The tax reform bill passed by the U.S. House of Representatives, now under review in the Senate, proposes sweeping changes to federal tax regulations, several of which have implications for higher education. Education professor and higher education finance expert Jennifer Delaney spoke with News Bureau education editor Sharita Forrest about the possible ramifications for college students and their families.
The $1.5 trillion Tax Cut and Jobs Act passed by the U.S. House on Nov. 16 would require graduate students to pay taxes on the tuition waivers they receive. If this bill becomes law, how might college affordability and access be affected?
There are big differences between the bill passed by the House and the Senate’s bill. Imposing taxes on the tuition waivers that graduate students receive in exchange for working as teaching or research assistants is a bad deal for students. These waivers significantly reduce college costs for these students. Beyond the tuition waivers, many of these students earn low wages and may not receive enough income to pay the taxes that will be imposed.
In 2011-12, there were 145,000 graduate students in the U.S. who received tuition waivers, according to the American Council on Education. About 57 percent of the graduate student waivers went to scholars in science, technology, engineering and mathematics fields. There’s definitely a national interest in making sure that workers are getting trained in STEM fields and contributing to our economy, and tuition waivers are an important piece of how students are able to study in these fields.
The House bill also affects the tuition waivers that universities provide for employees, their spouses and dependents for undergraduate study. Institutionally provided tuition waivers would become taxable income under the House bill.
Neither the employee tuition waivers or the student tuition waivers are addressed in the Senate’s bill, however.
How will the tax reform plans affect student loans?
Currently, taxpayers can do an above-the-line deduction of up to $2,500 on interest paid on qualified education loans.
While the Senate bill doesn’t address this, the House bill eliminates the student loan interest deduction altogether. The deduction is one of the things that really helps people manage their student loan debt, particularly when they’ve entered the workforce and are in repayment.
On the plus side, the House bill contains a provision to help some families following the discharge of a student loan. Currently if a loan is forgiven for any reason, the discharged loan amount is considered income for tax purposes, and individuals would need to pay taxes on that amount. Under the House bill, any loans that are forgiven because the debtor has died or become permanently disabled will no longer be considered taxable income.
If all of these changes are signed into law, do you think there will be significant repercussions for higher education?
Absolutely. These changes are going to negatively impact students and make college more expensive overall. These tax reforms will negatively affect colleges and universities in other ways by limiting some of the things they can do in terms of receiving charitable gifts.
Some institutions will possibly be taxed on their endowment income, their activities in the bond market will be restricted and their ability to exclude some types of interest on their borrowing will be affected.
The House proposal calls for eliminating the tax deductions for state and local taxes. Will that have funding implications for higher education?
This will impact institutions by having a negative effect on state budgets. During economic downturns or when state budgets are under stress, higher education is often one of the first spending categories on the chopping block, and that can lead to tuition increases. Any changes to SALT that impact state or local governments likely will impact institutions.
The existing tax code has two other deductions for college expenses – the American Opportunity Tax Credit and the Lifetime Learning Credit. Any reforms on the horizon with those?
The House proposal entirely repeals the Lifetime Learning Credit, which is directed more at adult learners – people who are returning to college or retraining, not kids just out of high school. The Lifetime Learning Credit can also be used by graduate students to support their studies. There’s concern that repealing it will have a negative impact on nontraditional students and adult learners who want to return to college later in life.
The change to the American Opportunity Tax Credit is to increase the time you can apply it. Currently, you can only claim it for four years. The House proposal increases it to five years, which will benefit the many students who take longer than four years to complete their bachelor’s degrees – but that likely won’t replace the benefit that returning students would have received under the Lifetime Learning Credit.
