The little-noticed new tax on students with large financial aid packages

Higher education leaders are asking Congress to fix a provision in President Trump’s 2017 tax law that raised taxes on low- and middle-income students who receive scholarships or grants covering non-tuition expenses, The New York Times reports.

Since 1986, scholarship money covering non-tuition, indirect educational expenses—such as room and board—has fallen under the “kiddie tax,” which taxed a child’s unearned income at the rate of their parents. In an effort to simplify the tax code, a little-known provision in the Tax Cut and Jobs Act of 2017 cut the tie between students’ unearned income and family income.

Under the legislation, unearned income over $2,550 is now taxed at 24 percent, while unearned income over $9,150 is taxed at 35 percent, and $12,500 or more is taxed at 37 percent—even if the student receiving the scholarship funds comes from a family that qualifies for a far lower tax rate. For context, in 2018, the average cost of room and board alone was $11,140 at four-year public universities and $12,680 at private colleges.

The Times notes that those tax rates were “first established 33 years ago to prevent wealthy parents from funneling money to their children to lower their tax burdens.” Now they apply to approximately 1.3 million undergraduate and 15,000 graduate students who have scholarships and grants that offset non-tuition expenses. Furthermore, according to The Hill, this law also raises taxes on some “Gold Star” families who receive survivor benefits.

Congressional backers of the bill say they did not anticipate this problem in 2017. Jesse A. Solis, a spokesperson for Republicans on the Ways and Means Committee, told The Times that when the committee recently discovered the unintended consequences of low-income scholarships, they quickly started working on solutions. “Discussions with the majority are ongoing, and we are hopeful that bipartisan action can be taken soon to provide greater certainty for students and their families,” Solis says.

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