House Tax Bill Could Lead to Significant Tax Increase for UNC Grad Students

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The current IRS 1040 income tax form.

Last Thursday, the House of Representatives passed a version of the tax reform bill that, if made into law, could lead to a massive tax increase for many US graduate students.

The cause of this would be the removal of section 117(d)(5) from the tax code. This section establishes that any reduction to university tuition, granted in exchange for work, cannot be taxed.

Many graduate students work as teachers and researchers at their universities, and in exchange receive moderate stipends and have their tuition costs covered by waivers. The removal of section 117(d)(5) would mean that the value of these tuition waivers would be considered part of a student’s taxable income.

Depending on course load, a graduate student enrolled at UNC’s School of Medicine, is  charged from around $8,000 to $34,000 in out-of-state tuition. These numbers vary between different graduate programs at UNC, but generally fall within this range. That means a UNC graduate student in the life-sciences, receiving a $30,000 stipend, could see their taxable income increase to more than $60,000, without taking home any extra money.  

How much your taxes would increase would depend on factors like your residency status, credit hours, and the stipend value. But even for students with relatively low tuition costs, the increase could be several thousand dollars annually, adding significant financial strain for many students who are already scraping by. The effect would be even worse at institutions like MIT and Harvard, where graduate tuition can be more than $50,000.

Graduate students would not be the only ones affected. University employees are the other major group that benefit from tax-exempt tuition waivers, and are often able to send their children to school at greatly reduced costs. For many, that means access to education that would otherwise be prohibitively expensive.

Cutting tuition waiver tax exemption is not the only way the House bill would impact higher education though. The bill would also drop a $2,500 deduction of student loan interest, as well as the tax exempt status for bond financing at private universities.

Unsurprisingly, the House bill has been met with significant concern by US educational institutions as well as students. Erin Rousseau, a graduate student at MIT, wrote a sharp essay for the New York Times on how the House tax reforms may force her to leave school, and the president of Elon University, Leo Lambert, wrote an op-ed piece in the Raleigh News and Observer in opposition. The Association of American Universities has also issued a statement arguing that the proposed reforms would make higher education less accessible for many Americans.

On the other side, arguments have been made that the relevant proposals, particularly the removal of section 117(d)(5), would not be as detrimental to graduate education as many have claimed.

Forbe’s contributor Preston Cooper wrote that colleges could dodge any negative effects by simply reclassifying tuition waivers as scholarships. That change, Cooper argues, would keep tuition assistance protected from being taxed. Whether it’s feasible for public universities like UNC to make this change rapidly enough isn’t clear, but it seems reasonable that universities could make some adjustments to help students.

All that said, it’s important to point out that the Senate version of the tax reform bill, which could be voted on as soon as next week, retains the tax-exempt status of tuition waivers. So, it is still very much undecided whether the reforms affecting higher-ed will actually become law.

Even though the House bill has already passed, the UNC Graduate and Professional Student Federation (GPSF) has urged students to petition their senators to fight the House proposals and to prevent any reforms to tuition waivers from being made into law. Students should also call their state senators, North Carolina Senators Richard Burr and Thom Tillis.

With the Senate potentially voting on their version of the tax bill at the end of the month, the debate over these tax reforms is almost certainly just getting started.

Peer edited by Erika Van Goethem.

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