How Ending Tax-free Tuition Waivers Could Impact U.S. Higher Ed

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Penn's Laura Perna and Notre Dame's Patrick Thomas discuss the potential impacts of eliminating a tax break on graduate school tuition waivers.

Graduate students across the country are staging walkouts and otherwise speaking out in protest of a provision in the tax reform legislation passed by the U.S. House of Representatives that could potentially add thousands of dollars to their tax bills.

Currently, the tuition waivers that graduate students receive for acting as teaching assistants or research assistants are tax-free. The version of the tax overhaul passed by the House would treat those waivers as income, meaning they could be taxed. The Senate version of the legislation leaves the exemption in place, meaning the provision is one that would have to be negotiated by Congress before it can send the bill to President Trump to sign into law.

“The tuition benefit is a really important component of enabling the best and the brightest to take the time that is needed for graduate education,” said Laura Perna, chair of the higher education division of the Graduate School of Higher Education at the University of Pennsylvania. Perna and Patrick Thomas, founding director of the tax clinic at the University of Notre Dame Law School, recently appeared on Knowledge@Wharton’s SiriusXM show to discuss the impact such a change to the tax code could have on students, individual colleges and the country’s higher education system as a whole.

“There are a number of layers of uncertainty here as far as whether this would actually be the result of what this bill does, and also if that is the result — if these tuition waivers do become subject to tax — what the response of the Internal Revenue Service and the universities would be to that,” Thomas noted. But presuming that is the case, “it would have a tremendous impact on graduate students.”

“The tuition benefit is a really important component of enabling the best and the brightest to take the time that is needed for graduate education.”–Laura Perna

Thomas added that he ran the numbers of what the impact of taxing the tuition waivers would be to the typical graduate student at Notre Dame. “Bottom line, between federal, state and local income taxes, they would be paying over half of their cash stipends just in taxes and then would have to get by with the rest for food, rent and things like that.”

Along with stipends to use on living expenses, many universities offer tuition waivers to doctoral students and others in return for helping to teach classes and working in on-campus labs. The stipends are taxed, but the waivers, which can potentially save graduate students tens of thousands of dollars in tuition, are not.

House Republicans have said ending the tax break, along with other changes, would simplify the tax code and cut taxes overall. During a recent discussion sponsored by the American Enterprise Institute, a right-leaning think tank, House Ways and Means Committee chairman Kevin Brady, a Texas Republican, argued that the provision treats graduate students who work on campus differently than those who work at private companies while they are in school and are taxed on the salaries they earn, The Boston Globe reported.

Both Perna and Thomas noted that House Republicans’ call to end the tax break was surprising; neither recalled hearing previous discussions from either side of the political spectrum about the need to eliminate it. “There’s no really good policy reason for including it” in the tax reform legislation, Thomas said.

Perna, who is also an affiliate of the Penn Wharton Public Policy Initiative, added that she had seen one estimate showing that more than half of the impacted graduate students are in science and technology related fields. Increasing the number of graduates from U.S. universities in STEM-related careers is viewed by many as crucial to economic growth.

“There are other provisions that have been talked about that really seem anti-higher education, anti-middle class,” Perna said. “I think we need to be thinking very carefully about the implications of these very different proposals for what we’re trying to achieve as a society.”

Additional coverage:

How the Republican Tax Plan Would Impact Real Estate

Is There a Tax Cut in Your Future?

How the Bewildering World of Student Loans Creates Debt Traps

Thirty Years After the Last Major Tax Reform, Is It Time to Retool?

The Knowledge@Wharton SiriusXM show airs Monday through Friday, 10 a.m. – 12 p.m. EST, on Wharton Business Radio on SiriusXM channel 111.

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