Monday, November 6, 2017

What's the point of taxing tuition waivers?

This post is about graduate students, the tax reform bill and Congressional politics - don't want to read about it? No worries, I won't be offended. 


Last week, the House leadership released the Tax Cuts and Jobs Act, which is their approach to tax reform. There are lots of various constituencies that are irritated by this proposal (e.g. those who are adopting children will no longer have access tax relief), but it's a surprise when there's something that affects graduate students. From Inside Higher Ed's Andrew Kreighbaum, a short summary of the bill's effects on students (emphasis mine): 
Students -- especially older, part-time and graduate students -- would also see negative consequences from provisions of the Republican proposal, higher ed advocates said. The bill restructures the American Opportunity Tax Credit, eliminating tax benefits for students who take more than five years to graduate, as well as part-time and graduate students. And it repeals the Lifetime Learning Credit, which is used by grad students, workers who need retraining and part-time students and nontraditional undergrads who take more than four years to graduate. 
The proposal would also eliminate a provision of the tax code used by many universities to waive the cost of tuition for graduate students filling positions like teaching assistantships. If the proposal were to go through, those institutions wouldn't be able to waive tuition costs without imposing new taxable income on grad students, said Steven Bloom, director of government relations at the American Council on Education.
I find this proposal rather bizarre - how much could the government stand to make from this? I have always found this tuition waiver to be somewhat of an accounting fiction, i.e. a department of chemistry at a university enrolls a graduate student, and the university will charge the student tuition, and issue a tuition waiver? And so I presume that there is money that is transferred from column A to column B in the university's books, but it's not as if the student sees any amount of that money.

Let's also stipulate this: if this were to proceed the way that it looks to proceed, graduate students would be devastated, as their taxable income would go from $20-30k to (depending on the size of the tuition waiver) $70-80k. According to the tax tables, that's a move from somewhere in the $2000 range to the $8000 range, depending on exemptions, deductions and the like. That would be brutal for anyone, and people would be forced out of graduate school quickly.

But here's my real question: why is the House GOP doing this? Is there really that much money to be gained from this? Is it (as lots of people on Twitter saying), punishing one's political enemies? And if this were to actually be passed into law (something relatively unlikely, I suspect), wouldn't lowering charged graduate school tuition to zero be a way to get around this? especially if the money doesn't actually exist?

Readers, tell me where I am wrong. 

29 comments:

  1. Been there, done that.
    When I started graduate school (1985), our salaries were not taxable (don't remember why). About my 2nd year, they changed the rules, and suddenly they were. Some schools interpreted is that anyone who was already in was grandfathered and their salary was never taxed, some schools only taxed the raises over the years but not the base amount, and some decided everything was taxable right away. It was bad for a couple of years, then they gradually started paying people more, to make up for what was lost to taxes. Sounds like deja vous all over again.

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    1. Actually this would be very different than what you are describing. What happened back in the day (happened to me as well) was someone saying you make $15K and no taxes were taken out and then all of sudden they were going to tax the $15K. This is saying you make $15K, but since your tuition is $20K we are now going to tax you on $35K - quite different tax implications.

      Back in the Bush #1 era (I believe it was Bush #1) the proposal was to tax tuition reimbursements from companies as additional income. But it ultimately did not pass.

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    2. True, this is worse, but both involve a big chunk of grad students' money suddenly going to the government. Here's hoping this goes nowhere as well.

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  2. I bet it's not even an accounting fiction but rather PR. It communicates to the student that yes, they really are a student, not just an employee grind, grind, grinding at that grindstone to make money for their "non-profit" university.

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    1. I don't think that's the point at all. Tuition is real money when paid off a grant or fellowship. When paid off a teaching assistantship, it is a transfer of money from one column (the undergraduate teaching mission, paid for by undergrad tuition) to another column. In this respect it's less "real." Getting rid of tuition would not affect the overall budget for the teaching assistantships, but would prevent the university from recouping tuition from grants and fellowships.

      It has nothing to do with communicating anything to the student. There are real costs to graduate education (for instance, faculty for graduate student-only courses). These costs are paid either by grants, fellowships or indirectly by the undergraduates who are benefiting from teaching assistants.

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    2. In support of this statement, my grad institution (expensive private school) "charged" grad students full freight until they passed their candidacy exam, i.e. the time they were more likely to be actively taking grad classes and working as TAs, thus having their tuition covered by high-paying undergrads. After candidacy was established, tuition was lowered to a much more reasonable number when they were more likely to be supported by PI's grants.

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  3. Well, for no-longer-teaching grad students, that tuition is, presumably, funded by NSF/NIH grants.

    It varies from school to school. My undergrad school "charged" grad students pretty much the same tuition as undergrads paid; my grad school "charged" grad students some token amount like ~$800/semester (both private top-50s in the northeast). Consequently, groups at the former were postdoc-heavy, since that was cheaper.

    The real motivation for this policy is probably beyond the scope of the comments section of this blog.

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  4. "The real motivation for this policy is probably beyond the scope of the comments section of this blog."

    Humor us with your tl;dr version, why don't you?

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    1. They’re digging around in couch cushions and shaking down children for their lunch money trying to pay for cuts for their donors.

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    2. Fine.

      Worst-case scenario? Henry VIII and the monasteries.

