In the world of higher education during the pandemic, freshmen spent their first year in college joining Zoom classes, and seniors graduated in their living rooms on a Skype meeting. Institutions were forced to make cost reductions at first and continuously adapt to a virtual education environment. Fortunately, aid arrived quickly in the form of grants – benefiting both institutions and students. To provide an overview of new legislation, its tax impact and other permanent changes resulting from the pandemic, we discuss it all below.
Significant legislative changes
As of July 2021, over $76 billion has been appropriated under the Higher Education Emergency Relief Fund (HEERF) I, II and III in grants to institutions.
Several legislative changes impacted tax-exempt universities and private higher education institutions during the pandemic. Under the CARES Act, we saw the HEERF I, the Coronavirus Response and Relief Supplemental Appropriations Act (CRSSAA) and HEERF II; and the American Rescue Plan introduced HEERF III. But, how does all of this impact educational institutions?
HEERF I
HEERF I grants were mostly used to pay schools for room and board refunds owed to students no longer living on campus. HEERF II grants primarily funded “lost revenues.” Lost revenues were calculated analyzing year-to-year revenue comparisons and could include revenue from tuition costs, summer camps, concerts and other auxiliary sources.
HEERF II
Institutions that were previously reimbursed for room and board refunds to students under HEERF I could not also apply lost revenue to this same source under HEERF II.
HEERF III
Next, enter the American Rescue Plan, which introduced HEERF III. HEERF III provided a relief fund of $36 billion. Institutions that took grants from the first two installments of HEERF could receive further funds and did not have to take additional action to qualify or receive them. Institutions could use these student grants to apply to students’ outstanding balances, provided the institution has obtained students’ consent to do so. New guidance also clarified that all students who were enrolled on or after March 13, 2020 were eligible, and institutions could not place any condition on the grants to students to secure continued or future enrollment.
As a result of these significant funds, institutions can hope that retention will improve as outstanding balances are resolved. The costs of receivable collections should decrease, too, with outstanding balances forgiven. Also expected to decrease is the cohort default rate due to students being able to stay enrolled to finish a degree – and students who stay in school are much less likely to default on student loans. Allowances for doubtful account estimations will likely lessen, which will result in stronger balance sheets and income statements for schools.
Institution portions
Projects to assist with online learning, social distancing and other minor improvements resulting from the pandemic were permitted fund use for schools leveraging the institution portion of the grant. Capital construction projects, though, were prohibited.
Similar to the student portion of the grant, institutions could use the institutional portion to discharge students’ outstanding balances. The guidance does however encourage schools to look specifically at students who have enrollment or transcript holds and other hardships related to unpaid balances. If schools have alternate uses for the institutional funds, it would be advantageous to encourage students to use the student portion to satisfy outstanding debts.
Cash management of HEERF funds
Institutions must begin drawing down funds once allocated within 90 days of notice of allocation. As with all federal grants, institutions must minimize the time between drawing down the funds and expending the funds. The Department of Education may issue notices if excessive drawdowns of cash occur at once, and if this situation occurs, schools must notify the Department and explain how funds were expended.
HEERF grants must be expended within one year from the date of award notification, too. The good news is that any unexpended HEERF I or HEERF II are automatically extended to the date requirements of HEERF III.
What the future holds
It is critical for the advancements of institutions to inform current and future donors that the government aid primarily went directly to students for emergency needs, and that funding is still necessary for these higher education institutions. The HEERF grants had very limited uses for capital projects, and enhancements to athletic facilities, dormitories, laboratories and student unions are all necessary to retain and attract students.
The possible impact of future tax changes
As the Administration looks to raise the corporate tax rate from 21 to 28%, not-for-profit organizations and higher education institutions may think a higher corporate tax rate doesn’t directly affect them. However, this change would increase the tax on unrelated business income for those filing a Form 990-T.
Other proposed tax changes that may impact charitable giving include taxing capital gains and ordinary income similarly, as well as the increase to individual tax rates.
New legislation
If utilized, the American Families Plan could have a huge impact on the higher education sector. President Biden announced the American Families Plan in late April and, through this, increased the maximum Pell grant by $1,400 for eligible students. As nearly seven million students depend on the Pell grant at over 6,000 institutions, this was well received in the industry.
In a June 2021 release from the National Association of Student Financial Aid, the association encouraged lawmakers to double the maximum Pell grant to $13,000 from $6,500. They stated that the Pell grant has not kept up with inflation, let alone the steep increases in tuition passed by higher educational institutions. The Pell grant, when adjusted for inflation, is at a level similar to 1978, while costs of attending public and private universities have increased by 20% in just the past 10 years. The average cost of attending a private not-for-profit four-year institution is currently $37,650. The challenge is that 95% of Pell recipients have family income under $60,000, so paying $37,000 while only receiving a $6,500 maximum Pell grant makes it difficult for families to consider private colleges for their children. By increasing the Pell to $13,000 a year, it will aid in making attendance at a public or private four-year institution possible, according to the association.
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About our authors
Jill Boyle
Jill Boyle, CPA, is a director at Sikich with more than 15 years of experience providing tax and compliance services to a variety of clients. She leads the firm’s not-for-profit tax practice, overseeing all tax engagements in this industry. With a concentration in serving not-for-profit organizations and individual taxpayers, Jill dedicates her time to supporting public charities, private foundations and professional organizations. She is an extraordinary resource to clients and provides direction and leadership for the tax team.
Ray Krouse
Ray Krouse, CPA, is a partner on Sikich’s not-for-profit and higher education practices team. Ray has more than 25 years of public accounting experience. He has extensive experience in providing audit and consulting services to a wide variety of not-for-profit clients, including colleges and universities, voluntary health and welfare organizations, fraternal and other member organizations and private foundations. In addition, Ray specializes in the areas of Uniform Guidance and Student Financial Aid testing. He has significant experience with the Student Financial Aid requirements and serves as a technical resource for all college and university audits.
