Living expenses are college expenses.
The comics got it right, Congress can too.
A recent Doonesbury comic strip not only adeptly illustrated the issue of college student homelessness, it also highlighted a little understood fact that has big consequences for college students. The strip begins with parents listening to their university student daughter talk about a fellow student needing to move into their house because she is homeless. The parents are stunned that students at their daughter’s four-year institution could be homeless. The daughter says of her friend, “her scholarship doesn’t cover room and board, and she’s not the only one.” When we read this, our hearts sank because we know homelessness is a common problem for too many students, and scholarships are often unable to cover these costs.
But, why don’t scholarships often cover room and board? A little understood fact about our federal tax code may shed some light. The effect of provisions contained in the Internal Revenue Code were enacted by the Tax Reform Act of 1986 regarding the tax treatment of scholarships, and place undue constraint on private sector scholarship providers and a hugely unfair burden on students. Scholarships funds that are used to pay for room and board, transportation to and from campus, child care, and other miscellaneous expenses are considered taxable income to the recipient, preventing scholarship providers from covering these costs without passing on potential tax liability to the recipient.
Living expenses for an average four-year public university total more than 50% of the cost of attendance. For two-year community colleges, living expenses make up approximately 70% of the cost to attend. Yet, when scholarship providers offer assistance with these expenses, the funds are treated as income and the student may have to pay taxes. Our tax system is actually harming today’s college students and potentially preventing them from being successful.
According to national financial aid expert Mark Kantrowitz of SavingforCollege.com, receiving a scholarship is the only type of generosity taxed by the federal government. From the 1950s through the 1970s, living expenses were included as educational expenses and exempt from taxation. In the 1980s, however, Congress decided that for tax purposes, living expenses were not college expenses, and therefore taxable. Yet every campus must include living expenses in their college financial aid formulas and cost of attendance.
The impact of this burden is, of course, on those students who are most vulnerable to not completing their education — students who work more than 20 hours per week and/or who are moderate and low-income and receive several types of financial aid – federal, state, institutional and scholarship aid. Students who receive full-ride scholarships and graduate fellowships also often have to pay taxes. A small adjustment to the federal tax code regarding the tax treatment of scholarships would empower and encourage scholarship providers to do more to help students with their living expenses, even keep them from experiencing homelessness, and ensure their success.
We are calling on Congress to introduce and pass legislation to change the tax code and make college scholarships and grants once again completely tax free. Our tax code should not prevent the private sector from assisting students, nor should it burden students who have worked hard to earn their scholarships and grants.
Robert C. Ballard, President and CEO, Scholarship America
Jackie Bright, Executive Director, National Scholarship Providers Association
Scholarship America and the National Scholarship Providers Association (NSPA) together represent over 500 scholarship providers and 1,400 corporate, foundation, and philanthropic partners. Annually, our organizations deliver over $5.2 billion in private financial aid making higher education more affordable to more than 1.1 million students.
For students receiving $10,000 or more in scholarships, the six-year bachelor’s degree attainment rate is 85%, compared to 55% for students who do not receive a scholarship. Attainment rates among scholarship recipients for four-year bachelor’s degrees are 52%, compared to 28% for non-recipients. The impact of scholarships and grants makes every difference for today’s college students.