Why You Should Care About Graduate Students Being Affected by the Tax Cuts and Jobs Act

I was traveling home last night by taking the Cap Metro bus north of the UT Austin campus. Two girls right beside me were discussing the Tax Cuts and Jobs Act recently passed by the Senate. “You see, I’m a graduate student,” one girl said. “I used to care about [the tax bill], but now I have no real passion for it.”

It’s strange to hear such a thing from someone, especially when many graduate students organized yesterday on my campus just to march and demonstrate their discontentment with the bill’s provisions. Possibly this girl was hearkening on a point I’ve also overheard from other individuals. “It’s okay that the tax bill negatively affects group X, because the bill is being prepped for reconciliation between the Senate and House drafts. It hasn’t passed, yet.” So, of course, that means you should not care, yet, too. Or, at least, that’s the logic I think other people are trying to convey. 

When it comes to a people’s political consciousness, waiting for the succession of a bill is not exactly the wisest option for deciding to care and to express a public opinion. Too often do a people wait for an atrocity of any magnitude to occur before they finally get around to voicing public outrage. It is always a puzzle to me why a democratic people would consistently choose to be reactionary when they can choose to be proactive on many issues. Why muse about the puzzling psychology of a democratic society when practical issues are immediately at hand, though, particularly when it seems like practicality is all what people care about, anyways?

Given the tremendous scope of the tax bill, and those who are negatively affected by it (everyone who is not a high-income earner), possibly the best way to continue is to limit my scope to those who are and are not expressing their lack of concern: graduate students.

Why might you care that graduate students are being singled out in the Tax Cuts and Jobs Act, even if a reconciliation bill passes or not?

Before you might even decide that caring is an option, you might want to know exactly how graduate students are even affected.

According to Title 26 U.S. Code § 117 (d), “Gross income shall not include any qualified tuition reduction.” “Qualified Tuition Reduction” can be defined as "the amount of any reduction in tuition provided to an employee for [a school's undergraduate] education." Many graduate students across the United States are admitted to their respective universities under the provision that they receive qualified tuition reductions by serving as a teacher’s assistant or instructor of a course.

These provisions are very important for graduate students, because becoming a university employee moderates the financial burden graduate programs impose on students. Graduate programs are very expensive, usually more than undergraduate programs, and scholarship opportunities are far fewer, while loan options are also more costly in the long-run. Federal direct subsidized loans, for example, have some of the lowest interest rates available, but these loans are not offered to graduate students. Even federal direct unsubsidized loans require graduate students to pay more in interest rates than undergraduate students. Pell Grants are also typically offered exclusively to undergraduates. The reality of the typical graduate student’s financial situation is pretty clear: pay more for school with higher interest rates on loans. Oh, and depending on your program, you can be in school for longer than the standard undergraduate four years, too, which means you need more financing.

The original Tax Cuts and Jobs Act specified that Section 117 (d) would be repealed, meaning that graduate students who are employed by a university will be required to submit the amount of reduced tuition costs as taxable income. (Sec. 1204 (a))

In order to receive a qualified tuition reduction, universities reduce the price of tuition in exchange for labor by graduate students. However, graduate students are not your normal employees, because they are still buying a product—education. The price of education is just being discounted. To be clear, students do not receive income for their work; they only receive a tuition reduction. The House and Senate are treating this exchange as if students were acting solely as sellers of labor, not as customers.

Does this not sound strange, yet? Consider workers’ benefits. Employers typically offer salary and wage earners healthcare benefits packages. Employers reduce wages and salaries in exchange for better packages. We assume workers are sellers of labor, and benefits packages are income. The income is only being substituted by another means, the benefits packages. The House and Senate do not try to tax healthcare benefits packages as income, though. Why tax tuition reductions, but not healthcare benefits packages? Certainly, tax revenue is not the motive here.

Possibly, Congress introduces this tax because graduate students are a small enough pool of voters that Republican congressmen and women do not have to answer to. After all, higher education is typically a left-leaning sphere in terms of political ideologies, so Republicans are typically not concerned about this group of constituents. Healthcare benefits packages are not likely to be taxed, simply because there is little to no political success that could be achieved from such a proposal. In fact, public outrage insures the fact that healthcare benefits packages will most likely never be taxed. 

Motives aside, there are some real implications from this taxable income proposal.

1. Universities receive the burden to reclassify their qualified tuition reductions as scholarships to take the burden away from graduate students. However, once they do this, they cannot require graduate students to work in order to receive the money. Scholarships cannot be offered to students on the contingency of future work. Some might muse that graduate students would still equally accept those teacher assistant and instructor positions for experience and resume purposes, but this will not be the case for every graduate student in every field of study. Liberal arts graduate students might keep those positions, but STEM graduate students now have time to use their education in privatized sectors outside of the university system.

The fact of the matter is that graduate students with higher scholarship opportunities have a higher reservation wage, meaning a higher wage needed to be offered in order to convince students to become employees of a university. They have less of an incentive to work. Universities might try to remedy this situation by hiring more staff or simply pushing off higher tuition prices on undergraduate students. This is not exactly a great situation, since higher education uniformly becomes more expensive. Since education is the most tried-and-true pathway to career advancements and higher income, it is especially disappointing that Americans cannot simply choose not to pursue higher education.

2. Universities also have the option of uniformly doing nothing, and let graduate students take the burden of the taxable income. For many graduate students who just recently started their graduate careers, they might be forced to drop out of their programs simply because universities do not reduce tuition enough to cover what students lost due to the tax. For other graduate students who are in the middle or near the end of their degrees, many will rationalize that they should push through with their education and finish it since they have already invested some much time into their degrees. Having no appreciation for sunk costs, many of these students will be making inefficient decisions as they take on more debt for a degree with possibly little pay off from a higher education market that offers limited employment. 

3. Consider the graduate students who do drop out of their programs. Group them with another group of individuals, those who are now considering attending graduate school. These people are now evaluating their finances and the pay-off of attending a graduate program in the United States, and many of these individuals are 1) considering to apply internationally and 2) considering to not apply at all. At a time when students are now thinking about applying for graduate programs, even stipulating a tax is harmful, since it discourages higher education involvement. Prospective students are making decisions now, and the prospective tax influences those decisions now, whether the bill passes or not.

4. If students look to apply internationally, the United States government risks the beginnings of a brain drain. Of course, this reality is an extreme case, but, again, even stipulating a tax begins this process. Brain drains negatively affect this country, because the United States looses intelligent and innovative minds that stimulate markets and economies, as well as further develop a country's culture, to other countries. What real benefit does the United States gain when it chases its young minds out of this country for a very little increase in tax revenue?

To summarize, the tax proposal is bad. Graduate students should care and you should, too. Don’t wait for Congress to pass a bill before you decide to care.

 

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