Last week, the House passed H.R.1, the Tax Cuts and Jobs Act, their side of the GOP tax “reform” plan. While there are many reasons to oppose this bill and its Senate companion, one issue, in particular, seems to be overlooked, with potentially devastating consequences: the repeal of section 117(d) of the Internal Revenue Code.
What this would do is allow tuition waivers to be taxed as earned income. So what does this mean and why is it so bad?
First, let’s back up and explain how most (not all) graduate studies programs work. For many graduate degrees, a graduate student provides their labor in the form of teaching and/or research in exchange for a small living stipend and a waiver on tuition costs. This means that, while the stipend barely covers the cost of living, a student does not have to go into extreme levels of debt (read: hundreds of thousands of dollars in debt) in order to get a graduate degree.
Under current tax law, the stipend the student earns is taxed, but the tuition waiver is not. This is because, while the student does not have to pay the tuition, they do not actually receive any of the money.
What will happen under the GOP tax plan
Repealing section 117(d) effectively makes the tuition waiver count as taxable income. Thus, a graduate student who formerly paid taxes on, say, the $30,000 stipend they received, would now also be on the hook for the tuition costs that they do not pay the school. For public universities that dole out smaller stipends, this could add $12-15,000 to one’s taxable income. For many private universities, this could amount to adding an additional $50,000 or more to that amount. So, the student is suddenly on the hook for taxes on $80,000 (or more) of annual income, while they only earn $30,000 (or less) a year, giving them an effective tax rate of 37%, which is a higher rate than the newly proposed 35% tax bracket for those making $200,000-$500,000 a year.
In most estimates this difference amounts to an increase in the amount of taxes owed by $3,000-10,000, depending on whether the student attends a public or private school. Remember that this difference in taxes comes from the meager income received via stipends, so a student’s functional post-tax annual income could suddenly drop to as low as $22,000 or less.
Well, why shouldn’t students have to pay for the tuition waivers?
After all, by not paying for the tuition, students are “saving” a lot of money. This is a counter-argument I’ve seen and it’s a frustrating one. Remember, graduate students don’t see a penny of that tuition waiver. They don’t receive any money for the waiver. All the money they earn comes from their stipend. Furthermore, many graduate students going into academia are not going to be making very much, with the high end of post-doctoral positions paying $50,000 a year. Graduate students aren’t typically in it for the money, but to contribute meaningfully to their academic field.
But the tax plan saves students money in other ways
Another counter-argument I’ve heard is that graduate students aren’t properly taking into account all of the other money that the GOP tax plan will save them via doubling the standard deduction and other tax credits. That is just plain untrue. Graduate students have already taken that into account with their calculations and they still will be on the hook for a much higher tax bill. Perhaps this is unsurprising, considering that their taxable income will more than double.
Taking $12,700 off of $80,000+ compared to taking $6,350 (the previous standard deduction) off of around $30,000 doesn’t actually save you that much money. And an extra $6,350 off is not nearly enough to offset the $50,000 extra that one is suddenly being taxed for.
But what about education credits?
One education credit, or American Opportunity Tax Credit, is being phased out at the end of this year, so even if the credit helped, it would only help in the immediate future. Furthermore, the credit only applies to “four post-secondary education years.” This means that it’s largely inapplicable toward master’s and doctorate degrees, which take place after the completion of a bachelor’s degree.
Another education credit, the Lifetime Learning Credit, normally allows students to deduct up to $2,000 in taxes owed in the form of a tax credit. There is no limit to the number of years you can apply for this credit, but there are income limitations. Given the substantial increase in taxable income that tuition waivers would result in, will likely be easily surpassed. But okay, assuming an affected graduate student does not exceed the income limit and would be able to use this credit, H.R.1, in fact, repeals this credit.
Well, it’s up to the universities to figure out how to make this work
This is another common argument I’ve heard. “Well, if this will be as damaging as you say, then universities will just have to figure out a different way to help graduate students so that they aren’t affected as much.” Perhaps instead of “waiving” the tuition cost, universities can perhaps provide a scholarship to their graduate students that cover the cost of the tuition, thereby not increasing their tax burden. Or, perhaps they can just bring the tuition cost down to $0.
Putting aside that some scholarships are taxable, and that it seems highly unlikely for a university to willingly charge $0 in tuition, both of these scenarios miss a crucial aspect of the way tuition functions for research purposes. Often, grants provided to universities are based, in part, on the tuition they collect. That funding is then used to purchase necessary equipment and to hire more personnel. While this system is not ideal, fixing it would require a comprehensive reworking of our national grant system, which would take a prohibitive amount of time. This means that if a tuition isn’t collected, universities will take a serious hit to their funding. Some private universities with large endowments may be able to absorb these costs, but H.R.1 is also taxing university endowments.
The bottom line
H.R.1 would be devastating to graduate education. Many students would either have to drop out or take out extensive loans to be able to afford graduate degrees. Many American students would likely flock to countries like Germany that offer free graduate education. This would especially affect the fields of academic research in which the tuition waiver system is commonly used. As a result, the United State’s standing in research and academia would suffer internationally as fewer students would be able to choose that route due to financial constraints. More students would opt for the more financially lucrative industry jobs after they graduate, meaning that there would be fewer students heading to the valuable and crucial roles of academic research.
Furthermore, it would likely disproportionately hurt people of color, who already struggle to enter and complete these programs, by further burdening them with additional financial concerns. This would ostensibly restrict graduate degrees in the United States to the rich, who may not want these degrees anyway. The postdoctoral employment field is not highly paid, at least in academia.
What you can do
The House bill already passed. While the Senate version of the bill does not currently contain the repeal of section 117(d), once it passes, Congress will need to reconcile the bill. Graduate students have a small political voice compared to the housing and healthcare industries, so if this concerns you, you should make sure that the reconciled bill does not include this tax on tuition waivers.
Call Congress — call your representatives and demand that they do not allow this part of the tax bill to pass, under any circumstances. Tell your House representative that the tax on tuition waivers needs to be removed from the final version of the tax bill. Tell your Senators not to allow this to be added to the final version of the tax bill. Tell both chambers of Congress you do not support any tax bill that keeps this part of the bill intact.
Raise awareness — tell everyone you know about this aspect of the tax bill. Encourage them to contact their representatives and tell others. This topic is not being covered extensively in the news, so word-of-mouth is critically important.