Yesterday, the House passed their version of tax reform, the creatively-titled Tax Cuts and Jobs Act, 227-205. The higher education universe has been (rightfully) freaking out for the past week, as the bill would eliminate the tax credit on waived tuition, raising the tax burden on paid graduate students by anywhere from ~$3,000-$15,000 annually. The New York Times said this change would “bankrupt” these students, and Forbes went so far as to say it will “destroy graduate education” entirely. The reactions of my grad school friends echoed the media panic: some see a major threat to their savings, others are contemplating leaving school early to get a job. Unsettled, I ran the numbers on my graduate financials.
At Vanderbilt, my stipend was approximately $28,000/year, which incurred a federal tax bill of about $3,700. Vanderbilt’s tuition was around $34,000 annually, but it was entirely waived (essentially, Vanderbilt paid itself that money when I was a teaching assistant). The new tax plan would require tax payment on the whole $62,000, bringing my tax bill to almost $11,000. If nothing else were to change, my net income would fall from $24,000 to $17,000…coincidentally equal to my average living expenses for my two years in Nashville (granted, I live a low-frills lifestyle). I can imagine how this would be a major deterrent for potential graduate students, and how only those from affluent backgrounds could attend under this system.
But something else would have to change, based on the current economics of graduate education. Research institutions make money and build prestige according to the number of productive labs/departments on campus, and these departments depend on graduate student research/enrollment to thrive. I don’t believe for a second that universities would sit back and watch as people stop applying for graduate programs. For starters, they could lower graduate tuition to ease the tax burden: under the House proposal, the rate increase from 12% to 25% would occur at $45,000 (if Vanderbilt halved tuition, for instance, taxes would also be halved, topping out at $5,400). These universities already benefit far more from skimming a large percentage off the top of any government and industry research grants awarded to institutional labs. Alternatively, the universities could raise the stipend to offset the taxes, deflecting a portion of the costs to the external grants that support some graduate researchers. This would increase the university’s per student financial burden (by about $7,000 in my Vanderbilt example, up 11% from $62,000 to $69,000), but department employment could be maintained at ~90% of current levels if total funding for graduate students is constant. With the job market for Ph.D.s as tight as it is, a slightly more competitive admissions process may not be the worst outcome.
Fortunately, this is not law yet; the bill must first pass the Senate. The current Senate version mercifully keeps the tuition waiver tax credit, instead targeting interest on endowment investments (still fundraising from universities, but by a much more palatable means). More than likely, the House’s provision to eliminate the tuition credit will be dropped from the bill, as most contentious provisions are. While I believe there are many ways the academic research system should be improved, this bill is not an answer. In fact, it’s not fully clear what the purpose of this proposed change is, whether it’s a sneaky bid to undermine higher education or just a misguided attempt to close a loophole. Anyway, hopefully the Senate gets it right. Hey, I’m not in grad school anymore, I am allowed to be hopeful!