<p>according to a student loan expert quoted in the WSJ, the average increase in student loan costs is $2,000 over a ten year period, i.e., ~$200/yr if we ignore compounding.</p>
<p>The "working poor" pay virtually no Federal Income Tax. Therefore it is absurd to suggest they are helping the more fortunate middle class. If the choose not to use college as a way to economic growth, that's their stupidity and probably explains why they are "working poor".</p>
<p>forget it, I wrote a comment 2x and lost what I wrote. I'd let some else write the economic tome. </p>
<p>Personally I think that having a fixed rate environment in an inflationary cycle is better for me the borrower and bad for the taxpayer, lender, and government's deficit. </p>
<p>Disclaimer: I reserve the right to-change-my-mind, as more information becomes available.</p>
<p>Those "plus loans" at 8.5% don't look good to me.</p>
<p>Comments arising from this thread:</p>
<ol>
<li> So what did you all expect from this administration?</li>
<li>
[quote]
Xiggi Quote: "One of my pet peeves is that scholarships became taxable in 1986,."
[/quote]
- ...and why shouldn't they be?<br></li>
<li>
[quote]
The General Accounting Office (GAO), the Congressional Budget Office (CBO), and the Office of Management and Budget (OMB) have all found that switching completely to direct lending would save billions of dollars a year.
[/quote]
So.... a single payer student loan system is more efficient than using the private sector? Can we admit that in public? Or do we get flamed for even suggesting such a thing?</li>
</ol>
<p>Xiggi's Quote: "One of my pet peeves is that scholarships became taxable in 1986,." </p>
<p>Kluge's answer: "...and why shouldn't they be?" </p>
<p>Kluge, I could advance a couple of reasons to support my position. However, I'd like to know why you believe that scholarships should be taxable. </p>
<p>Do you believe that it is veiled employment and thus taxable?<br>
Do you believe that it is a taxable gift?</p>
<p>I believe it is income. I think exceptions to income tax on income should be rare, and based on a very good and very well understood rationale. My touchstone always is: should we raise the taxes paid by waitresses and cab drivers to make up for the income lost by this exemption (or tax cut?) Now, most people receiving most scholarships will have little other income, and thus, with our graduated tax structure and base of exempt income, shouldn't end up paying much in the way of taxes - if anything - anyway, just as a low income worker won't pay much (other than the regressive FICA tax.) But there will be exceptions to that rule. So, the real question is: should students who have significant other income, or who receive very large scholarships, be granted a special status which allows them to avoid sharing the national tax burden, or should they pay their share of taxes on that money like everyone else does?</p>
<p>I don't believe that there is a defensible policy reason for taxing income which is earned by a person's labor more than all other kinds of income. And yet, that seems to be an assumed value that is not examined in tax policy discussions. As you might imagine, I also don't think large inheritances should be tax free, or capital gains, or lottery jackpots, or dividends, or other kinds of "unearned" income.</p>
<p>Kluge, I believe that income taxes should be fair. Alas, in many cases, it is not. I also believe that there is a case for having higher tax rates in exchange of social services. However, that is a discussion that goes a lot farther than the question of taxing a portion of scholarship income. </p>
<p>I will not try to convince you as much as giving you some food for thought via examples or clarification of facts. </p>
<p>First, I'd like to point out that I doubt that many students who have large outside income are affected by THIS taxation in the same way as the poorest students. The ramifications for students who happen to have zero of very low EFC can be extensive. </p>
<p>In a nutshell, all scholarship income is taxable, but is also subject to deductions for tuition, books, and fees that are mandatory. The taxable portion of a scholarship typically represents the portion that covers room and board, personal expenses, and travel expenses. For graduate school students, this is usually refers as a stipend. </p>
<p>Let's assume that tuition, fees and books run $30,000, room and board $8,000, and personal expenses and travel are about $2,000. Students with medium to large EFC -from assets, income or family- will not be affected as long as the scholarship stays below $30,000. On the other hand, students who receive a combination of scholarship in excess of the deductible expenses will face a tax liability. In the case of someone with zero EFC, the income will be about $10,000 and, depending a number of factors, may represent a tax liability upwards of $1,000. While it is correct that this low income is taxed at a low rate, many students are also considered dependents of their parents and may not benefit of the larger personal exemption. </p>
