Insights from Saint John's University President Michael Hemesath

Insights from Saint John's University President Michael Hemesath/

Tax Reform and Higher Education

Now that the Tax Cuts and Job Act of 2017 has been passed it is possible to examine the implications for higher education.  The tax reform bill is of particular interest to higher education because from its earliest drafts, Congress, and the House of Representatives, in particular, seemed to target higher education in ways that would raise costs for families and students.  This apparent objective flies in the face the increasing need for investments in human capital for young people (see here and here) and of vocal concerns about the increasing costs of a college education (see here here and here).

The initial version of the tax reform included the taxing of tuition benefits for employees, graduate students and employees dependents.  It eliminated the deduction for student loan interest, as well as tax-free financing for private college and university capital projects.  The bill also proposed a 2% tax on endowment returns that would have affected about 250 institutions (Saint John’s University would have fallen just outside the original threshold).  These provisions naturally spurred institutions, students and families to lobby Congress, arguing that the proposed changes would make it harder for students to afford what is increasingly becoming a required credential for the middle class and for institutions to hold down tuition costs.

In the end, the outcome was not as dire as first feared, as the Senate bill, which was largely the basis for the final bill, was not as punitive toward higher education .*  The taxing of tuition benefits was removed from the final bill.  The deductibility of student loan interest was retained and only with refinancing of capital projects does the interest become taxable.  The endowment tax remained but was dropped to 1.4% of investment returns and the endowment per student threshold was raised to $500,000, which dropped the number of institutions affected to approximately 32.

From the perspective of the academy and economic research that emphasizes the importance of investment in human capital for long-run economic growth, good sense mostly prevailed.

Yet three questions remain.

    1. Why would Congress punish private institutions?  The endowment tax will only apply to private institutions despite the fact that many public institutions also have billion dollar endowments.  One of the strengths of the American higher education system is the diversity of options available to students: 4500+ institutions of higher education, of which 2200+ are four year degree granting institutions.  Private institutions range widely in size, program offerings and the nature of the student experience.  They are also among some of the world’s finest schools and draw many thousands of the best international students in the world to the United States.  While private institutions do benefits from some government grant and loan programs, they do not directly seek government revenues in the way public institutions do.  Anything that would weaken this sector seems to be cutting off one’s educational nose to spite one’s growth-focused face.
    2. Why tax endowments?  While endowments certainly confer prestige and have a significant impact in some rankings, they serve a very important role in providing financial stability in uncertain times and allow institutions to make a long run reputational/quality promise to students and faculty.  Endowments also, in normal economic times when market returns are at long-run historic levels, allow for institutions to do some combination of: covering costs that rise usually rise faster than inflation (labor costs), moderating tuition increases and increasing programming, research activity or educational quality.  In short, endowments provide an important source of revenue that allows institutions, at least potentially, to control tuition while maintaining institutional quality.  Taxing them makes this less possible. In addition, the gifts that schools used to build their endowments were given with the understanding that the returns would be untaxed, as colleges and universities are non-profits.  This new provision obviously violates that understanding and potentially impacts future giving.  Furthermore, it opens the door for taxing any charitable institution’s endowment, from less well-off schools to foundations of any kind.  This change represents a fundamental change in the way charitable organizations are treated in tax law.
    3. Have Congressional and public attitudes toward higher education changed?  This last question strikes me as the most important one.  Some commentators have observed that the provision targeting higher education are primarily political.  The Minding the Campus blog argues :

      Public attitudes toward universities have distinctly soured in recent years. What the public perceives as outrageous student behavior, feckless university leadership, and excessive tuition fees has combined with a growing hostility by Republican lawmakers angered over the large political donations and public criticism that academics have made attempting to oust them from office. Lawmakers are growing tired of feeding the mouths that bite them. Revenues raised by taxing colleges can modestly help fund other tax reductions that lawmakers want to make, which are probably economically beneficial to the well over 90 percent of the population living outside the Ivory Towers of Academia.

This hypothesis does not address why the provisions in the new tax law focus on private institutions (recall incidents at Berkley and Evergreen State), but it is consistent with the current contentious political environment.

If this interpretation of the tax provisions is accurate, the question for higher education and the public is whether these views are temporary or represent a fundamental shift in attitudes. There is very strong evidence that a well-educated populace plays an important role in long-run economic growth (for example see here and here ). There is also evidence that the changing role of technology in the economy is requiring a more educated workforce. All of which suggests that higher education has and will continue to play a central role in the prosperity of individuals, their families and the country as a whole.

To let politics get in the way of educating young people, either on campuses or in legislative bodies, will leave us all poorer.

*One other provision in the final version of the tax law that is likely to impact colleges and universities is the doubling of the standard deduction, which will cause the number of itemizing taxpayer to drop from about 30% of taxpayers to 5%. Though this change was largely aimed at tax simplification rather than targeting higher education and other charities.

