Education is the best investment a person can make in his or her future and the best investment a government can make in its workforce. That’s why educational expenses have enjoyed a privileged place in the American tax code since pretty much forever.
The GOP tax bill that recently passed the House was particularly brutal to higher education and, while the Senate bill is less onerous, the two will have to be reconciled before being sent to the President. Until both Houses of Congress agree upon a final draft which protects higher education, the threat to academics is a real one. If passed, the result of these provisions will be a withering of institutions of higher education and a massive increase in the cost of a college education.
How Taxes Are Changing
Under current law the taxable value of a scholarship is zero. That will change under the tax bill which recently passed the House. Since scholarships amount to the bulk of the pay that teaching assistants and other grad students receive, this means that the average Grad Student will see their taxable income more-than-double while their stipend — the money they actually live on — remains the same. The result, according to the Harvard Crimson, is that graduate students will see a 400% increase in their tax burden if the Republican Tax Cuts pass.
The Student Loan Interest Deduction
Students who don’t have scholarships typically take out loans and the interest on those loans is tax deductible. Indeed, the vast majority (66%-88%) of college graduates today have student loans. Those loans are, increasingly, just part of the cost of going to college — much like the cost of a mortgage is part of the cost of buying a house.
Regardless of the wisdom of going to college on borrowed money, more than 13.4 million currently-enrolled students signed loan paperwork with the expectation of having that tax deduction upon graduation. Millions more count on that deduction to help pay off loans taken years or even decades ago. Under the tax plan as it passed the House, this deduction will end.
Some universities have substantial sums of money invested — “endowments” — which are used as a source of perpetual funding. This is common among Ivy League schools and other elite institutions. Historically these endowments are tax-free because they fund not-for-profit educational efforts but the Senate Tax Plan would change that, levying an excise tax on educational endowments.
What This Means
There are several obvious consequences to these changes in tax policy but the biggest and most obvious one is the potential collapse of higher education in the United States. To understand how, we need to look at the workhorses of academia: the grad-students.
Popping the Education Bubble
Grad students are essentially paid nothing in exchange for the opportunity to study the fields they love. The average grad student makes just $22,383 a year. If taxes go up and stipends don’t, many won’t be able to afford to continue in their studies.
But gradstudents are vital for the day to day function of nearly every college and university in the country. If grad students suddenly cost more the only options are hire fewer of them or find more money. Hiring fewer is simply not an option; many institutions are already in significant debt and are counting on high enrollment and tuition to pay those debts. That leaves “find more money” which means increasing tuition substantially.
A national tuition spike could be just the thing to trigger widespread questioning of the assumption that a college education is necessary. That starts an uncomfortable ball rolling:
A Brain Drain
Of course, there are college educations to be had outside of the United States. If the cost of education rises too fast or the availability drops too fast America’s most talented students will look elsewhere. The American system of higher education directly supports American economic power, American agricultural competitiveness, and American military supremacy. If a generation of America’s best and brightest travel to Europe, China, and elsewhere for their undergraduate and graduate work the fruits of their research and careers won’t be there to prop up the next generation of industrialists, farmers, and warfighters.
Of course, in the shorter term, the consequences to small-town America are difficult to overstate. There are on the order of 500 small liberal arts colleges in the United States, most scattered up and down the Eastern Seaboard. In most cases these colleges anchor the local economy in whatever small college town they support. The problems facing graduate students rapidly become the problems facing the restaurant owners, mechanics, grocery stores, and laundromats they frequent and, from there, the ripples spread through the community as a whole.
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More On Taxes
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