<p>The problem is that the student may not have the cash available to pay the taxes, and considering his zero EFC, may not count on much help from his parents. I realize that the student could get a job to pay for the taxes, but this may trigger a vicious circle of events. Among others, his EFC will move upwards or the school may reduce its award. It also assumes that the amount for personal expenses and travel is sufficient. Here, you may consider the issue of maintaining a health insurance, buying medicine, or paying for normal expenditures. The cost of insurance is typically not included in full ride scholarships. You may remember, the problem that Candi faced at Yale with the issue of facing large medical bills for necessary treatment. </p>
<p>Also, you may realize that the largest portion of the taxable income represent money for room and board. The student typically sees this a mere credit/debit situation. The school grants come in, the money for tuition and room and board comes out. The student really never sees the cash. FWIW, we may draw a parallel to the situation of employees having to travel for their jobs. The funds they spend on hotel, travel, and meals is reimbursed by their employer. The reimbursement may be added to their paycheck, but it is not income. Yet, they were housed and fed without triggering any taxable income. This example contradicts the theory that students should be taxed on the room and board because most everyone pays for food and housing with after tax dollars. Attending college is not a job, but in many cases, the scholarship come with the obligation to reside and eat on campus. I may be wrong but I also believe that the military does not consider the room and board expenses of soldiers as income. </p>
<p>However, the biggest question remains: Why does the government issue a Pell or SEOG grant -to the poorest students- but then turns around and seeks a payment of several hundreds dollars, if not thousands? Isn't the message that the government is dedicated to increase the number of poor students in college, and especially help lower SES students seek graduate degrees? Again, the impact of the taxation does not hit the well-off; it hits the students who have few resources. </p>
<p>Lastly, if the need to tax this type of income is really that great, a compromise could be reached. Students should be able to file correct tax returns -which a great number of students does NOT do- but also allowed to defer the payment of taxes until such time they start earning a living. FWIW, I also believe that a large portion of the Pell/SEOG should be reimbursable, if students reach a certain level of taxable income. Such repayments could help increase the Pell/SEOG grants for future generations.</p>
<p>Well, the cost of meals eaten while travelling on business is only partly deductible (although the percentage has risen recently) and I think the theory is that restaurant meals on the road are a necessary aspect of doing business away from home, and are more expensive than home-cooked meals. That is - that's the rationale. Of course, it's a crock. The deduction is a payoff to the restaurant and business lobbies - just more government subsidy of business (which I'm on record as saying is not in and of itself a bad thing, but which is frequently - as in this case - simply abused.) Everyone has to eat. The cost of food should not be tax deductible - to anyone. (Generally speaking, the individual exemption sort of amounts to a blanket "necessities of life" deduction for everyone.) And the cost of having a roof over your head - ditto. </p>
<p>What you're actually suggesting is that students should receive a subsidy for a variety of very good policy reasons. So why not just do it directly, as a subsidy, instead of taking the roundabout route of making a tax exemption - which will affect people unpredictably? Either way, some students (and some waitresses) will get sick, others not, some will have parents who help financially, others, with parents with equal financial resources, will have to go it alone. </p>
<p>It's not that the need to tax this type of income is that great, it's that the need not to make a lot of small exceptions to the rule is. The deductibility of "business meals" is a good example of how that process can get out of hand. You're a very intelligent person, and I imagine it didn't take much time or effort on your part to construct your very logical case for exempting scholarships from taxation. Picture a few years from now, and you're working for a lobbying firm, with your full time job being to figure out ways to justify tax breaks for pig farmers, casinos, or refineries. Think what a convincing case you could make. (See deductibility of business meals, above.) Meanwhile, who's doing the same for the waitresses and cab drivers? Nobody. So they end up bearing a larger and larger share of the tax burden. </p>
<p>Taxes aren't fair. But trying to hold the line against further deterioration of the underlying logic of the system is important.</p>
<p>Yes everyone has to eat but most don't spend at least $40 on an individual dinner at home while it is very easy to do so on the road for business--often more. It is part of the cost of doing business--certainly for me as I have to visit many sites around the US for my job, and is as much a business cost as the phone and computer.</p>