      Best-case scenario? Combined with the proposed 401(k) stuff and end of the protections on student loans, we're looking at the end of higher-education as a means of social mobility and the complete destruction of the educated middle class. nbd

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    3. I would argue that higher education has been destructive to social mobility. Requiring a 4-year degree for an entry-level job in a cubicle farm is a socially acceptable, 100% legal way of saying "we want a nice white suburban kid who's like us."

      There are a few older guys at my company who got promoted to high levels after starting on the plant floor with a high school education, and this almost never happens today. Most of what the average desk jockey needs to know is learned on-the-job after college, and a bachelor's degree often just means someone partied for four years.

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  5. so, how do i not get political in answering when the questions posed are very much about politics?

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  6. I'd say the GOP is playing to their base. See, I'm smacking around those "intellectuals" who mock your beliefs.

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    1. Seems a bit narrow and wonkish for performance art.

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  7. The reason for this, CJ, is that the GOP hasn't got a "win" since the current office has taken over. Many donors are upset of this despite having a great majority, one the likes has not been observed before. So when such and such is asking for money to run for office/re-election, these donors can point to "nothing" being "won". Google it, it's a very real thing.

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    1. Sure, that is a thing...but this particular item is not about getting a "win" - this particular provision will not sway a vote one way or another. This is simply about trying to pinch every penny to try and make back the massive shortfall in revenue that has been projected with this tax cut. Yes, yes, we have all heard how this tax cut (Cut, cut, cut, cut bill) will stimulate so much additional revenue that we will all be rolling in it. But, it simply will not. It's been tried before and not worked.

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    2. I disagree. They sell it as a win to the middle class because "larger tax breaks" when in reality it hammers the middle class more. It's all about them getting "wins" to their donors and attempting to push their agenda further.

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    3. Yes, the overall tax bill is sold as this. That's not something that is debated or even the point of the original post. The point of the original post was why go after the tuition as salary provision.

      My point is this rather small part of the overall bill is not going to sway one vote or another and will not help get a "win". It's simply the architects of the bill trying to grab back as much revenue as they can because they know they are going to lose a significant amount - without spending offsets.

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  8. Because of this, I wonder if grants like Pell grant, and other 'free money' will become taxable for undergrads.

    What about scholarships? Will this also be taxed? That's essentially what a tuition waiver is in my mind.

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    1. No, scholarships are a separate line in the tax code, and are not being struck.

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  9. In general, when people earn income, you're supposed to pay taxes on it. I don't think that is very controversial. This is true whether the income is monetary or non-monetary. If I gave you money, you have to pay income taxes on that gift. If I give you free in-kind services, those are taxable as income. The current proposal would just make this true of tuition received for free by graduate students. Whether the graduate students will value the "free" tuition that they receive to the same extent that their university charges the goverment for it is another story.

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    1. If this passes, see the anon 9:55 above you. Could it extend to undergrads? People receiving scholarships and/or grants? The reason some people receive grants is because they may not have the monetary means to afford college and then now they may be asking the person to pay taxes on it. Where does it end?

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    2. Yes. It would extend to faculty/staff children who get a tuition remission benefit as well.

      They're also going after the ability of non-profit educational institutions to finance debt with tax-advantaged bonds. And creating an excise tax on endowments.

      It's a concerted effort to declare that the current government is not interested in having an educated population.

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  10. It does seem like a very odd provision to go after considering I doubt many people outside academia know about this. (Thus, it seems an odd thing to try to "gin up the base" over.) I also doubt this would raise all that much revenue since I imagine many universities would just restructure the way they pay graduate students. As far as I am aware, though, universities (at least the public university I did my PhD at) already charge 50%+ overhead on anything that gets paid out of any grant. Couldn't they just charge "overhead" instead of "tuition" and get around the whole thing? Maybe it wouldn't be such a bad thing if it would get universities to stop with the convenient fiction that TAs or graduate student researchers are anything but employees.

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  11. Starving Grad StudentNovember 7, 2017 at 12:30 PM

    Hmmm under this bill my tax burden jumps from 10% to 40% of my income...yes...cut...

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  12. GOP is looking to pay for the tax cuts using any method they can find under the reconciliation rules. To that end, hitting students and academics who don't normally vote for them anyway probably is an easy way to do it, although it is not explicitly aimed for that purpose.

    Public schools probably can't drop tuition to "0" without permission of their legislatures. Private schools probably can, but they would have to give up the tuition waivers in their research grants if they did it. Would they be willing to do so? The first goal of any research proposal from the administrative perspective is to loot as much funding from the govt as possible into the institution to waste on other purposes, hence the ever more bloated overhead rates that we see.

    Actually, the policy wouldn't be so bad if they phased it in slowly so the current generation doesn't get all of the downside. Might eventually reduce the number of grad students and start bringing the job market back into equilibrium. Any policy that stops subsidizing bloated universities for recruiting endless new students would be a good thing at the end of the day.

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  13. This is a great form of PhD birth control. I thought having a minimum salary for students would do it, but this is even better!

    Universities have contorted every income stream in a manner to make them unaccountable and untaxable. This tax would pop the bubble and further expose the fact that universities are easily eating up 60%+ of the science grant money they are getting in overhead and other things...no wonder those labs look so shabby.

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