November 19, 2017

Letter to the Editor: Concerning graduate student tax reform

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To the Editor:

On Nov. 16, 2017, the House passed their long-anticipated Tax Cuts and Jobs Act. The suggested tax reform, the Tax Cuts and Jobs Act, includes the following provision:

“Qualified Tuition Reductions: Under current law, qualified tuition reductions provided by educational institutions to their employees, spouses, or dependents are excluded from income. The exclusion may be provided in the form of either reduced tuition or cash. The reduction must be part of a program that does not discriminate in favor of highly compensated employees and may not apply to graduate programs (except for a graduate student who is teaching or a research assistant).

Provision: Under the provision, the deduction for interest on education loans and the deduction for qualified tuition and related expenses would be repealed. The exclusion for interest on United States savings bonds used to pay qualified higher education expenses, the exclusion for qualified tuition reduction programs, and the exclusion for employer-provided education assistance programs would also be repealed.” Section 1204, Tax Cuts and Jobs Acts Section-by-Section Summary.

Under current tax law, graduate students who are teaching and/or research assistances can exclude tuition reductions received for graduate-level work. Section 117(d)(4), US Tax Code. However, graduate students still must pay taxes on the money they receive that is not directly used to pay their tuition (i.e. their living stipend). This is an equitable and fair system that incentivizes thousands of students each year to pursue their passion and add value to their intellectual community.

Under the Tax Cuts and Jobs Act, the above-mentioned tuition-reduction exception is repealed via the Section 1204 provision (supplied above). This has the impact of making a graduate student liable for taxation both on their tuition reduction and on their living stipend (money received above their tuition reduction).

To show the impact of this fundamental shift, please review this real-world scenario:

“The annual stipend for a PhD student in Carnegie Mellon’s school of computer science is about $32,400. The university covers the student’s $43,000 tuition, in exchange for the research she conducts and the courses she teaches. Under current law, the government taxes only a student’s stipend; the waived tuition is not taken into account. But under the GOP bill, her annual taxable income would rise from $32,400 to $76,234. Even factoring in new deductions also included in the proposal, the CMU document estimates her taxes would amount to $10,209 per year—nearly four times the amount under current law. That would slash her net annual stipend by 25 percent, from $29,566 to $22,191.”

But there may be a solution. The Tax Cuts and Jobs Act does not repeal Section 117(a)-(c) of the current US Tax Code. This section states that “gross income does not include any amount received as a qualified scholarship by an individual who is a candidate for a degree at an educational organization.” Section 117(a), US Tax Code. A “qualified scholarship” is “any amount received by an individual as a scholarships or fellowship grant to the extent it is used for qualified tuition and related expenses.” Section 117(b), US Tax Code. However, this is limited by the language that “the scholarship income exclusion doesn’t apply to any amount received that is payment for teaching/research/other services by the student required for receiving the qualified scholarship or qualified tuition reduction.” Section 117(c), US Tax Code.

In implementation, this paragraph would also force the same group of graduate students to pay taxes on their “scholarship” because these students receive that scholarship as “compensation” for teaching/research services. However, under this same provision, student athletes who receive a scholarship do not receive taxable income because there is a not a “specific act” required of them as there is of graduate students (i.e. research requirements). Interesting, no?

Thus, I am proposing that Cornell retroactively re-classify all graduate students who would be impacted by this egregious tax reform to make their designation mirror that of student athletes. Cornell, instead of requiring specific teaching/research acts from these graduate students, should only require a general commitment to a department, much like student-athletes are required to commit to their team. This retroactive reclassification would ensure that, if this tax reform is passed, Cornell University graduate students will still only be taxed on their living stipend as is the current case. Their “tuition reduction” will be reclassified as a scholarship not conditioned on specific teaching and/or research services and thus excludable from taxable income. These scholarships will be condition on a “general commitment to performing the duties required of specific department members” much like student-athletic scholarships are condition on a “commitment to performing the duties of a team member.” Thus, if student-athletic scholarships are tax exempt, graduate-student scholarship should be as well.

In sum, current graduate students receive a “tuition reduction” predicated on future services and only excludable under a special exception in Section 117(d); this section is being repealed under the Tax Cuts and Jobs Act. Under my proposal, graduate students would now receive a “qualified scholarship” that is not “payment for teaching, research or other services” and is thus excludable from taxable income. Graduate students should be treated as student athletes and subject to tax liability for only the portion of their scholarship that does not towards tuition.

If this suggestion is not appealing and/or functional, that is fine. But something must be done.


Nicholaus Mills grad
JD/MBA candidate

Alex Bransford grad
JD candidate