<p>Waitroids and all others earning tips have been getting away with murder for underreporting tips for decades.</p>
<p>Kluge, I am afraid that you went on an tangent with the deductibility of travel and entertainment expenses. </p>
<p>While the employer who reimburses the employee cannot deduct the entire expense, the employee who is reimbursed does not have to include it in his income. Actually, unless I am mistaken, an employee can also claim a deduction for non-reimbursed expenses associated with his job. In any case, imagine the situation where employees were reimbursed via taxable income for expenses they did not have a say in nor control about? That is what happens to students. </p>
<p>In this case, you have to associate the students and the employees ... not the students and employers. </p>
<p>Please note that the taxability of scholarships only started in 1986. So, the argument of deteriorating the tax base is a tad suspect. Also, there exists some ambiguity in the deductibility of room and board. For instance, the distinction is not made in the application of 529 funds which uses the broader definition of cost of attendance. </p>
<p>Again, Kluge, the main issue is NOT that students should contribute an amount of taxes on the benefits they receive. The issue is that this precise tax does not constitute disguised welfare for middle class. Quite to the contrary, it does have a major impact on a segment of the student population that -probably- was not targeted and it hits them at a time they can ill afford a reduction in spendable cash. I wish I could give you more details about how this pans out for students. It is not unusual for students to seek to get out of their meal plan because they cannot afford it or skimp on buying the necessary books. For some, there is no other option.</p>
<p>Barrons: Easy - but not necessary. You can spend $40 going out to eat while at home as easily as while travelling. The cost of restaurant meals is pretty much the same in similar establishments accross the country. Why is my sandwich deductible in Georgia, but not California? I don't spend any more when I'm travelling than when I'm not, unless I get dragged along to a "nice" place that my fellow expense account warriors feel they "deserve". Eating in expensive restaurants is not "part of the cost of doing business" - it's part of the cost of showing off to prospective clients and business associates. Why that should be subsidized by the Government eludes me. But thank you for the case study in rationalization for Xiggi's consideration.</p>
<p>Xiggi: I understand your point. But my point is that you have gone fundamentally awry by viewing it as "this precise tax". There is no "special tax" on scholarships - it's the same tax everyone else has. The general principle is that income - from every source - is taxed, unless there is a specific exemption for it. Your proposal that scholarships should be exempt from tax (and you make some good points about the fact that it only affects scholarships which exceed the cost of tuition) because that tax causes a severe burden on some students could be more precisely dealt with by providing those students with grants or other forms of overt subsidies.</p>
<p>Historically, income tax rates were higher (up to 70% nominally), but there were more exceptions. At various times the rates have been lowered and exemptions removed. I assume that's what happened in '86, although I'm no student of the subject.</p>
<p>I'm not disagreeing with the basic premise that students are deserving of consideration in government (including tax) policy. The problem I have is that you start by exempting your $4 burger and you end up exempting Barron's $40 filet mignon. Always. And the cabbie still pays for his tuna sandwich. Tax policy is complicated. Unintended consequences abound. My preference is to leave the tax code alone for a change, and address your policy issues directly and forthrightly, with grants or other overt subsidies, instead of the backhanded subsidy of tax cuts, exemptions, or deductions.</p>
<p>Kluge, and then when we go to the same restaurants as the people who write the meals off, we pay higher prices because the restaurants raise their prices so they actually get the subsidy.</p>
<p>So restaurant goers pay more twice, their taxes are higher because of the subsidy and the prices of the dishes are higher.</p>
<p>The idea that restaurants raise their prices because they get some business travel business goes against basic economics. With the greater volume of business they are more likely to reduce prices as they have higher table turnover and can be more efficient in other areas--more business=less wasted product and greater staff efficiency. That's just an absurd post for a thoughtful person.</p>
<p>And those cabbies might be eating tuna but they are not reporting 75% of the tips they make either. Every dime I make is reported. While I certainly could eat out while at home I'd rather not spend $300 a week on my food bill. We hold it to once a week or so.
