Oct 30, 2011

Should grad student stipends be tax exempt?

There's a petition on the Whitehouse website to make grad student stipends tax exempt. Stipend amounts that go to educational expenses (tuition, books, etc.) are already exempt, so this change would affect the remainder of stipend income. The motivation for the petition is apparently to encourage more people to attend graduate school.

I find this very hard to understand. What evidence is there of a supply shortage of graduate students? Even average grad programs get 10, 20 or 30 times more applicants than they can admit. Since federal taxes on grad stipends are in the area of 10% per year, removing those taxes would only increase grad student income by a small amount. That means that the applicant pool would at best be increased very slightly, and there would probably be little to no impact on the quality of the applicant pool overall.

While there is no supply shortage of graduate students, there is obviously a supply shortage of academic jobs for graduate students relative to the demand for those jobs. Making grad school more attractive-- which is what the petition would accomplish if successful (which I doubt, as explained above)-- would only make the problem worse, or at least not make it better.

Why should a graduate student making $30,000 a year should be exempt from income tax when a high school teacher, bank clerk, or secretary making the same salary receives no such exemption?

The petition has some vague rhetoric about needing to increase interest in grad school to remain competitive in the sciences, but it's difficult to see where the problem is. Top American research universities-- places like Harvard, Stanford, MIT, Berkeley, University of Michigan, Cal Tech, etc.-- are among the best in the world, and American students considering an advanced degree in a science or engineering discipline rarely choose foreign universities over these elite domestic ones.

What about students who are deciding between pursuing a science or engineering degree and entering the workforce in one of those fields after obtaining their Bachelor's? Again, what evidence is there that too many students are taking jobs rather than getting advanced degrees in science or engineering? And what evidence is there that science is being held back by some Physics majors getting jobs in finance or consulting rather than pursuing graduate degrees?

The only reason I can think of to worry about the supply of grad students is in attracting non-American students to American graduate programs. But that issue seems to revolve much more around immigration issues (like how difficult it is to obtain the right kind of visa) than around salary. Anyone even thinking about a technical advanced degree will already be considering American universities. If the visa issues are resolved, I don't see the added benefit of making grad stipends tax exempt.

You can read the text of the petition yourself, and see what you think. From where I stand, it's a non-solution in search of a problem.

24 comments:

  1. Politely, I would like to argue that its not 10% for the taxes, its 20%. Most students dont make close to $30,000 and the ones that do are getting paid by government fellowships. Everyone is allowed to their opinion. In the larger city, the stipend that starts at $14,000 a year barely covers rent and food for a safe place after taxes. There are many issues to be discussed. The main issue is more that every school is different. Some give health insurance, stipends, money to travel to conferences. I do feel that teachers are not paid as well as they should be. Obviously, supply of graduate students is not the issue. The issue is discussion of what rights and payments graduate students should have.

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    1. Exactly.
      I am currently getting 15k yearly as stipend and it does not even cover rent... especially when there is 150+ taxes on it monthly...
      I don't know where the above individual is getting the 30k average from.

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  2. Anonymous-

    I do not object to thinking about whether graduate students, along with anyone else making the same kind of salary, should pay less in taxes. I absolutely object, however, to the suggestion that grad students ought to receive special tax treatment not afforded to anyone else making the same salary. This is especially objectionable given the petition's specious rhetoric about needing to promote graduate education.

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  3. It's worth pointing out that grad students are exempted from FICA, and at the low incomes that grad students make, FICA is a much bigger deal than income tax proper. (Although it's a mixed blessing because fewer years paying into Social Security can potentially lower your ultimate benefits.)

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  4. I'm not aware of an exemption for FICA that is particular to graduate students, but I'm open to correction. FICA is a payroll tax, and graduate students just taking classes and getting stipends aren't earning wages per se, so it would make sense for them not to pay payroll taxes.

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  5. Well yes, it's not a specific exemption for grad students as such. The way the tax code seems to work is that students who earn money by performing services for the school which are more or less subsidiary to being a student (such as being a teaching assistant, or work study) are exempted from having to payroll taxes they would otherwise have to pay on such income.

    The point of my comment was merely to point out that graduate students already (even if merely as a side effect of aspects of the tax code not intentionally targeted at them) benefit from lower taxes on their income. Someone who makes $20,000 a year as a teaching assistant is going to pay quite a bit less in taxes than someone who makes $20,000 a year working as a cashier.

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  6. Right, many students working for their schools during their education will be exempt from FICA (provided that certain conditions are met).

