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Oct 02, 2016 11:09 AM EDT

How Do Donations for Scholarships Make Tuition Higher?

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Higher education is an important element of the nation's economy. However, the cost of higher education has ballooned causing the House Ways and Means Committee to have meetings discussing the use of college endowments. One of the issues raised during the meeting was the use of tax codes to encourage people to donate to universities.

The question was raised by Rep. Peter Roskam, Chairman of the Ways and Means Oversight Committee, in hopes to increase donations to universities and colleges. This seems to be a good idea but Rabbi Dan Ekhenkratz reasoned out that it will just increase the cost of tuition fees.

He argued that such an endowment will put a university in a certain dilemma whether they will have to make tuition free or increase it. How does it happen? He, then, gave a scenario where a certain organization donated $20 million to a university but that donation should only be used for tuition reducing scholarships.

He continued that if the endowment annual withdrawal rate is at 5 percent, the university will be able to acquire $1 million of annual scholarship income, which is enough to make tuition free for incoming freshmen. Now, here's the dilemma: make the first year free or let those who can afford pay some amount?

If the university makes the tuition totally free, they can attract different students but the quality of the university will be the same in some areas. On the other hand, if the university lets those who can afford pay a certain amount, they need to raise the tuition cost. Why? Because the $1 million donation was for tuition reducing cost. So even if they increase the tuition from $20,000 per year to $40,000, students will still pay $20,000 because of the donation. Thus, there's really no reduction but an increase and the students didn't really get the tuition reprieve they need.

With this in mind, lawmakers need to consider the different points before they consider using tax codes for university endowments. If not, it can just worsen the situation.

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