Higher Education Tax Policy is a Bad Deal for Actual Policy Goals � The Quick and the Ed

Higher Education Tax Policy is a Bad Deal for Actual Policy Goals � The Quick and the Ed

Higher Education Tax Policy is a Bad Deal for Actual Policy Goals

by Ben Miller

Being a nonprofit institution can be a boon for a college or university. For one, the tax exempt status makes them an attractive target for big donations from wealthy alums and businessmen looking for a writeoff. But it also means that schools can issue tax-exempt bonds, an attractive form of debt that is cheaper to use because the absence of taxes allows them to charge a lower interest rate.
Now those tax-exempt bonds are coming under greater government scrutiny. Last week, the Congressional Budget Office (CBO), released a study on the usage of this det instrument by colleges and universities. Specifically, it looks at whether these institutions are using tax-exempt bonds for arbitrage–taking the proceeds from selling debt a low interest rate and investing it in something that has a higher return. (For example, if I borrowed money through a tax-exempt bond at 2 percent interest and invested it into a bond at 5