    That's still quite different from thinking they should be exempt from income tax. And I don't think the justification for the FICA exemption would need to go through any tenuous claims about needing to incentivize graduate study.

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  7. Graduate school is not like most jobs. There is no increase in salary, there is no yearly review and until recently at my school there was no health insurance. The truth is that our rights a few and hardly defined. Our full-time job is researching, TAing, etc. The long term issue is that more and more graduate students are heading to industry after they graduate. There is usually a cap of salary for academia jobs. Industry is where post-graduate students make a lot of money. I see an issue that many of the people who would be great professors are not remaining in the academic field. Why is this a problem? Having a PhD does not mean that you can actually teach well, but many graduate students who have taught well leave academia. The cycle of having professors who care more about grants and publications over teaching will eventually cause undergraduate students to receive a poor education. A little more money means living more comfortably and maybe actually getting to see you family more than once a year.

    The other argument is that the research required to get a PhD has to be done to get the degree regardless of the payment the graduate student gets.

    Finally, the truth is that less American borns are getting PhDs. The International component at Universities is extremely important for collaborative research and there is no reason to change that. The main issue is that we arent keeping enough of the students educated in the US here to help with developing technology, starting companies and teaching at the university level.

    The petition is trying to start the discussion of education incentive. This petition is also not just a random effort of a few graduate students wanting to get more money. http://www.nagps.org/policy/legislative-action-center/national-advocacy/current-issues

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  8. "I see an issue that many of the people who would be great professors are not remaining in the academic field."

    I think it's a great thing that many grad students don't go into academia. It's only a problem if there aren't enough talented teachers and researchers taking academic jobs. But I see absolutely no reason to think that's true.

    But this is really a different issue, since the petition is about pay for grad students rather than pay for professors.

    "Finally, the truth is that less American borns are getting PhDs. The International component at Universities is extremely important for collaborative research and there is no reason to change that. The main issue is that we arent keeping enough of the students educated in the US here to help with developing technology, starting companies and teaching at the university level."

    Again, this is really not about grad student tax exemptions, but about what happens after grad school. Even so, I'd really like to see some evidence that we aren't retaining enough foreign students after they leave graduate school. The academic job market in most countries is no better than the U.S., and few places in the world have as much concentrated research, entrepreneurship and industry as some of the American hotspots (like Silicon Valley).

    Finally, as for the issue of general benefits in grad school- I would suggest comparing the benefits of an average Ph.D. student working half-time for his university to anyone in the country making the same income working part-time in a non-academic environment. I suspect the Ph.D. student comes out much better- more likely to have health insurance and other benefits, better working conditions and job security, etc.

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  9. Matt: I was agreeing with you. My point was that because grad students are already the beneficiary of significant tax benefits, even lower taxes wouldn't really make that much of a difference.

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  10. This comment has been removed by the author.

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  11. This happens so rarely that it can be hard to recognize- thanks for the discussion!

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  12. Thank you for this incisive takedown of another feel-good reform. Why are our fellow graduate students so easily swayed by impassioned appeals to their walet? Did any of us really think that the PhD route was paved with gold?

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  13. "Appeals to their wallet"? For the graduate students who do work hard, their hourly wage would be more than likely be under the minimum amount required by law. Yes, graduate students chose to pursue a PhD but there isnt any control over how much each student is paid. At least not taking out the $500-$1,000 would allow students to live a little more comfortably or actually visit their family.
    In terms of bad faculty, there is more than you think. Although, the argument remains whether it is the faculty themselves or the list of requirements needed to receive tenure. Teaching remains to be a consistent focus that is dropped down to the bottom of the list behind grants, money, publications, etc. This is obviously fueled by the reduction of funding, especially in the STEM field.
    Job security for PhD students is not that good. If someone is going to get fired, its always the graduate student first. In terms of work environment, there is no 40 hour week and done for graduate students. It is self paced if you have a nonexistent advisor who does not want to move their research forward. In terms of benefits, graduate students just got health insurance in the last few years. After you are done taking classes, 1.5 years in - all they are paying for in your stipend. So really the $20,000 (stipend) + $1,000 does not equal a normal job.
    In terms of International students, countries are paying students to come here and then return home.
    Am I wrong to think that we should keep some of the money going towards to people that are willing to put themselves through a struggle for 5-7 years after already completing a college degree? If nothing else, this petition at least starts a discussion about graduate students and their jobs. Since they arent like normal jobs, reviews, pay raises, full benefits, etc there tends to be a lot issues that occur.
    My question to you is why are you so against it? What makes it such a wrong thing for this country?