You Are Our Brand

I regularly tell students that in many of the circles they will travel after they graduate, and even during their undergraduate years, that when someone learns they are a Johnnie that this knowledge will bring with it assumptions and expectations.

Almost always those expectations will be positive and prove helpful to the Johnnie.  The specifics vary by individual and situation but non-alums or parents have told me on different occasions that Johnnies are smart, hard-working, creative, modest, loyal, thoughtful, ethical, fun, spiritual, kind and just..good..guys, among other things.

I don’t tell young Johnnies this to swell their heads or pump them up, but to remind them of two things:

  1. The many graduates that have gone before them have established a reputation for Saint John’s and Johnnies that they benefit from, and they owe these previous generations a debt of gratitude.
  2. They, the young men in my audience, are, or soon will be, the Johnnies in the world that must live up to that reputation and maintain it as a sacred trust for the generations to come.

I was reminded of this first point when I received an email that was making the rounds on campus recently.
A friend of a Johnnie had written a touching tribute to his Johnnie friend on why he loved and respected him and on how the Johnnie had come to help the writer appreciate what happens at Saint John’s (and Saint Ben’s.)

I have taken the liberty of hiding the writer’s identity and editing his words slightly to preserve his anonymity.  I have also called his friend simply “Johnnie,” as I know that the true Johnnie in question would modestly prefer to remain anonymous.

I also think that the writer could be virtually any Johnnie’s friend and the subject could be any of thousands of Johnnies.

Advice For College Students: Who you are Speaks Louder Than What you Do
by A Friend of a Johnnie

I received the list and it looked impressive.

It contained the topics being offered to student leaders at the upcoming Saint John’s University/College of Saint Benedict Student Leadership Seminar.

The voice at the other end of the phone was confident and articulate, crisp and engaged. It was the President of the Saint John’s University student body.

“We’ve had a speaker who had to cancel last minute (the conference is in one week) and we wondered if you might be able to speak in his place? Here are some of the topics we have so far: Goal setting and project management. Leveraging your leadership. Business leadership. Innovation. Managing a team. Building and marketing a brand. What do you think?”

Wow.

Knowing that this opportunity was in the works for a few days, I had the chance to rough out a speech in my mind. But it was quite different from the topics this bright young man was proposing. Oh, I think I could give a decent twenty to thirty minute talk on most of them, but these were more pragmatic, tactical topics. My sense of what young college leaders needed to hear was a bit more visionary.

So here is what I would like to say:

Saint John’s University in Collegeville, MN is barely an hour away from my home in Minneapolis. For years, my family has driven by it (largely unaware of the towering Abbey Church amidst distant forest) en route to a lake resort by Detroit Lakes or (years later) on my way home from college or my wife’s North Dakota family home. That was about as much as I knew of Saint John’s, until I met Johnnie.

Johnnie is my senior by about fifteen years. He is the physician who recruited me to my current clinical position, is one of the closest friends I have ever had, and is one of the wisest people I have ever known. He is a Saint John’s graduate. For seventeen years, I have known Johnnie, had lunch with him, gone out for beers, taught with him, exchanged towel-snapping humor and plumbed topics ranging from faith and politics, history and literature. And over the years, Johnnie has taught me a great deal about Saint John’s. When Johnnie begins reflecting on the university, it’s as if he just left the campus yesterday. The landscape in his language brings Saint John’s to life. From the cavernous Abbey Church and the buzzing Refectory to the Hill Museum and Manuscript Library and woodworking shop, from the Great Hall and the quadrangle to the Abbey guesthouse and the Stella Maris chapel on the lake. In Johnnie’s telling, these are sites of great fun and a little maturity, raw buffoonery and intense spiritual growth. I’ve heard gut-busting stories where close friends secretly removed the passenger seat from his car as he returned to it on a first date. And I’ve learned from how moved he was seeing a solitary twelve-year-old boy enter the empty Abbey Church at mid-day, pray for ten minutes, sign himself, then go about his day.

But the thing that has always stuck with me about Saint John’s University (and by extension, its sister College of Saint Benedict) is that culture matters. Clearly, different colleges draw different people to themselves, so there is a skewed (if I may say, impressively skewed) population of students who are choosing to go to Saint John’s. Notwithstanding the type of people who have chosen to attend Saint John’s, a college, if it is doing its job, is not simply meant to educate. It is supposed to form. And formation is not a matter of bestowing knowledge, but engendering wisdom. Even more than fostering skills and employability, college should forge character. Beyond offering facts that populate the mind, college should offer lessons that cultivate the soul. Saint John’s did that for Johnnie. Granted, his antennae (more than most of his contemporaries) were out for spiritual mentors, wise professors and enduring friendships. And he found them. My flaw was that I was a bit too stressed and utilitarian about getting into medical school to pay close attention to culture in college. While I had an excellent college experience, I will admit that at times superficialities eclipsed the transcendent. But for Johnnie, something in him incessantly looked for this substance and he found it. He found it at Saint John’s.

