Is There a Hidden Tax in Texas College Tuition?



Texas Lt. Gov. Dan Patrick has indicated that he will take a hard look at the so-called Texas college tuition “set aside” program, which provided approximately $345 million in subsidies to over 200,000 students in the last fiscal year, and has asked the Senate Higher Education Committee to hold hearings to review the program.  He considers this subsidy a “hidden tax” on more affluent students who pay up to 20% of their tuition into a fund that is redistributed to financially needy students.

Here is the way the program works: In Texas, there are two types of tuition charges for undergraduate students in public institutions, statutory tuition and designated tuition.  Statutory tuition is prescribed by the Legislature and is currently set at $50 per semester credit hour.  Designated tuition is set by the institutions and this type of tuition was deregulated in 2004 (there was designated tuition before deregulation, but it was capped at the amount of statutory tuition).  When this deregulation was adopted, the law provided that 15% of the amount of tuition in excess of $46 per hour would be set aside for financially needy students to lessen the impact of tuition deregulation, and an additional 5% would be set aside to fund a state-sponsored college loan program that is available to all students.  So, in effect, there is a 20% tuition set-aside as a subsidy for financial assistance, and based on 2014 data this funding provides about $3,600 annually in aid for the average full-time undergraduate student who receives it.  Unlike several other states, however, there is transparency built into the Texas deregulation law in the form of a letter accompanying the tuition billing that reports the amount of the tuition that is being set aside for tuition subsidies.

Sen. Paul Bettencourt of Houston has likened this to an accounting trick and wonders if the state would be better served by eliminating the set-asides and replacing them with fully transparent state funding, thereby “buying down” tuition for those currently providing the subsidy.  Texas Association of Business CEO Bill Hammond thinks that this would be a difficult change to make and might hinder the state’s efforts to open more opportunity for a college education to more students from all economic backgrounds.  And, as Sen. Kirk Watson of Austin has indicated, the fate of these set-asides will surely come down to a philosophical question: should wealthier students subsidize poorer students?

This issue is not new to me, having had a daughter who attended one of the state’s better (and more expensive) universities a number of years ago and found that approximately 20% of her tuition was allocated to a fund for such subsidies.  I was incensed at the time and protested vigorously, particularly since we had saved for her education since her birth, were denied financial support because of our income level and the size of her college fund, and we felt that the practice was unfair to her, not to mention the perverse incentives it promotes for students and their families by penalizing work and thrift.  Over 20 years later, I still feel the same way, even more so because of the growth of this practice, and I believe that this redistribution is bad public policy.  If the subsidy to these students is warranted as a public interest, it should be funded by all taxpayers after full disclosure and public debate in the legislative forum.

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