The Qualified Tuition Reduction, IRC Section 117 (d) allows nonprofit universities to give their employees, spouses, or dependents tuition reductions that are excluded from taxable income. This long-standing provision helps employees and members of their families afford a college education, providing an important benefit to many middle- and low-income university employees.
What is a Qualified Tuition Reduction?
Section 117 (d) of the Internal Revenue Code allows nonprofit universities to give their employees, spouses, or dependents tuition reductions that are excluded from taxable income. This long-standing provision helps employees and members of their families afford a college education, providing an important benefit to many middle- and low-income college employees.
A qualified tuition reduction may be in the form of “tuition remission,” a “tuition waiver,” or a “tuition grant.” Regardless, it means that the university or college pays some or all of the tuition for the employee and/or his or her dependents.
Under Section 117 (d), neither the institution as an employer nor the employee pays federal income tax on the amount paid by the institution for tuition expenses. This lowers the federal tax liability of the employee and, potentially, the employer. The tax exclusion applies to tuition paid for education below the graduate level (including K-12), unless the recipient is a graduate student engaged in teaching or research.
Typically, an employee and his or her immediate family members use the benefit at the employee's own university, but the benefit is sometimes available to employees and/or their dependents who attend other universities. In these cases, universities cooperating in a tuition waiver program may be part of a public higher education system or a voluntary consortium.
Each university sets its own tuition remission policy based on the employment market and its available resources. The benefit must be widely offered to university employees and cannot discriminate in favor of highly compensated employees.
Employees and their Families
Tuition remission is widely available and used in every type of university by employees in all occupation groups.
Conservative estimates suggest more than 27,000 undergraduate students received an employee/employee family tuition reduction in 2011-12 (Tax Reform and Higher Education).
The majority of employees benefitting from the provision are low- and middle-income. 50 percent of employees receiving tuition reductions for themselves or family members earned $50,000 or less, and 78 percent earned $75,000 or less (CUPA-HR 2017 Salary Report).
A broad cross-section of college and university employees benefit from Section 117(d). Under the law, if an institution chooses to offer this benefit, then all employees must be able to receive it. As a result, the provision benefits a range of employees, including administrative staff, maintenance and janitorial staff, as well as instructional and research faculty. Conservative estimates suggest more than 27,000 undergraduate students received an employee/employee family tuition reduction in 2011-12.
Graduate student research and teaching assistants rely heavily on Section 117 (d) to make their graduate educations possible. Under Section 117 (d)(5), the tuition remission a graduate student receives is not subject to taxation. Section 117(d) significantly lowers the cost of graduate education by permitting universities to provide many graduate students with a non-taxable tuition reduction while serving as teaching or research assistants, a central component of their academic training.
About one out of four students (24.4 percent) pursuing doctoral degrees in 2011-12 received institutional tuition and fee waivers, the average amount being $12,645.90. In addition, 6.2 percent of Master’s degree-seeking students received institutional tuition and fee waivers, the average amount being $6,510.80 in 2011-12 (CGS Tax Reform Examples).
According to data from the Department of Education, 60 percent of tuition reductions went to graduate students in STEM programs. Close to 145,000 total graduate students received a qualified tuition reduction in 2011-12.
Colleges and Universities as Employers
Section 117(d) also provides nonprofit and public colleges and universities an important tool for recruiting and retaining valued employees.