I recently came across this article in The Washington Post by David Walsh, a grad student studying history at Princeton. The article discussed the ramifications of removing Section 117 the US tax code on the taxes paid by grad students.
Section 117 makes certain school expenses (i.e. tuition and supplies) tax exempt. According to Walsh’s article, the tax plan proposed by the House would eliminate these tax exemptions.
Before proceeding, I would like to state that I have not had the time to read the plan in detail, so I cannot comment on the particulars. If I were to speculate, I would say that eliminating Section 117 is likely part of a larger attempt to go after tax deduction and close loopholes that allow people to avoid paying taxes like. Eliminating Section 117 would be consistent with, though not equivalent to, taxing all non-monetary income in the private sector. To be clear, I am NOT saying that these two types of tax exemption are equivalent, to say that would be a major fallacy.
Now, to the consequences of the proposed plan…
For middle class families of undergraduate students, the elimination of Section 117 would make college significantly more expensive, likely furthering the opportunity gap (by which I mean the difference in professional opportunities) between families of different means. I mention this primarily because, while this article is about graduate students, I would be remiss if I did not mention a more pressing human consequence of the plan.
The consequences would be particularly stark for graduate students. Masters students do not typically get financial aid, perhaps because a graduate degree is not considered as vital to a person’s prospects as an undergraduate degree. For students paying out of pocket, this means a significant amount of debt and student loans, which typically consumes a sizeable portion of their disposable income for years after graudation. Masters and other professional degrees (i.e. M.D. or J.D.) offer an important (and sometimes a vital) leg up in many sectors of the professional world. Students already go into considerable debt when they get an advanced degree, so increasing this burden will drive down the number of students seeking admission to these programs.
One major issue is the cost of university degrees, which has sky-rocketed in recent years. It may well be argued that universities really don’t need to charge so much for degrees and that this proposed overhaul of the tax system would force them to lower their costs. However, this argument does not take the elasticity of demand for advanced degrees into account. Students already go into considerable debt when pursuing graduate degrees in the hopes that pursuing a Masters or Doctorate will advance their careers. Increasing the burden of debt on students will likely result in students simply taking on additional debt, with no real costs born by universities or lending agencies.
Even if the number of students seeking graduate degrees were to diminish, universities would still be able to continue filling their graduate programs. Graduate programs are already highly exclusive: universities would likely still be able to fill their programs with students they would have otherwise rejected if fewer students were to apply. In other words, doors will open for students who can afford to pay taxes on the income they devote to tuition.
The starkest consequence will likely be for Ph.D. programs, where students’ incomes are largely derived from their stipends. Before I go any further, I would like to clear the air about what Ph.D. students actually do.
When I was a graduate student, the majority of people with whom I spoke assumed I was spending most of my time in lectures and occasionally doing teaching work. This was true during the first year of my program (the masters portion of the Ph.D.), as it would be for most graduate students. However, during the second or third year of graduate school, Ph.D. students diminish their class load and eventually stop taking classes altogether because the purpose of graduate-level coursework is to prepare students to work for the university, typically as researchers. When students cannot convince someone to pay them a full-time salary to do research, they support themselves by teaching. Teaching does not advance a student within a program: it is merely how they support themselves while they work.
A Ph.D. is granted after the a student’s body of original research becomes sufficient in breadth to convince the faculty of a department that they are going to be able to be productive academics or researchers. The time required varies between departments and universities, but what does NOT vary is the fact that students spend most of their time doing research. In other words, they are working full time for the university. This, along with the fact that Ph.D. students are typically paid a stipend, made it seem odd to me that I as “paying” a sort of invisible tuition.
This is where the repeal of Section 117 comes in. As Walsh points out, instead of paying between taxes on a $18k-40k a year stipend, students would pay also pay income taxes on the $30k-60k tuition, meaning that students’ would be paying taxes on a total income that is over twice their actual income, because they are being spared the cost of tens of thousands of dollars they should theoretically be charged in order to work full time and almost never take classes at a university. I will follow the example of the article and use Princeton as the example.
An elephant in the room here is that it seems stupid to charge Ph.D. students this tuition in the first place. There are a few counter-intuitive and administrative reasons for students to “pay” tuition (which is really paid for by their department, advisor, or external grant/fellowship) which I will not go into at the moment for lack of time. For now, the most important fact is that this practice of charging (then waving) tuition for Ph.D. students is here to stay.
