 billion and that Yale University has an endowment of more than $40 billion.

“Yale and Harvard are basically hedge funds. They should be taxed as hedge funds and not as the pretend non-profits that they are,” Ms. Stepman continued.

“Obviously, we wouldn’t be taxing it 100 percent. But some portion of that still opens up a very decent pot of money to start giving out loan forgiveness benefits,” she added.

She would also tax non-tuition revenue and ensure institutions pay property taxes on the land they own.

Ms. Stepman noted that states could act on the property tax issue independently of the federal government, even using the revenue for state-level loan forgiveness pools.

“Think of how much more attractive it would be for young people to move to Florida if universities are cognizant of their tuition rates because their money is going into this bailout fund,” she said.

Ms. Stepman would also target wasteful university research spending and link future taxation on universities to trends in student loan debt, including how often borrowers default.

Proposed GOP solutions to the student debt crisis include the Federal Assistance to Initiate Repayment (FAIR) Act (pdf), which would offer scaled-back relief for some borrowers. That sort of income-driven repayment aligns with the recommendations of the University of Chicago researchers who documented the regressive nature of broader student debt relief.

Ms. Stepman hopes lawmakers build on the 1.4 percent tax on private university investment income in the Tax Cuts and Jobs Act.

“I'd like to see AOC answer why she thinks a $53 billion hedge fund called Harvard University ought to be tax free,” she said.

“I think that the universities are the bad guys,” Ms. Stepman continued. “They benefited enormously from this problem. So we should make them be part of the solution whether they like it or not.”