Since I met Johnnie, I have been to Saint John’s campus twice, my wife has participated in a spiritual retreat there and we have brought my young daughters to campus. I own a Saint John’s baseball cap and T-shirt and shamelessly plug the College of St. Benedict to my young daughters. And to this day, upon finding out that a person of particularly impressive and intriguing character (bright, witty, religious, deep, grounded) went to Saint John’s (or Saint Ben’s), I simply nod my head and say to myself, “Well, that makes sense.”
When I first encountered Johnnie (and ever since we have been friends), I have been impressed with what he has done, but I am moved by who he is.

The degrees, awards and accolades that will be granted to graduates from Saint John’s and Saint Benedict’s will be noteworthy and useful, but they will matter far less than the character into which each graduate has been formed. And the tactics by which you lead (while important) will matter far less than the integrity by which you live.

Who you are speaks louder than what you do.

________________________________________________________________
Each and every alumnus is our living and breathing brand, each and every day, in each and every interaction and a powerful example of our mission to the world.  Thank you, Johnnie.

By |November 14th, 2017|Categories: Alumni|0 Comments

Politics of the moment versus investment in the future*

Each year the Gallup organization asks Americans about their confidence in various institutions.  It will not surprise readers that the confidence Americans have in our institutions ranges widely.  The data for 2017 reveals that the institutions in which Americans have “a great deal” or a “quite a lot” of confidence ranges from a low of 12% for Congress to a high of 72% for the military.  These numbers are up slightly from 2016.

The Gallup poll does not ask specifically about higher education but another recent poll by the Wall Street Journal suggests that colleges and universities are suffering from their own crises in confidence among the public.  The WSJ Poll from this summer revealed that only 49% of those polled believe that “A college degree is worth the cost,” while 47% disagree.  This slight 2% gap in support for higher education is a significant drop from the 13% gap between supporters and skeptics when the same question was asked four years ago.

This number is troubling enough to those of us in higher education, but it is even more concerning when the responses are broken down by respondent.  The drop in confidence about the value of a four-year degree can be attributed almost entirely to non-graduates.  College graduates, on the other hand, continue to believe that college is worth the investment by a more than two to one margin, a gap that has remained stable.

What is interesting to consider is why this drop has occurred.  There is no evidence that the economic return on a college education has lessened.  College graduates continue both to earn a significant wage premium over high school graduates in the labor market and experience considerably lower rates of unemployment regardless of the economic conditions.  Economists calculate that the value of a four-year degree over a lifetime ranges from $500,000-$1M.  Yet a significant portion of the population does not believe a degree is worth the investment, which suggests that they are likely to discourage their children and other young people from going to college.

Looking at the data more closely suggests that the current contentious political environment might well be influencing attitudes toward higher education.  Republicans, men and rural residents – generally more conservative respondents – are more skeptical about the value of a college degree, while Democrats, women and urban residents – a generally more liberal demographic – continue to have faith in higher education.  These data are consistent with the hypothesis that the political tensions on campus around issues of free speech and diversity may have caused more conservative citizens to become more skeptical about the value of college.

As an educator and economist, these trends are worrying, especially as they relate to young men. Too few men are pursuing degrees already, as only 43% of American undergraduates are male.  Both for individual young men and for our country as a whole, a greater percentage of men need to pursue higher education.  While young male high school graduates can find good jobs in the currently healthy economy, the longer run question is what skills young men will need for a lifetime in a changing and unpredictable economy.  Those future jobs will likely require some investment in post-secondary education.

There is no denying that our campuses have become more politicized, as our country has become more polarized.  There have been incidents that have revealed some institutions to be less supportive of the free exchange of ideas than in the past, and this has hurt those schools.  The University of Missouri, for example, has seen a drop in first year enrollment of 35% following political protests on its flagship campus.

Young people are certainly right to consider what their campus experiences will be when they are weighing the biggest investment decision they are likely to ever make.  These experiences are an important part of any college education.  But they should also remember that the vast majority of the 2200+ four year institutions in America have continued to focus on their educational mission.  Every day faculty and staff are helping students pursue their educational dreams.

College graduates by a 2 to 1 ratio continue to believe that their investment was worthwhile.  Young people should reflect on this as they consider their own academic and economic investment in the future.

*This is the text of my To A Higher Degree column that appeared in the St. Cloud Times on Sunday, October 22, 2017.  To A Higher Degree is published the fourth Sunday of the month and rotates among the presidents of the four largest Central Minnesota higher education institutions.

By |October 31st, 2017|Categories: Higher Education|0 Comments