Why the House tax plan could crush graduate students

Larry Summers: GOP tax plan is a 'serious error'
Larry Summers: GOP tax plan is a 'serious error'

About 145,000 graduate students would take a big hit under the House tax plan.

Many Ph.D. students studying science, technology, engineering and math receive tuition waivers. That means their tuition is covered, and that money isn't taxed as long as the student does research or teaches for the university.

That makes perfect sense to Benjamin Shih, a Ph.D. student studying engineering at the University of California, since he never even sees the money. The college charges him for tuition and then immediately waives it. He also receives a research stipend of about $25,000 a year, which is taxed.

But the House bill passed earlier this month would add about $32,000, the entire value of his tuition waiver, to his taxable income.

That means he would owe an additional $3,600 in taxes next year.

"I think it will make it significantly harder to be a graduate student," Shih said.

Shih lives modestly on the stipend he earns. He usually visits his family on the East Coast twice a year, but says he wouldn't be able to afford those trips if his tax bill does go up. He also doesn't think he'd be able to put aside the little money he does now into savings.

For now, Shih and other graduate students are holding their breath. The provision isn't included in the Senate's tax plan, which is expected to be voted on this week. Then the House and Senate versions will have to be reconciled into one bill.

Almost one-quarter of students pursuing doctoral degrees received a tuition waiver during the 2011-2012 school year, according to the Council of Graduate Schools.

Related: How tax reform could affect families paying for college

Ph.D. students aren't the only ones who would be affected. Some students pursuing a Master's degree get tuition waivers, too. In total, about 145,000 graduate students benefited from a waiver in 2012, the most recent data available. A little more than half are pursuing Ph.D.s or equivalent degrees, according to the American Council on Education.

"It's pretty much the expectation that you don't pay tuition for a Ph.D. program. I would absolutely not have done it if I had to pay," Shih said, who does research for the Bioinspired Robotics and Design Lab at UC San Diego. He helped design a soft robotic "gripper" flexible enough to handle fragile objects so that it can do things like screw in a light bulb.

Colleges and universities are concerned about how repealing the tax exclusion could hurt research programs.

"The current tax code helps reduce the cost of college for good reason -- not just because a college education benefits individuals, but because it benefits society at large," the Association of Public and Land-Grant Universities said in a statement.

Related: How would the middle class fare under the Senate tax bill?

The House bill eliminates several tax deductions and credits to pay for tax cuts and to simplify the tax code. It eliminates the student loan interest deduction as well as the tax exclusion for tuition reimbursement received from an employer. It scraps the Lifetime Opportunity Credit that benefits students enrolled in higher education for more than five years, but expands the American Opportunity Credit by one year.

"The current law education tax benefits are so complicated that they are ineffective because many taxpayers cannot determine the tax benefits for which they are eligible," a summary of the bill said.

The bill also nearly doubles the standard deduction, which could make up for the loss of some other deductions. It raises today's standard deduction for singles to $12,200 from $6,350.

But it's unlikely the new standard deduction will offset the loss of tax-free tuition waivers for graduate students, which often exceed that amount. The bill also eliminates the $4,050 personal exemption you're allowed to claim today for yourself.

Shih would see his taxable income raise to about $44,800 from $14,600 after taking those three changes into consideration.

"I think this tax change would discourage a lot of students," he said.

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