House Tax Bill Would Hammer American Grad Students But Not Foreign Counterparts

Students attend the New York University 2017 Commencement at Yankee Stadium on May 17, 2017 in the Bronx borough of New York City. (Photo by Dia Dipasupil/Getty Images)Students attend the New York University 2017 Commencement at Yankee Stadium on May 17, 2017 in the Bronx borough of New York City. (Photo by Dia Dipasupil/Getty Images)

The House version of the GOP’s tax reform bill has drawn outrage from graduate and doctoral students over a provision that would count tuition waivers as taxable income.

Adding insult to injury, the measure would hit American students while leaving their foreign counterparts unscathed.

Under current tax law, students who receive tuition waivers — a break on fees offered by universities in exchange for teaching or research assistance — don’t have to report the value of the waiver as income. But the House plan would do away that exemption, potentially raising annual taxable income by several thousand dollars for many students.

The provision has generated no small amount of protest from student groups, who warn that it will “bankrupt” already financially strapped students and “destroy” the U.S. higher education system. Whether or not the heavier tax burden wold lead to an educational apocalypse is an open question, but it is certain to fall harder on Americans than on international students studying at U.S. colleges.

That’s because, thanks to a host of bilateral tax treaties, many foreign students are exempt from paying income tax on grants or awards from educational institutions. The treaties remain in force regardless of changes to U.S. tax code, so the foreign students covered by the bilateral tax agreements would still enjoy the exemption even if the House bill became law.

The U.S. has entered into tax treaties with dozens of countries, including the two largest senders of foreign students: China and India. A tax treaty with China — ratified in 1987 under the Reagan administration — exempts “grants or awards from a government, scientific, educational or other tax-exempt organization” from federal income tax.

A 1991 treaty offers similar tax relief on “grants, scholarships and remuneration” received by Indian students in the U.S. It also specifically exempts “any remuneration” received for “teaching or research” for a period of two years from the date of the student’s arrival.

The same tax exemptions apply to American students studying in the partner countries, so the treaties in and of themselves don’t confer an advantage to foreign students studying at U.S. colleges. But if the treaties are combined with the tuition waiver provisions of the House tax bill, they could create an uneven playing field for American students at home, according to some higher education observers.

Norman Matloff, a professor of computer science at the University of California-Davis, argues that the House bill would have an adverse affect on U.S. students, especially those in the STEM fields.

“Some American students who would otherwise have pursued a PhD would now choose not to do so, while there would be no impact on the international students,” he wrote in a blog post on Wednesday. “Result: Universities would depend even more on foreign students than they do now.”

Although it would make tuition waivers taxable, the House plan leaves untouched a section of the tax code that exempts payments categorized as “scholarships.” Universities could potentially preserve students’ tax breaks by re-classifying tuition waivers as scholarships, but they would no longer be able to require students to work as a condition of receiving the money.

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