Graduate Students Face New Tax Threat
GOP Proposal Could Tax Graduate Student Scholarships and Fellowships
Republicans are floating a 50-page list of ideas to help offset the cost of planned tax cuts. The list includes a proposal to eliminate the tax-exempt status of graduate student scholarships and fellowships, which the GOP calculates would produce $54 billion in additional federal revenue. Taxing all graduate scholarships and fellowship income would reduce the financial support that graduate students rely on for their education, significantly increasing their financial burden. It could profoundly impact students’ ability to finance their studies, particularly for those in fields with limited access to private funding.
What Is the Proposal To Tax Graduate Student Scholarships?
Many scholarships and fellowships graduate students receive are not fully taxed. Qualified expenses, like tuition and required fees, are typically tax-exempt and can be used to offset stipend or fellowship income, while income used for living expenses—like rent or groceries—is taxable and must be reported.
The budget panel document outlines a proposal to eliminate the ability of students to offset part or all of their scholarship and fellowship income with qualified education expenses. While this could bring in an estimated $54 billion in incremental federal revenue, it would wreak havoc for graduate students, many of whom are already struggling given inflation and wages that haven’t kept in line with the rising cost of living.
The tax-exempt status is vital for many graduate students. With an average annual income of between $20,000 and $50,000, grad students are not exactly earning millions. The tax policy shift would significantly change how they receive financial assistance, making higher education even less affordable.
Scholarships and Fellowships Are Crucial For Graduate Students
Graduate students often rely on scholarships and fellowships to supplement their income and offset the high cost of tuition, fees, and living expenses. According to a 2023 report from the National Center for Education Statistics, approximately 60% of graduate students receive financial assistance, with many relying on fellowships, scholarships, and research assistantships to fund their education. These financial aid forms are especially crucial for students in fields like the humanities and social sciences where salaries for teaching and research positions are often insufficient to cover living expenses.
The Tax Burden: Calculating the Impact On Graduate Students
To understand how this proposal would impact graduate students, let’s examine the typical value of scholarships and fellowships and how taxing them could affect their finances is essential. Let’s assume a graduate student receives $35,000 per year in scholarships and fellowships. The amount will, of course, vary significantly depending on the program and the student’s study area. For example, graduate students in medicine or law may receive larger stipends. In contrast, those in the humanities or social sciences may receive less.
Let’s break this down with a simple example. Suppose a graduate student receives a scholarship or fellowship worth $35,000 annually, which would not be subject to taxes. Under the new proposal, however, this scholarship would be considered taxable income.
Current Situation (No Taxation):
- Scholarship/Fellowship Amount: $35,000
- Taxable income: $0
- Tax Burden: $0
Post-Proposal (Taxable Income):
- Scholarship/Fellowship Amount: $35,000
- If the graduate student had $25,000 of other income, the taxable scholarship would now bump them up to the 12% marginal tax bracket (after accounting for items like the standard deduction).
- Using the Smart Asset income tax calculator their tax burden would go from $1,040 to $5,216, an increase of $4,176.
Therefore, under the proposed change, a graduate student receiving a $35,000 scholarship or fellowship could face an additional tax burden of over $4,100 annually. This would be an effective “pay cut” of 12%, leaving the student with only $30,800.
Graduate students face several financial challenges, from high tuition costs to limited access to affordable housing. Making their scholarships and fellowships taxable could strain their ability to pursue higher education, particularly for low-income and middle-income students who rely on financial aid to make ends meet.
Conclusion
The GOP proposal has the potential to drastically increase the financial burden on already-strapped graduate students. While it is just a proposal for now, if it gains traction and enacted, it could make it even more difficult for students to afford advanced degrees, particularly in fields with limited funding options.