Report Dings Tax Deduction for High-Income Grad Students

A new report from the Brookings Institution argues that the federal government is forgoing hundreds of millions in tax revenue each year through a tax credit that largely benefits graduate students with high incomes.

The Tuition and Fees Deduction benefits about 8 percent of graduate and professional students. But the report from Jason Delisle, a resident fellow at the American Enterprise Institute, finds that the median income of the borrowers who claimed the benefit in 2011-12 was about $100,000.

The total cost to the government is about $200 million, a fraction of what it would cost to expand the more popular American Opportunity Tax Credit, which is more beneficial to undergraduates. Delisle argues that money would be better spent on making a down payment for changes that would make undergraduate education more affordable.

“It’s a bunch of people with high incomes getting graduate degrees and getting a tax benefit,” he said.

Advocates for graduate education, though, say the report reinforces a false dichotomy between supporting undergraduate and graduate education.

Delisle’s findings are also part of a larger critique emerging in recent months over federal benefits for graduate students.

Those students were targeted for a rollback in benefits under both the Tax Cuts and Jobs Act, which passed in December, and the PROSPER Act, which advanced out of committee last year but hasn’t yet received a floor vote.

An initial version of the tax-cut bill would have stripped grad students’ tax deductions for tuition benefits, before that aspect was dropped thanks to heavy lobbying from student groups. And the PROSPER Act proposes capping graduate federal lending and eliminating Public Service Loan Forgiveness, which would have big implications for graduate students working in the public sector.

News coverage of student borrowers with exceedingly high loan balances -- a dental school graduate profiled by The Wall Street Journal last week holds more than $1 million in loan debt -- has also prompted discussion of whether the federal student loan program subsidizes wealthy universities and well-paid, well-educated borrowers and leaves taxpayers and low-income students on the hook.

Delisle himself has been a longtime critic of the Grad PLUS program, which he argues should be eliminated and replaced with credit products from the private market. The PROSPER Act would deliver on that recommendation by eliminating both the Grad PLUS and Parent PLUS loan programs, although the bill includes some form of borrowing for parents. 

Many economists, on the right and the left, have questioned the wisdom of using tax credits to advance higher education access. And Delisle says the tuition and fees deduction is another example of a program that primarily benefits student borrowers who least need the assistance, Delisle said.

“It’s really mostly a benefit for people working while they are in grad school,” he said.

The tuition and benefits deduction is open to undergraduate and graduate students. But it is only claimed by a small group of grad students because the government offers other tax benefits -- the American Opportunity Tax Credit and the Lifetime Learning Credit -- that are more beneficial to undergrads and lower-income grad students, the report says.

The deduction is available to borrowers who earn more than $66,000 annually ($132,000 for joint filers) and up to $80,000 annually ($160,000 for joint filers). The data examined for the analysis don’t indicate what kinds of graduate students are claiming the deduction, but it could include teachers working toward a doctorate or business professionals pursuing an executive M.B.A.

Those borrowers can claim a maximum benefit of up to $880. That’s chump change, Delisle said, to those making six figures but could make a real difference to undergraduates struggling to pay for the cost of a college education.

Meanwhile, the deduction doesn’t benefit graduate students who don’t earn income or low- to middle-income grad students.

But Beth Buehlmann of the Council of Graduate Schools said assessing the tax credit based on the income of those claiming it doesn’t account for the whole financial picture of those students. Those borrowers have different life circumstances than those who claim the Lifetime Learning Credit, she said -- they’re older, they may have dependents and their occupation may require a master’s degree in order to advance.

“We’ve been nibbling and nibbling at graduate support by the federal government,” she said. “Why are we looking to graduate students and expecting to find ways to save resources on the backs of graduate students? It’s frustrating to think you can continually go back to the graduate student well.”

And Buehlmann said higher education must move past a graduate-versus-undergraduate framework.

Delisle said it’s perfectly appropriate to judge those benefits against each other.

“We are making a trade-off because we spend this money on grad students,” he said. “It means we have less money to spend on undergrads. I think that’s the wrong trade-off to make.”

Justin Draeger, president and CEO of the National Association of Student Financial Aid Administrators, said that he agreed in theory that tax policy is not the best way to promote access and completion for higher ed. But because various student benefits are overseen by different congressional committees, the elimination of aid via one program often doesn't mean an equal reallocation of funds elsewhere.

"That's where in practice it makes it difficult to support any reduction in benefits," he said.

And Draeger said while it's appropriate that the bulk of higher ed subsidies go to undergrads, he's never taken that to mean all subsidies.

"I don't know where the line is, but it seems like we're constantly arguing from the extremes."

Note: This story has been updated to clarify that the PROSPER Act includes a borrowing option for parents.