Oversight in 2017 Tax Law Charges Low-Income Students at Exorbitant Rates

President Donald Trump’s 2017 tax law, which was pushed through Congress in less than two months with the goal of simplifying the tax code, is having unforeseen consequences for low- and middle-income college students.

The New York Times reports that many students with large financial aid packages for non-tuition costs such as room and board are being taxed for these expenses at a rate of nearly 40 percent under the so-called “kiddie tax.” Passed in 1986, the provision originally required offspring to pay taxes on unearned income, such as trust funds, at the same rate applied to their parents’ income.

The 2017 tax code, however, disregards parental income and taxes students solely on the amount of their unearned revenue, including scholarships intended to pay for living expenses. The revision disproportionately affects individuals from disadvantaged backgrounds, as funding for nontuition expenses is typically offered to students with limited means.

This group of students constitutes a significant portion of the college population nationwide — as many as 1.3 million undergraduates and 15,000 graduate students, according to The Times. At the University of North Carolina at Chapel Hill, approximately 14 percent of the undergraduate class is affected by the burdensome tax due to widespread participation in a comprehensive scholarship program called the Carolina Covenant.

Under Trump’s law, students who received scholarships for living expenses in fiscal year 2018 owe 35 to 37 percent of the amount of this funding as part of their federal income tax. According to the College Board, the average cost of room and board at a public four-year institution is $11,140; at a private four-year university, it is $12,680.

The rule has also created significant tax hikes on tribal funds awarded to Native American youth as well as to survivor benefits granted to families of service members killed during active duty.

Higher education leaders have already written to Congress urging them to fix the loophole, The Times says. Meanwhile, several Republican lawmakers have stated that they are willing to address any unintended consequences of the recent law, emphasizing the need for bipartisan support.