Scholarship tax hurts students - Hopkins Chic

Remember the elementary school bully that stole the little five-year-olds' lunch money? Well, maybe not. He (or she) was a figure of popular imagination, maybe more so than a reality.

But now, bring back that image. Put the national government in the bully's shoes and a college student in those of the five-year-old. Because that's essentially what happens: Our national government taxes all scholarship money beyond the cost of tuition as if it were income.

Who thought imposing this tax would be a good idea? Talk about unpopular moves. I can imagine the legislative session went something like this: "Hm, how can we express our anti-societal tendencies? I know! Let's kick some puppies and baby seals, toss our gum wrappers on the sidewalk and, oh! tax college students' scholarships!"

For students living on campus, the taxation issue was still on the edges of the radar screen. Johns Hopkins University doesn't itemize costs for tax purposes and puts the whole $35,000 or whatever underclassmen are now paying under the category of tuition and related costs.

However, students who move off-campus during junior and senior years are still responsible for covering room and board. For those lucky (or academically gifted) enough to receive more than the $25,000 covering tuition, the office of Student Financial Services will write a check to the student each semester for the difference between scholarship money and tuition.

Logically, this money is then used to pay for rent and living expenses and/or buy books and food. The 251 undergraduates at Johns Hopkins who received more in grants and scholarships than the $25,570 bill for 2001 tuition got an average of $28,665, or $3,095 more than the minimum deductible, according to Jamie T. McMillan, assistant director of Student Financial Services. Financial Services estimates that students spend another deductible $800 on books annually, which would leave these recipients with an average of $2,400 towards the year's living expenses.

Now, we're not talking about funding a posh lifestyle. As a point of comparison, full-time income from a minimum-wage job brings in a little more than $10,000 a year.

Seriously though, I can understand why such a tax was imposed. Academically talented students attending schools less expensive than ours may be able to amass several thousand dollars more in scholarship money than the cost of tuition, fees and living expenses combined. Think about it: If you were a good student in high school and went to a state school, there's a good chance you could have gotten a full ride plus a stipend from the college as well as money from outside sources - community organizations, the state, contests sponsored by your school guidance office, etc.

Now that hypothetically you could be earning some $4,000 a year more than all your expenses combined, that does begin to seem like income. In this context, the tax seems more legitimate. Someone with that much extra money - essentially, disposable income - can subtract 18 percent - or whatever the tax bracket would be, depending on other sources of income - and still not have to work during the school year.

However, I'm willing to bet that no one at Hopkins, or another school in a comparable price bracket, is earning that much off scholarship money. Instead, that 18 percent is pulled straight from living expenses. Say someone who entered with almost a full ride - $30,000 - can take a $25,000 deductible for tuition and books. That leaves $5,000 to cover living expenses for the year. Now, assuming the student has other forms of income counting against the $4,000 deductible all taxpayers receive, approximately $1,000 is owed as taxes. So, assuming all $5,000 are spent on living expenses, which is a reasonable, if not low, figure, the student is responsible for paying the $1,000 out of pocket some time in mid-April.

Granted, when you're at a school charging $25,000 in tuition, paying an extra $1,000 or so in taxes isn't bad in the big scheme of things. However, it's not going to make a student's life any easier, especially a student supporting him or herself.

Benefactors give students scholarships not only to help them cover the cost of college but so that they may not have to work - or will work less - while finishing school. Not only that, the federal government understands that many students need support in order to attend school; hence, the existence of federal programs including the Federal Work-Study program and the Lifetime Learning Tax Credit.

The solution? Give full-time college students a larger deductible. Let them subtract living expenses from the taxable portion of scholarship money. In fact, to be fair, why not give all students a larger deductible for the first four years of college? The federal government understands the need for an education and the work involved in obtaining one, as evidenced by the presence of federal programs such as Work-Study. Revising the tax laws would make life easier on students supporting themselves while preventing them from earning a profit from money designated for education expenses. It's a logical and attractive way to support higher education and hard work.