Briefing Report: The Hidden Tax on Middle-Class Families - Diverting Higher Education Fees for Financial Aid

Wednesday, January 27, 2010

Summary

University of California (UC) and California State University ( CSU) fees represent a hidden tax on middle-class students and families because 30 percent of the fee revenue is used to fund financial aid for other students. This expenditure is in addition to General Fund expenditures for Cal Grant entitlements and other aid programs for which UC and CSU families also are taxed. If student aid serves a general good, then it ought to be funded fairly by all taxpayers and transparently allocated in the annual Budget Act.

Middle-Class Families Pay Full Fees at UC and CSU, or “From Each According to His Ability”

In 2010-11, resident undergraduate students at UC will pay fees of $10,302; CSU students will pay $4,429 (these are “system-wide” fees; campuses may charge additional fees). Given the fact that the state heavily subsidizes all resident students, these fees fund only a fraction of the actual cost of attendance. Nevertheless, fees represent a significant expenditure for students and their families. For many, however, these out-of-pocket costs are covered in whole or in part through student aid. In addition to federal Pell Grants, California provides aid to cover fees for more than 113,000 UC and CSU students at a cost of $765 million through the state’s Cal Grant entitlement program (which costs over $1 billion annually when community college and private college students are included). Cal Grant entitlement awards are paid to students earning up to $29,400 for an individual ($80,200 for a family of four). Those students earning more are less likely to be eligible for other aid, including work-study, and many pay full fees.

Middle-Class Families Pay Hundreds of Millions for Other Students, or “To Each According to His Need”

In addition to Cal Grants, there exists another significant, though little known, source of student aid termed generically “institutional aid.” It is funded mostly through fees and allocated by the higher education institutions. UC and CSU have historically set aside a portion of student fee revenue from those who pay fees to fund financial aid for lower-income students who do not, a practice called “return-to-aid.” In 1987-88, 16 percent of new fee revenue was diverted for aid; more recently, fully 33 percent of new fee revenue has been utilized for this purpose (even more for graduate students). As the table below shows, in 2010-11, this diversion is expected to transfer nearly $1.3 billion from fee payers to other students, $772 million at UC and $486 million at CSU.

Fee-Paying Students Subsidize $1.3 Billion in Aid for Other Students
(2010-11 estimates; dollars in millions)
Institution Total Fee Revenue Fee Revenue Diverted to Aid Percentage of Fee Revenue Diverted to Aid
UC $2,566 $772 30%
CSU $1,747 $486 28%
TOTAL $4,313 $1,258 29%

UC and CSU Fee Policy: A Lesson in Wealth Redistribution

The California Constitution requires any tax increase to be approved by a two-thirds vote of each house of the Legislature. However, the Constitution also creates UC as a public trust governed by the Regents. CSU, alternatively, is subject to legislative direction, but in most matters is governed by the Board of Trustees. Both governing boards retain the power to charge and collect fees. Although both segments rely on the Legislature to appropriate funds for their operations, the expenditure of these funds – and fee revenues – is left largely to their governing boards. Both boards choose to allocate substantial portions of these fees not for the benefit of the fee-paying student, but to pay for the education of other students. In fact, as the table below shows, a hypothetical student who entered UC in 2007 and graduates in 2011 will have paid nearly $1,400 in extra fees – an extra tax – to further subsidize other students.

A Fee-Paying UC Student’s Hidden Tax
Year 2006-07 2007-08 2008-09 2009-10 2010-11 Extra Tax
Fee $6,141 $6,636 $7,126 $8,373 $10,302  
Fee Increase   $495 $490 $1,247 $1,929  
% Increase   33% 33% 33% 33%  
$ Diverted   $163 $162 $412 $637 $1,373

Note: Some increases were imposed mid-year; increases are annualized here for illustrative purposes.

When a Fee is a Tax

California courts have held that a nexus must exist between a fee and the governmental service funded by that fee. Certainly it is appropriate for university fees to finance a portion of the paying student’s university education, but may a third of these fees be used to pay for someone else’s education? If the people of California determine that the provision of financial aid to some students is a worthwhile public policy goal (and they have, as evidenced by Cal Grant entitlements), then it follows that “the people” – not just some people (namely, other students and their families) – should fund this goal. The fact is, students who pay fees for other students do not derive any special benefit from the fee diversion that the general public does not. Yet because a substantial portion of these fees are being used to support a general fund purpose much like Cal Grants, it is difficult to view this fee policy as anything but a higher education surtax.

Conclusion

This report is not an argument against providing student aid. While it is clear that increasing funding for student aid enables universities to raise their prices, insulated as they are from the market effects of doing so, it is also clear that student aid eases access to college for some students. Nevertheless, in order to more transparently and accurately demonstrate to the public the state’s substantial investment in student aid, to more equitably share the cost of the public policy choice to provide aid, and to relieve students and families from the unseen but no less heavy burden of bearing the cost of other students’ education, the practice of “return-to-aid” should be eliminated.

 

For more information on this report or other Education policy issues, contact Roger Mackensen, Senate Republican Policy & Fiscal Office at 916/651-1501.