Durham County

Tax law changes could threaten the affordability of higher education for students

Tax code books sit on a table as the House Ways and Means Committee begins markup of the GOP tax bill on Nov. 6. Provisions in the House proposal could hit institutions like Duke University – and their students – hard.
Tax code books sit on a table as the House Ways and Means Committee begins markup of the GOP tax bill on Nov. 6. Provisions in the House proposal could hit institutions like Duke University – and their students – hard. Bloomberg

Proposed federal tax changes would levy new taxes on the endowments of private universities like Duke, reduce the deductibility of student-loan interest, count grad student cost breaks as income, change the tax rules for charitable giving and even tinker with the ones that govern debt financing.

Buried in the details of a tax proposal Republicans in the U.S. House of Representatives are pushing is a provision that would fundamentally change the economics behind a person’s decision on whether or not to pursue a master’s degree or doctorate.

It would alter existing tax law by effectively making the tuition discounts and waivers high-level schools like Duke University offer many of their graduate students fully taxable as income.

That’s no small matter when a year’s tuition in Duke’s graduate school is nominally $51,480 in a master’s program and $55,040 in the opening stages of a Ph.D. program.

In reality, at Duke and other big schools many graduate students don’t pay anything like the sticker price, as a combination of assistantships and department-arranged discounts drives down the cost of attendance. Tax-wise, those benefits don’t count now as income, but if the change should pass Congress and be signed into law, the federal government would claim a cut.

And given that graduate students often live on narrow financial margins, more taxes could mean the difference between going to school or not.

“I’d have to make a pretty rapid career change,” Michael Burrows, a third-year Ph.D. student in Duke’s Sanford School of Public Policy, said when he was asked to assess the change’s likely personal impact. “I didn’t come in with any savings to speak of. Like most graduate students I know, I live pretty much paycheck to paycheck. Under the most conservative estimates of what the bill is in its current form, it would increase my taxes. It would about double them.”

Burrows in addition to being a specialist in health policy is an activist and spokesman for the group that has tried to convince graduate students at Duke to join the Service Employees International Union. He said local activists are working with the SEIU and other unions nationally to “generate opposition to the bill at every level possible.”

Nor are they alone, as Duke has aligned with higher-ed trade groups like the Association of American Universities and the Association of Public & Land-Grant Universities to oppose the package, and not just for the provision that targets graduate students.

“There are a number of deeply concerning if not alarming aspects of these bills, as far as higher education is concerned, Michael Schoenfeld, Duke’s vice president for public affairs and government relations, said after concluding a trip to Washington, D.C., to lobby congressional delegates. “It’s a perplexing way to stimulate creativity and jobs, and will have exactly the opposite effect.

A Duke School of Law tax law specialist, Larry Zelenak, said the House GOP proposal is “a remarkably bad-news bill” for universities, students, faculty and donors.

Overall, it’s a “potential credit negative for the higher-education sector,” which was already facing financial risks from potential clampdowns on research grants and health care subsidies, Moody’s Investors Service said in an analysis it released on Nov. 7.

The existing tax breaks for tuition and other expenses evolved over the years into an “important tool for the federal government to help subsidize the cost of education,” Moody’s analysts noted, adding that the House GOP proposal, in reducing them, is “potentially harming the affordability of higher education.”

The proposed repeal of the existing tax break for graduate tuition waivers was one of the first details to attract notice. Critics argue it could dry up the talent pipeline that feeds scientific research in the U.S. But Dan Drezner, a prominent international-politics professor at Tufts University, in a Twitter posting that made the rounds earlier this month sized it up as a potential “disaster for all Ph.D. education in the United States, full stop.”

Zelenak said he found the provision “a bit of a head-scratcher,” given its potential impact, and speculated that it was collateral damage of a section that more obviously targets employee-benefit programs at Duke and other universities that supply tuition breaks to the children of university employees.

He thinks it’d ultimately be possible for universities to craft a workaround, by turning existing grad-student tuition discounts and waivers “into flat scholarship, which would be a matter of form, not substance.”

Zelenak is also skeptical that the taxation-of-endowments section in the bill would hit universities hard “enough to change any behavior.”

But he nonetheless suspects the package is an outgrowth of Republican hostility to higher education that’s surfaced in recent years in public opinion surveys. Burrows, by contrast, said it looks to him like “part of a vision to make higher education accessible only to the most well-off.”

There is in fact a conservative/populist critique of higher education that argues the sector has prospered at the expense of traditional industries, along the way undermining social coherence and making it harder for people without a bachelor’s or higher-level degree to compete in the labor market. More broadly, conservatives tend to oppose government tax subsidies of any sort, on the grounds they bend the economy to the government’s preferred shape.

But the reality is that bill in practical terms would alter the economy, in not-necessarily predictable ways, Schoenfeld said.

“Let’s not forget that the major universities bearing the brunt of this are in many cases the largest employers in their regions, if not states,” he said, pointing out a fact that applies to Duke on both counts. “They’ve been among the largest job creators in recent years. Provisions that negatively impact them are pretty quickly going to result in job reductions, not job creation.”

Ray Gronberg: 919-419-6648, @rcgronberg