WASHINGTON—Thanks to the new tax law, many U.S. graduate students this year will owe taxes on their fellowships and stipends for the first time. And some will see their financial aid shrink accordingly.

“There’s a lot of dissatisfaction, dissension and anger” among affected students about the new tax regulations, said Patrick Melia, assistant dean of the graduate school at Georgetown University here. “It’s created a lot of unneeded frustration.”

Until August 1986 fellowship grants from universities, government agencies and private institutions were generally exempt from federal taxes. But last year’s Tax Reform Act permits an exemption only for that portion of a grant used to pay for tuition, books, materials and equipment used in pursuit of an academic degree. The rest is taxed as ordinary income.

Students who work as teaching or research assistants face an additional tax liability. Previously, their compensation was not taxed if some form of service...

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