[Updated on November 14, 2017, to include changes and information about Senate version]
Tax reform was a major promise from President Trump and Members of Congress from both parties during the 2016 campaign. That promise has now taken shape as the 429-page Tax Cut & Jobs Act. The next step is for the House Ways and Means Committee to do a four-day markup, which is a formal process for considering amendments to legislation.
What does this have to do with colleges?
Tax policy has a huge influence on higher education policy, affecting how students pay for college and how institutions make investments, among other things. There is a lot to unpack in the current GOP proposal. Here are four big items you should be aware of:
Ending the student loan interest deduction | When you take out a federal student loan, you have the initial amount of the loan plus the interest on that loan. The current provision allows you to deduct the payments you make on the interest on your student loans (up to $2,500) when paying your taxes. The proposed policy would end this deduction.
Eliminating tax credits | Students and families paying for tuition can take advantage of a few different tax credits, depending on how long the student has been in school. These include the American Opportunity Tax Credit (up to $5,000 per year), Lifetime Learning Credit (up to $2,000 per year), and the Hope Scholarship Credit (up to $1,500 per year). The proposed policy would eliminate the Lifetime Learning Credit and Hope Scholarship Credit. The future of the American Opportunity Tax Credit is a little murky, as a separate provision could limit access to the credit. Ultimately, the proposed policy would limit or eliminate the credits students and families use, depending on how long students are in school.
Taxing “waived tuition” | This largely affects graduate and doctoral students, but it is worth knowing about. A form of financial aid that many institutions use is tuition remission. Essentially, a college will say a student does not have to pay some or all of their tuition, typically in exchange for their contribution to research or responsibilities on campus. The proposed policy would require students to report the value of the waived tuition as income. So if you make $20k per year during a part-time job and your institution waives the $40k annual tuition, the proposed law would tax you as if you earn $60k annually.
Tax on university endowment investments | Universities raise a lot of money for important programs like scholarship and faculty recruitment and retention. Universities do this through traditional fundraising (if you are an alum, you get hit up for money a lot) and making investments. The proposed policy would establish a 1.4% tax on income that private universities generate through investments. While it only targets institutions with uber-large endowments, the higher ed community is concerned about the precedent and long-term pressure to raise additional funds to offset the loss of income in order to maintain important programs.
What does the Senate have to say about this?
The Senate released their version of the bill on Friday, November 10th. The Senate version is generally better for higher education in comparison to the House version. You can find a quick breakdown below comparing the key parts of the plans, but the Senate bill introduces a new issue:
- Royalty taxes | Most institutions are nonprofit organizations, which means the money they earn is usually not subject to taxes. Institutions own their own branding and can license out usage of that branding for commercial purposes. That's how you get all the t-shirts, magnets, and mugs in the campus bookshop. The institution generates revenue each time those items are purchased through royalties. The Senate bill would treat that revenue as "unrelated business income" and tax it as if the institution were a for-profit corporation.
Here is a quick overview of the key differences:
|Higher ed tax credits||Leaves them alone||Eliminates all but one|
|Student loan interest deduction||Leaves it alone||Eliminates it|
|Endowment tax||Taxes them||Taxes them|
|Tuition waivers||Leaves them alone||Taxes as income|
|Logo royalties||Taxes as unrelated income||Not included|
Why does this matter?
The U.S. tax code is pretty messy, and both parties tend to support cleaning up the seemingly endless list of deductions and credits and loopholes. It is not much of a surprise that some items that affect higher education would be included in a tax reform proposal. In and of itself, that is not a big problem. Actually, much of the higher education community agrees that higher education tax credits are not well targeted as a form of student aid and could be eliminated in order to significantly invest in the Pell grant program. The major hangup is that the savings that the Tax Cut & Jobs Act eliminates these benefits without reinvesting the savings back into better targeted higher education programs.
If you are interested in getting involved with this issue, reach out to NCLC at firstname.lastname@example.org. We'll connect you with some awesome partner organizations who are working on this issue.