If this tax bill goes through, then a student at Princeton earning approximately $32k a year would have a net income of approximately $18k a year as opposed to $29k or $30k, coming to about $1500 a month for rent, utilities, food, and other daily expenses. This is not viable in that area, and the university would not be lowering rents around there because of the revenue generated by the legion of students and faculty paying rent. This leads to two possible outcomes:
(i) Princeton increases the graduate student stipend to adjust for an after-tax income that would be livable in the area
(ii) Princeton does not change the stipend, so students are all forced to find extra sources of income.
Let’s look at the scenario (i) in the case of engineering and science departments (sticking to what I know). Lab groups in these department are usually responsible for paying for their own graduate students, and the new, much more exorbitant costs of graduate students will make them an undesirable expense for most groups. Already, postdoctoral fellows, who come in knowing more than graduate students are less expensive at most universities, so many groups CURRENTLY need to be incentivized to spend resources on costly graduate students who require significant training. Therefore, most departments will cut back significantly on the number of Ph.D. students they admit.
Furthermore, because the funds for these departments come from external grants which are primarily governmental since academic research tends to produce public goods, the large taxes effectively paid by the research groups themselves would mean that the taxpayers would be getting less “bang for their buck” in research. Let me say that again: in scenario (i), by trying to save taxpayers money, the new tax plan will ensure that taxpayers get less for the money they pay.
So, let’s look at scenario (ii). Here, departments would not have to pay more for Ph.D. students, but the students themselves would have to find extra sources of income to make up the lost income which, in many cases, could be as much as $10 k. The first problem that comes to mind is the difficulties students might have finding part-time jobs, particularly when universities are located in college towns. For now, let’s assume that there are no such difficulties and that somehow, part-time work abounds and students are all able to find reliable sources of extra income to provide them with a living wage. Even making $5k a year from these jobs will require significant amounts of time for students to spend NOT working for their lab groups. Their attentions will be split, and the student’s group’s productivity will suffer. This will ALSO be a blow to the bang for the taxpayer’s buck spent on research. It doesn’t stop there though: Ph.D. students already tend to find their workload to require 100% of their attention so adding the implicit requirement of an extra part-time job will prevent Ph.D. students from focusing their full attention on their studies. This will likely lead to many more Ph.D. students burning out than currently do, thus reducing the labor pool of prospective scientists, engineers, and academics.
There is a silver lining here: the job market for people like me who got their Ph.D.’s before this tax plan. We would face reduced competition from a younger generation of scientists for grants. Given our overcrowded job market, this is a very non-trivial gift for us. However, I don’t think I need to make a case for the fact that improving the job prospects of current Ph.D.’s by reducing the number of future Ph.D.’s is not beneficial to the country as a whole.
One common argument I have heard throughout this debate is that students used to pay for their education by also working part time therefore students today should be able to do so. While there is truth in this premise, there are a few problems with drawing any sort of conclusion from this fact. Firstly, the costs needed to make up for short-falls in income were significantly smaller than those needed for today. Even adjusted for inflation, tuition has increased sharply over time. Secondly, most people who had to “work their way through school” were undergraduates. Thirdly, the competition for post-Ph.D. jobs has become RADICALLY more fierce, limiting the amount of time students can spend outside of a Ph.D. program and still land a decent job.
This last consideration is particularly important. Most of these stories also come from a time of almost unnatural prosperity in the US most of our potential economic rivals were recovering from World War II. During this time of prosperity, the government was able to fund research in a comparatively more lavish manner than they do today AND they were willing to due to a competition with the USSR. The labor market for researchers was also significantly smaller than it is today, so that finding a position was easier than it is today (this is not to say that it was easy). This meant that putting yourself at a slight disadvantage by partially diverting your attention was not as fatal as it would be today to your prospects for future employment.
Also, as I have mentioned earlier, graduate students are basically employees for the university and having to support your ‘indulgence’ of working does not really make much sense.
There is something to be said about the argument that graduate students are essentially going through an indentured servitude with the hope or expectation that it will pay off later on in their careers. I should mention here that while this may be true of masters/professional degrees, almost no PhD.’s elevate one’s earning potential above that of a masters degree, and instead take large amounts of time and effort that could be spent earning more elsewhere.
Most of the payment of a PhD is getting to work on an interesting problem, which is an extremely generous payout. The problem is that this is the reason for academics having lower salaries than their counterparts in the private sector. It should also be noted that while there seems to be a stigma that academics get to research any topic they choose, no matter how obscure or impractical, academics do not generally have complete control over what they work on: they need to get grants from someone who would like to see their proposed research carried out.
One of my inspirations for writing this post was the comments section in the Washington Post article. I realize that internet trolls are a common phenomenon, but the comments here seemed to be much more sincerely believed, and they echoed conversations I had had in real life. I hope that I have helped to clear the air.