Senators Call Tuition Set-Aside Theft, Secret Tax

Shawn Johnson graduated from Texas A&M University with a bachelor’s degree in accounting and a master’s in management information systems nine months ago, but he hasn’t forgotten the day he found out about what one state senator calls a "a 20 percent backdoor secret tax" on those paying for college. At 5:48 p.m. on Friday, May 28, 2010, he received an e-mail from the school’s business office letting him know that a significant chunk of his tuition money had been used to ease the financial burden for other students.

“This communication is being sent to you for informational purposes only,” it read. “No action or response is required on your part.” But Johnson did respond. Outraged by a practice he regards as outright theft, he started a website to drum up support for eliminating it. He could get his wish this session if state Sen. Dan Patrick, R-Houston, and others have their way. Hours after Gov. Rick Perry in his State of the State address Tuesday laid out his plans to aid Texas families who “continue to struggle with the cost of higher education,” Patrick argued in a Senate Finance Committee hearing that the "secret tax" needs to end.

There are two types of tuition: “statutory” and “designated.” The former, currently set at $50 per semester credit hour, is still determined by the state. In 2003, Texas legislators passed a bill deregulating tuition at public universities, allowing them to set their own levels of designated tuition. To mitigate the burden of an anticipated tuition increase, the state required that schools begin setting aside 15 percent of designated tuition that exceeds a certain amount — specifically the $46 per semester credit hour cap that existed before deregulation — for need-based aid, including grants, work-study programs and student loans.

Another 5 percent of undergraduate tuition is set aside to fund the B-On-Time Loan program, which gives needy students a no-interest loan that is forgiven if they graduate in no more than four years with at least a 3.0 grade point average. B-On-Time loans can be awarded to private university students. One of Johnson’s complaints is that he’s being asked to subsidize somebody else’s private education.

But, in fact, Johnson is incorrect, according to Dan Weaver, an assistant commissioner at the Texas Higher Education Coordinating Board. “That’s just wrong,” he says. Only public B-On-Time loans are funded with public university tuition, while state general revenue funds go toward the private university loans. 

Weaver says the misunderstanding over the B-On-Time loans is not the only thing some in the public are confused about. For one thing, he said, tuition set-asides are used at a variety of institutions, including private universities, around the country. And Texas has been setting aside a portion of statutory tuition for one of its need-based grant programs since 1975 — long before deregulation.

Since deregulation of public university tuition rates, average tuition has increased 72 percent, according to the Coordinating Board. For some students who do not qualify for need-based aid, the realization that they are unknowingly helping to ease the burden for others even as it becomes steadily worse for themselves does not sit well.  

“With laws like this on the books, they are making us mortgage our education for the benefits of others,” says Johnson, who is currently in the process of paying off $15,000 in student loans.

Johnson isn’t alone in his dismay. “I got calls from people in my district who were absolutely livid,” says state Sen. Jeff Wentworth, R-San Antonio. “They just believe this is a direct theft from them.”

Wentworth and Patrick have both filed bills in the current session to do away with the practice. Patrick hoped to do that last session, but could only generate enough support for a bill requiring public universities to notify students how much of their tuition money goes to financial aid for needy students, which is ultimately how Johnson found out. It passed easily — only state Sen. Wendy Davis, D-Fort Worth, voted against it.

“I felt as though the disclosure wasn’t, in reality, about making people aware of the issue so much as it was about creating an uproar,” she says. A freshman legislator at the time, she recalls quietly voting against it “out of respect for those who filed it.” Looking back, she says that if she had stood up and explained her vote, she might have brought some of her colleagues to her side.

As for the effort this session to eliminate a key source of the state’s need-based aid, she says, “I’m very concerned, especially when we think of the state of the Texas budget today.”

The state’s massive budget shortfall, estimated at between $15 billion to $27 billion, will inevitably lead to cuts for institutions of higher education and the state-run financial aid programs that make them affordable for many Texans. The current budget proposals issued by the Texas House and Senate essentially eliminate state-funded need-based grants for incoming students over the next two years. On top of that, there is discussion in Washington of cutting back federal aid for higher education to help ease the federal deficit.

“We’re worried about whether or not we’ll have enough grants and work-study money to help keep our institution affordable,” says Tom Melecki, the director of student financial services at the University of Texas. “That makes tuition set-aside all the more important to us.”

In the worst-case scenario, Melecki says, the university will have up to $33.7 million less to provide needy students. Tuition set-asides, which currently fund 18 percent of need-based grants, would then end up funding 23 percent.

In 2009, tuition set-asides generated $22 million in need-based financial aid at UT. At Texas A&M University, the total was around $13.9 million. Statewide, schools collected $98.5 million, which funded grants for approximately 60,000 students.

Davis, who relied on need-based aid for her own college education, cites two central reasons why she believes it should be protected. First, the diversity it encourages on campus benefits all students. And, she says, “we do not want to live in a state with a have-and-have-not culture.”

She says the whole state has an interest in helping to make Texas a state with a well-trained workforce. “This is just a small part of doing that,” she says.

As Patrick’s and Wentworth’s bills are currently written, they eliminate the requirement that universities set aside a specific amount of money, but not the universities’ ability to do so. If the legislation passes, Joe Pettibon, assistant provost for student financial aid at A&M, says that money — or a portion of it — might very well stay in need-based financial aid. Or the funds could become used for merit-based aid. “Those are conversations that universities will have to have that, in some respects, could be a good thing,” Pettibon says.

That might alleviate some of the frustration of people like Johnson. “If it was going to merit-based aid, I think I would have been ok with it,” he says. That way, he would at least have the option of competing for it.

Wentworth believes that the public expectation is that a dollar-for-dollar decrease in tuition would occur if the tuition set aside mandate is repealed, and he says he expects his bill to be amended accordingly in committee.

Wentworth, among the earliest proponents of the TEXAS Grant program, the primary state-funded need-based aid program, and Patrick both say they are supportive of efforts to increase college access through financial aid and scholarships — but not this way. “We should never have done this,” Wentworth says. “This is abusive on our part.”

Patrick anticipates that the repeal will ultimately pass, but with the budget concerns highlighted by Davis and others, he says, “this session might be tough.”