Tuesday, November 07, 2017

Taxes and grad student tuition

As has happened periodically over the last couple of decades (I remember a scare about this when Newt Gingrich's folks ran Congress in the mid-1990s), a tax bill has been put forward in the US House that would treat graduate student tuition waivers like taxable income (roughly speaking).   This is discussed a little bit here, and here.

Here's an example of why this is an ill-informed idea.  Suppose a first-year STEM grad student comes to a US university, and they are supported by, say, departmental fellowship funds or a TA position during that first year.  Their stipend is something like $30K.  These days the university waives their graduate tuition - that is, they do not expect the student to pony up tuition funds.  At Rice, that tuition is around $45K.  Under the proposed legislation, the student would end up getting taxed as if their income was $75K, when their actual gross pay is $30K.   

That would be extremely bad for both graduate students and research universities.  Right off the bat this would create unintended (I presume) economic incentives, for grad students to drop out of their programs, and/or for universities to play funny games with what they say is graduate tuition.   

This has been pitched multiple times before, and my hypothesis is that it's put forward by congressional staffers who do not understand graduate school (and/or think that this is the same kind of tuition waiver as when a faculty member's child gets a vastly reduced tuition for attending the parent's employing university).  Because it is glaringly dumb, it has been fixed whenever it's come up before.  In the present environment, the prudent thing to do would be to exercise caution and let legislators know that this is a problem that needs to be fixed.


Nathan said...

If no graduate student ever pays the tuition, then why is it there? Having just reviewed a few NSF grants, I know that it gets covered by grants. I don't want to give aid or comfort to the Repubs here, but the system always seemed a little fishy to me. What am I missing?

Anonymous said...

The current system seems a bit fishy to me too. Does the university somehow use the "waived" tuitions for its graduate students as a write-off on its own tax bill, by any chance?

Douglas Natelson said...

Here's my take - your mileage may vary. The current system is the result of decades of evolution, going back to the post-war and Sputnik-era boom of university research. The system was put in place to encourage people to go to STEM graduate school, with the idea that university research is a good long-term investment. The idea of tuition is that universities incur costs when educating students, and those costs (e.g. faculty and administrator salaries) may exceed endowment returns, so students pay. Collectively, the present system operates under the assumption that some people should foot their own bill for those costs (undergrads; grad students in many professional schools like law and medicine). Others are paid to go to graduate school, getting a modest stipend, in return for their labor in research and teaching. Universities want these researchers and teaching assistants, so they take the hit at the beginning (say during a grad student's first year) and eat (waive) the tuition. In later years, if those students are supported by research grants, they pass some fraction of the tuition cost onto the grants. Nathan, one alternate approach could be for universities to just eat all those costs, and set grad tuition very low for some programs, but universities would not like that, as there are real costs that would then have to be covered some other way. Anon, universities generally are non-profit entities, in terms of their tax responsibilities.

Douglas Natelson said...

It's also worth noting that prior to the 1986 tax reform package, the graduate student stipends themselves were explicitly tax free.

Anonymous said...

Doug, I would like to give universities the benefit of the doubt.

Sure, universities are non-profit entities, but it's not exactly true that they pay no tax. For example:

"When schools earn income from enterprises unrelated to their core educational missions, they can be required to pay a tax that was intended to prevent nonprofits from competing unfairly with for-profit businesses."

Here is a timely article:

Endowments Boom as Colleges Bury Earnings Overseas

Douglas Natelson said...

Anon, I understand, and I didn't mean to imply that they pay no taxes, just that they are taxed very differently than, say, companies or individuals. As you are no doubt aware, also lurking in the tax bill is a provision that would tax endowment returns of private universities (those with endowment dollars per student above some threshold). That's a whole separate discussion.

I really don't think universities can say that tuition waivers are effectively tax deductable.

Anonymous said...

Hi Doug,

Prompted by our discussion, I did some digging and found a copy of Stanford University's 2015/2016 tax return:


I didn't quite go through the whole document, but I think that a tuition waiver could be considered a "grant and other assistance to domestic individuals", and listed as a business expense (see part IX). Now how does this translate into tax owed, I do not know yet...