In 2002, Meg Whitman (Princeton class of ‘77), then president of eBay, pledged $30 million to her alma mater to be put toward building a dorm in her own name. The ultimate cost of the 500-student dorm, which required “skilled masons to cut thousands of pieces of stone” and featured three-inch-thick oak doors, worked out to about $200,000 per bed. Despite parting with $30 million at the time, one economist estimated that the real cost of the donation to her was much less: $20 million, thanks to the tax exemptions that come with donating to a university. In essence, the U.S. Treasury covered the $10 million gap.
The government—and thus, taxpayers—give a surprising amount of money to elite private colleges, a lot of which is hard to see because it comes in the form of tax deductions like Whitman's. Equally hard to see, and perhaps even more lucrative, is that the federal government doesn’t tax the income that universities earn on their billion-dollar endowments. Some of these deductions exist to promote research; others exist because colleges, as institutions, make commitments to serve the public good.
When taking these tax exemptions into account, far more government money per student is going toward selective private schools than to less-selective public schools. According to Robert Reich, a professor of public policy at UC Berkeley, the average amount of money that the government gives to public universities is less than $4,000 per student, and the average amount it effectively gives to Princeton, for example, is more than $50,000 per student.
These tax exemptions, drawn up in the name of egalitarianism, disproportionately benefit schools with very low levels of economic diversity. For every one student in the poorest quartile of the U.S. population at the nation's most selective colleges, there are 14 from the wealthiest quartile. It’s often argued that the wealthiest universities, whose massive endowments might give them some wiggle room in accepting more students who can’t pay full tuition, are where socioeconomic diversity could bloom, but a recent New York Times analysis indicated that endowment size doesn't determine economic diversity.
The amount of government money that makes its way to Princeton becomes more striking when taken alongside the amount of money that goes to the College of New Jersey, a similarly sized public university about 10 miles away. The tax breaks on Princeton’s endowment income, along with federal research grants and capital-gains exemptions, totaled about $420 million, or roughly $54,000 per student, in 2011. The College of New Jersey, with its modest $26 million endowment, received less than $2,000 per student in government money that year.
In recent years, it’s been found that increased college attendance rates among poorer students have actually led to more inequality, and the flow of taxpayer money might offer one explanation as to why. Even though more lower-income students are attending college, the resources at the colleges they do attend are lacking in comparison to those of expensive private schools. Many of these students fail to graduate and then have trouble paying off the loans they were forced to take out—problems that aren’t nearly as common at more elite colleges.
So what can be done? One option would be to eliminate tax exemptions for colleges entirely, though that might be an extreme move. Another is for colleges to come up with their own creative policies to promote economic diversity: Iowa’s Grinnell College, for example, has a minimum percentage of slots in each freshman class reserved for students whose parents didn’t go to college. But leaving it up to individual colleges to act individually and responsibly is idealistic. Instead, the tax benefits that don't have to do with research should probably only be conferred on schools that actually enroll large numbers of lower-income students. That way, taxpayer money is going where it was originally intended, and not toward three-inch-thick oak doors.