How the Tax Plan May Affect Grad Students
College Planning Taxes
During this whirlwind time regarding taxes in the United States, there are many changes which, if enacted in the final version of the tax reform bill, could have a drastic effect on the personal finances of millions of Americans. One such example is how university employees and students attending graduate school will be taxed on a type of benefit they receive called tuition waivers. When an employee or a student receives a tuition waiver, the college waives the collection of some amount of tuition, and sometimes other fees, usually in exchange for the employee or student working for the college in some capacity.
The tax bill does this by repealing section 117(d) of the current IRS tax code, which states, in general terms: gross income shall not include qualified tuition reductions, including tuition provided to an employee of a university, for education at that organization, or graduate students at educational institutions who are engaged in teaching or research activities for the organization.
By repealing this part of the tax code, Congress will mandate that these tuition waivers received by both employees of the universities and graduate students will be included as taxable income. Employees of universities are generally paid competitive wages and given tuition assistance benefits on top of normal compensation. For them, while this change will definitely raise their taxable income, the tuition assistance is usually not the majority of their income. On the other hand, graduate students who receive these tuition waivers are barely paid at all for their research or teaching assignments. The average stipend for Ph.D. students is around $20,000 per year while the average tuition for private graduate school programs is around $40,000 per year. Because of this imbalance, many graduate students could see their taxable income, and therefore their tax due, double or triple under this new plan.
Additionally, the tax bill would repeal the Lifetime Learning Credit and the Student Loan Interest Deduction. The Lifetime Learning Credit allows taxpayers to deduct 20% of the first $10,000 they pay in tuition and related expenses, for a maximum credit of $2,000 each year. The Student Loan Interest Deduction allows taxpayers with incomes of less than $75,000 to deduct up to $2,500 in interest on their federal student loans each year. With both of these provisions removed from the tax code under the current tax bill, the cost of attending college and paying off student loans would rise for just about everyone and have an outsized effect on lower-income families trying to send their children to college.
In general, education funding and planning has always been a balancing act. Between financial aid, tax breaks, and loans the government has historically been open to helping reduce the costs of higher education. However, these provisions in the most recent version of the House’s tax bill would eliminate many popular education-related tax breaks and make the cost of attending both undergraduate and graduate degree programs more expensive for the vast majority of Americans.
The tax bill does this by repealing section 117(d) of the current IRS tax code, which states, in general terms: gross income shall not include qualified tuition reductions, including tuition provided to an employee of a university, for education at that organization, or graduate students at educational institutions who are engaged in teaching or research activities for the organization.
By repealing this part of the tax code, Congress will mandate that these tuition waivers received by both employees of the universities and graduate students will be included as taxable income. Employees of universities are generally paid competitive wages and given tuition assistance benefits on top of normal compensation. For them, while this change will definitely raise their taxable income, the tuition assistance is usually not the majority of their income. On the other hand, graduate students who receive these tuition waivers are barely paid at all for their research or teaching assignments. The average stipend for Ph.D. students is around $20,000 per year while the average tuition for private graduate school programs is around $40,000 per year. Because of this imbalance, many graduate students could see their taxable income, and therefore their tax due, double or triple under this new plan.
Additionally, the tax bill would repeal the Lifetime Learning Credit and the Student Loan Interest Deduction. The Lifetime Learning Credit allows taxpayers to deduct 20% of the first $10,000 they pay in tuition and related expenses, for a maximum credit of $2,000 each year. The Student Loan Interest Deduction allows taxpayers with incomes of less than $75,000 to deduct up to $2,500 in interest on their federal student loans each year. With both of these provisions removed from the tax code under the current tax bill, the cost of attending college and paying off student loans would rise for just about everyone and have an outsized effect on lower-income families trying to send their children to college.
In general, education funding and planning has always been a balancing act. Between financial aid, tax breaks, and loans the government has historically been open to helping reduce the costs of higher education. However, these provisions in the most recent version of the House’s tax bill would eliminate many popular education-related tax breaks and make the cost of attending both undergraduate and graduate degree programs more expensive for the vast majority of Americans.