And yes we road warriors deserve a nice meal during a long day and I'll keep on doing it. I already have a list for my next business trip to Vegas.</p>
<p>Barrons, well, I don't see it the way you see it. If I am willing to spend $40 for dinner and I can write-off $10, I can pay $50. Guess what, the restaurants raise prices.</p>
<p>If the subsidies were eliminated, would prices go down?</p>
<p>That's like saying car companies can raise prices because some cars are sold to business people who write them off. Most restaurants get most of their business from locals and in some areas tourists. On any given night they might have 10-20% that are folks on business. They are not going to set prices based on the fact that some people might be able to deduct the meal. Now they would be hurt if they lost that 10-20% of their business. Then you'd see places closing their doors.</p>
<p>I'll have to think about the car analogy.</p>
<p>I do know that some people are leasing more expensive cars because they can write off the leases.</p>
<p>I am talking about the restaurants that have a lot of business customers, not restaurants that deal with locals.</p>
<p>Kluge, I realize that the tax was not a tax "precisely" created to discriminate against students. I also realize that the issue related to the lack of deductibility of the room and board. Please see my first post regarding this. In the same post, I said I would not try to convince you. </p>
<p>Allow me to wrap up my position by sharing with you the possible impact of a proposed bill. </p>
<p>First, please find a link to a letter prepared by Rep. Phil English<br>
[here.[/url</a>]</p>
<p>This letters provides the background for HR 1380 which was introduced in Congress on March 17, 2005, The bill is named the Higher Education Affordability and Equity Act. The HEAEA contains a provision to expand the tax-exempt treatment of all scholarships (graduate and undergraduate) by expanding the definition of "qualified educational expenses" to include room, board, and special needs services. It also includes provisions to make student loan inter more tax-deductible, increase contributions to education savings accounts, and generally make higher education more affordable at all levels. The complete text of the bill is available [url=<a href="http://www.andrew.cmu.edu/user/gsa/gradtax/HEAEA_text.pdf%5Dhere%5B/url">http://www.andrew.cmu.edu/user/gsa/gradtax/HEAEA_text.pdf]here[/url</a>] .</p>
<p>You may notice that the bill, based on the input of Congressional legislative counsel attempts to link scholarships to education savings accounts defined in 26 USC 529 where room and board are treated as "qualified educational expenses". The relevant articles of 26 USC 529 can be found at [url=<a href="http://www4.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000529----000-.html">http://www4.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000529----000-.html</a>] the Cornell Law library](<a href="http://www.andrew.cmu.edu/user/gsa/gradtax/HEAEA_dear_colleague.pdf%5Dhere.%5B/url">http://www.andrew.cmu.edu/user/gsa/gradtax/HEAEA_dear_colleague.pdf) . The section that is important is:
<a href="3">quote</a> Qualified higher education expenses
(A) In general
The term qualified higher education expenses means
(i) tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a designated beneficiary at an eligible educational institution; and
(ii) expenses for special needs services in the case of a special needs beneficiary which are incurred in connection with such enrollment or attendance.
(B) Room and board included for students who are at least half-time
(i) In general In the case of an individual who is an eligible student (as defined in section 25A (b)(3)) for any academic period, such term shall also include reasonable costs for such period (as determined under the qualified tuition program) incurred by the designated beneficiary for room and board while attending such institution. For purposes of subsection (b)(6), a designated beneficiary shall be treated as meeting the requirements of this clause.
(ii) Limitation The amount treated as qualified higher education expenses by reason of clause (i) shall not exceed
(I) the allowance (applicable to the student) for room and board included in the cost of attendance (as defined in section 472 of the Higher Education Act of 1965 (20 U.S.C. 1087ll), as in effect on the date of the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001) as determined by the eligible educational institution for such period, or
(II) if greater, the actual invoice amount the student residing in housing owned or operated by the eligible educational institution is charged by such institution for room and board costs for such period.
[/quote]
</p>
<p>As you may appreciate -to use one of our President's favorite expressions- the attempt of HR 1380 is to correct the oversight of 26 USC 117 and align the concepts of "cost of education" as they were defined in the Higher Education Act (20 USC 1087LL) and ""qualified educational expenses in 26 USC 529."</p>
<p>I apologize for the technicality of the above, but there is no good way to simplify the presentation of this type of information. </p>
<p>And with this, time has come to adjourn and let the chips fall at the discretion of our Congress. :)</p>
<p>Well, Xiggi - you've convinced me. (Of course, with one in college and two on the way, I may be a biased jury here.)
[quote]
I think exceptions to income tax on income should be rare, and based on a very good and very well understood rationale.
[/quote]
I understand the tuition deduction, and college room and board is at least as deserving as businessmen's. The rationale is good, the exception is small and well defined. OK. You've got my vote. Now, if we can just beef up the estate tax to replace the lost revenue...</p>