Unintended Tax Consequences for Fortunate Morehouse College Students? There Could be a Fix for That.
What an incredible announcement on May 19 by billionaire and philanthropist Robert F. Smith who pledged to pay off the student loans of all 2019 Morehouse College graduates. How great for these students. However, as some observe, this incredible gesture of generosity may have a downside in the form of a potential tax bill for the students receiving the debt forgiveness.
While it has long been established that scholarships awarded to students for higher education expenses like tuition, books, and fees can be excluded from students’ income, the same is not necessarily true for payments intended to help students with student loan debt after earning that degree. Section 117 of the Tax Code provides the tax-free basis for traditional scholarships but is silent regarding awards made after graduation. Many charitable organizations, including community and private foundations, would like to establish charitable funds to help graduates who have earned their degrees and are saddled with debt, but the limitations of our Tax Code are hampering this effort.
Interestingly, well before Mr. Smith’s announcement, several lawmakers in the House and the Senate, working with foundations and other organizations including the Council on Foundations, proposed legislation to fix this issue and provide similar tax-free treatment for post-graduation scholarship awards intended to help with student loan debt.
On July 24, 2018, Representatives Darin LaHood (R-IL) and Terri Sewell (D-AL) introduced the Workforce Development Through Post-Graduation Scholarships Act (H.R. 6486) to allow charitable foundations to administer post-graduation scholarship grant programs and provide tax-free treatment of the awards for the students. Foundation proponents including Joshua Gibb, President and CEO of the Galesburg Community Foundation in Illinois, thought this legislation could combat “brain drain,” stimulate regional economic growth and help address the growing student debt crisis. The Council engaged closely with the lead sponsors of this bill and their staff throughout the drafting process to ensure that this legislation embodied well-informed, carefully written public policy to strengthen foundations’ ability to serve their communities.
More recently on March 6, 2019, Senator Gary Peters (D-MI), introduced the Workforce Development Through Post-Graduation Scholarships Act of 2019 (S. 676), a similar bill with a more deliberate focus on low-income communities or communities that have suffered out-migration and have a lower than average bachelor’s attainment rate. Senator Peters and his staff worked closely with our colleagues at the Council of Michigan Foundations and others to create a bill designed to win bipartisan support.
At this point, these House and Senate bills have not been deliberated by their relevant congressional committees yet, but the Council is continuing to encourage the bills’ sponsors to keep the efforts on track. When the timeline for movement of the bills becomes clearer, it will be important for students, parents, and foundations to join hands and weigh in with Congress about the benefits that will accrue to the student, to their community, and to the economy.
Wouldn’t it be great if this bipartisan effort could result in a bill for the president’s signature before the hardworking young men who made up Morehouse’s class of 2019 have to file their taxes?