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  14. Anonymous 9:12--

    "Job security for PhD students is not that good." I would think the opposite is true. It's much harder to get dismissed from a graduate program than to be fired from a job outside a university, and graduate students are an important pool of labor for universities.

    "In terms of work environment, there is no 40 hour week and done for graduate students."
    Sure, but much of what grad students do is part of their degree work rather than part of their job. Would any Ph.D. student want to trade places with someone working at, say, WalMart and making an equivalent salary? I doubt it, and part of the reason is that graduate students have a very good work environment-- safe working conditions, interesting and challenging work, and so on.

    "My question to you is why are you so against it?" I'm very much against the way this issue is framed by the petition, which I think is completely disingenuous. Apart from the general merits of the tax exemption, the reasons the petition attempts to provide for supporting the proposal simply don't hold water.

    As for the issue more generally: as a former graduate student, I'm obviously extremely supportive of higher education at the graduate level, but I don't think that a unique tax exemption for grad students is a sound policy proposal.

    I'd much rather see an increase in fellowships, grants, and other competitive funding for graduate studies. That strikes me as a much more effective way of promoting high quality research than an across the board tax cut for graduate students.

    One point on which I agree with you is that it's useful in some ways to think of being in graduate school as like having any other sort of job. Spending 4-6 in a Ph.D. program is usually not the only option someone has. Students considering grad school should consider the opportunity cost of obtaining the degree: what are they giving up in order to obtain it? Could they have started themselves in a satisfying career outside of academia instead? In many ways people don't think of grad school as a job, and I think that is often to their detriment.

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  15. One thing that this post does not point out is that a graduate student is suppose to declare their tuition reimbursement as income and then take a deduction. This means they are not elligable for the standard deduction.

    hypothetical example

    grad student: makes 30k, receives 20k tuition credit, takes a 20k deduction (itemized), pays taxes on 30k.

    professional: makes 30k, takes the standard deduction of 5.7k, pays taxes on 24.3k.

    I agree grad students should pay taxes on their income but I think they should pay the same rate as professionals not more.

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  16. Anonymous 11:20--

    I'm not a tax code expert but I did pay taxes for a few years as a grad student.

    Tuition remissions, at least in my experience, show up on one's 1098 in the scholarship/grant category, along with stipend funding. What you pay for tuition and required educational fees shows up on the 1098 as "Payments Received for Tuition and Related Expenses."

    Any scholarship funds, stipend money, or tuition remission that you receive that is used to pay for tuition and educational fees is not taxable. If you receive funding beyond the tuition and fees, then that excess amount is taxable.

    So I think your analysis of the example is mistaken. If a grad student gets a 30k stipend and 20k in tuition remission, his income for tax purposes is 30k (subject to reduction by the standard deduction and personal exemption). Both the grad student and the "professional" in your example would have the same taxable income, and both would be eligible for the standard deduction and personal exemption.

    Also, as a previous commenter mentioned earlier, some grad students earnings are not subject to FICA witholdings- so there may actually be a tax advantage for the grad student in your scenario.

    I'm open to correction on any of this; thanks for the comment.

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  17. Also, in the event that one pays out of pocket for grad tuition (e.g. if tuition costs $5,000 but only $3,000 is remitted), the unreimbursed amount can count toward a tax credit such as the Lifetime Learning Credit. The tax savings from such credits can be substantial.

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  18. for me it should really be tax exempted because the amount of money that goes to the tax can be used into something more important.

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  19. They should pass this. It will help the students a lot.

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  20. AHEM excuse me, I make 13k. From which you subtract health insurance, conference costs, living costs, monthly medication, etc. and you barely have enough to visit your home country in the 4 weeks i have off from work. Not to mention that, being an international student with obvious student visa restrictions, I am only allowed to have a part time appointment (as opposed to American students who can choose to teach extra classes or otherwise combine several sources of funding) and I can't get employment outside of the university. This petition is obviously directed at helping current graduate students (who are making close to minimum wage), not at increasing their number. A person without the dedication to knowledge and research and teaching would just take a normal "real world" job that pays a number of times better than 13k. Plus, for doing pretty much everything an associate professor does, but with minimum support in terms of research and travel funding, mental support and career prospects, dealing with undergrads and the massive workload, 13k is pretty weak. "Supporting the graduate education" is about the government encouraging research in those already in grad school, especially since so much of it is funded by the government. It's a loop - a thank you to those who do much of the important work and no, don't go to Harvard, Stanford, MIT, Berkeley, University of Michigan, Cal Tech, etc.

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