It’s all too much
Most Americans agree that obtaining a college education is important for economic success, and that it should be less expensive, a New America analysis finds. Republican lawmakers are considering a change to tax policy that would make college more expensive for students receiving grants and scholarships to help pay their tuition bill.
Republicans are gearing up to extend tax cuts from the 2017 Tax Cuts and Jobs Act that mostly benefitted wealthier Americans, per an Urban-Brookings Tax Policy Center analysis, along with other new spending on their policy priorities such as immigration. To pay for the tax cuts and new spending, Republican lawmakers are considering slashing dozens of federal programs and benefits—including making college scholarships that help students pay for tuition, taxable income.
In a leaked document, obtained by Politico, of programs and existing tax breaks Republicans are considering changing to help pay for continuing the 2017 tax cuts, making all scholarships and fellowships taxable income stands out as a proposal that would immediately make college more expensive for the millions of students who receive grants and scholarships to help pay their tuition and fees.
If enacted, the change would make it more expensive to become a teacher, nurse, doctor, social worker or any of the other essential jobs where a college education is required. Tuition is expensive and students are constantly told that one way they can help make it less expensive is to get good grades so they can win a scholarship.
Are Scholarships Taxed At All Now?
Currently, if a student receives grants and scholarships that are used to pay tuition and fees, as well as books and supplies, they are not considered taxable income . Scholarships that cover expenses not directly related to educational activities, for example housing, food and transportation, are considered taxable income, and are meant to be reported to the IRS.
It is not clear from the document whether the plan would include other free money for college, like need-based grants. But, the IRS treats all grants and scholarships the same. Any amount that exceeds what students are charged for tuition, fees, and books and supplies, is considered taxable income.
How Many Students Use Scholarships To Help Pay For College?
The most recent data from the National Center for Education Statistics shows that 64% of the more than 15 million undergraduate students receive some form of grant or scholarship to help pay for college. The amounts individual students receive varies widely, but it is likely that many of these students would be impacted if lawmakers made scholarships taxable.
Fewer graduate students, at 43% of a population of over 4.5 million graduate students, receive grantsscholarships and fellowships to pay for their education. Graduate students who do receive grants and scholarships often receive higher amounts, as they are frequently studying in programs like law, medicine, and science fields where the price of tuition is higher than for undergraduate students. If scholarships were suddenly taxable, graduate students would likely face the higher tax bills than undergraduate students as a result.
How Much Does The Scholarship Tax Break Cost The Government?
Eliminating the tax break for scholarships would, according to the leaked document, save $54 billion over ten years.
Thought of another way, the price of college would increase for anyone who has to pay tax on their grants and scholarships. If enacted, this proposal would transfer $54 billion over the next decade, from hard-working college students and their families, as a way to pay for tax cuts that will mostly benefit very high-income individuals and companies the most.
How Would This Change Impact Students Who Rely On Scholarships?
Ending the tax-free status of scholarships would have a huge impact on the affordability of college for students who rely on those funds to make it possible to attend. This change would also automatically devalue the generous philanthropic contributions from colleges, individuals, and companies that donate to scholarship funds around the country.
Take these two examples, which assume the student has no other income for simplicities sake, one an expensive private institution and the other a more affordable public university:
- Undergraduate tuition and fees at Duke University, in North Carolina are just over $65,000 per academic year. But Duke provides large need- and merit- based scholarships, which for some students, cover full tuition. A student receiving a full tuition scholarship could end up facing a tax bill of approximately $6,000 if the law was changed to make tuition scholarship taxable, assuming the person had no other income.
- Undergraduate Tuition and fees at the University of North Carolina at Chapel Hill are just under $9,000 per academic year for students from North Carolina. UNC-CH also provides need- and merit- based scholarships that can cover full tuition. In this instance, the student would potentially face no tax bill, since the scholarship amount is less than the $14,600 standard deduction for single filers. But, if the student works, even a modest amount, their income from work would be added to the scholarship and lead to a larger tax bill than if they were only working part time.
Approximately 40% of full time and 74% of part-time college students work, NCES notes. Adding scholarships funds to the taxable income of working students would raise their costs for college significantly.
Both the examples above would harm students, but the impact could potentially be more significant for lower income people. These students are more likely to attend community colleges and public universities with lower tuition, reducing the risk of a tax bill if scholarship were made taxable. However, lower income students are also more likely to need to work to pay for other bills while in college.
If scholarships are made taxable, then students from wealthier families, who can afford not to work, could end up better off than students from families who need to work in order to make ends meet. In fact, students enrolled at lower cost institutions who come from wealthier families might be incentivized not to work, since doing so could land them with a tax bill.
The tax bills from changing how scholarships are treated could also land on parents, if they claim their college-aged student as a dependent for tax purposes. Whether it is the student or the parents who bear the cost, it would make the burden of paying for college much heavier for many families.
Students never actually pocket any of the money from scholarships that are used to pay tuition and fees, which can be very significant amounts, especially at high-cost private institutions. Most scholarships that pay tuition and fees are applied directly to a student’s account with their school. Even scholarships from outside organizations are typically sent directly to colleges. So, the result of this change could be students facing a tax bill of thousands of dollars for funds that went straight to their school to pay tuition.
These proposals are all a long way from becoming law, so nothing has changed yet, but they do indicate a willingness from Republicans to cut tax breaks for scholarships that help millions of students, many of them from low- and middle-income families pay for college, in order to extend tax breaks that provide much greater benefits to wealthy families than low income ones.
