To help future borrowers, the administration should work with Congress to make all educational debt payments tax deductible including private loans which cannot be forgiven by the government
When people carry education debt it can make it harder to budget basic needs, save money and qualify for financing to purchase a home.
Education debt and the online payday loan in Trenton cost of higher education also deters people from pursuing higher education, which is unfortunate for both their own socioeconomic mobility and the overall economy. To address this problem, the incoming Biden administration may ask Congress to forgive up to $10,000 of federal student loans per borrower to help people currently buried in debt.
A tax deduction, or write-off, reduces the amount of taxable income one reports annually to the Internal Revenue Service (IRS). For example, if a borrower holds $50,000 of student debt at a 4 percent annual interest and makes monthly payments of $600, the borrower will pay $7,200 per year ($2,000 in interest and $5,200 in principal). The interest that the borrower pays on those loans is currently deductible from their federal income taxes, up to $2,500 if their income is less than $85,000. The payments the borrower makes on the principal of the loan is not currently deductible.
A bit of quick math demonstrates how deducting the full amount of loan payments will help borrowers. The borrower above making $60,000 annually in 2020 would pay taxes on $45,600 (subtracting a standard deduction of $12,400 and the $2,000 in educational loan interest payments). Applying the 2020 federal tax rates, the borrower would pay $5,828 in federal taxes.
But, with all educational debt tax deductible before adjusted gross income, the taxpayer could deduct the full $7,200 in loan repayments for a taxable income of $40,400. Applying the 2020 federal tax rates, they would pay $4,684 in federal taxes. That is a savings of more than $1,100. Some borrowers would save significantly more, particularly as the interest portion of payments decline over time while the principal portion of payments increase, as is typical over the life of most student loans.
This change to the federal tax system will help nearly all student loan borrowers save money. It also incentivizes borrowers to make larger monthly payments because of the tax benefit, thus reducing the amount of time in debt. For Millennials and Gen-Z, this change in tax policy would be a ray of bright light after suffering through two financial crises and a global pandemic.
Making student loans tax deductible is good public policy. Education is the key to upward socioeconomic mobility. In turn, the country benefits from the increase in intellectual capital and the decrease in need for public assistance as people’s financial wellbeing improves. This proposed tax deduction means more people should be able to make their student loan payments and fewer people should default. This would also help close the wealth gap between white and Black and Brown families by making higher education more attainable for historically underserved populations and allowing more generational wealth production.
Making it easier to pay off student loans will encourage more people to attend college and graduate programs
This change in tax policy requires the political will to make an investment in the future of our nation. Americans hold more than $1.5 trillion in student debt. About 42 million Americans hold student debt. Allowing student loan borrowers to deduct their loan payments from federal taxes means accepting hundreds of billions of dollars in deductions each year, lowering federal revenues by billions. Filling in the revenue gap can be accomplished by reexamining how lawmakers prioritize tax deductions, many of which go to large corporations with little evidence that these deductions help the economy or address income inequality.
Tax policy reflects the values of our nation. If Americans want to encourage wealth generation and upward socioeconomic mobility and reap the benefits of a more highly educated and productive population, then lawmakers should make this investment.