GOP Tax Plan Targets Student Loan Interest Deduction
According to senior Republican leaders, the new tax plan for Americans will include some drastic changes to student loan borrowers. If the bill passes through Congress, the deduction for student loan interest will disappear. Given the indebtedness of American college students, the move is likely to anger many former and current students who are in student loan repayment. The GOP may regret the move, as the heaviest users of student debt are typically highly educated and politically active individuals in top income brackets.
Student debt is a big political issue at the moment, so some opposition to the loss of a tax credit is to be expected. After all, the existing tax rebate is significant. Student loan borrowers can deduct student loan interest payments for up to $2,500 annually. If the new bill is passed, many Americans carrying student debt may see their tax bills rise moving forward.
The existing tax deduction can be a powerful tool to help students pay off their loans. Since the tax break applies to student loan interest (not principal repayment), the heaviest borrowers stand to lose the most from the Republican tax plan. A larger balance means there is more interest to pay, making the existing tax deduction very helpful. In many cases, these borrowers have both federal and private loans to their name, adding to the balance. Oftentimes, these balances belong to individuals who attained an advanced degree past a bachelor’s or went to a prestigious school; these high student debt individuals are also associated with higher earnings.
People who only borrow small amounts and/or don’t complete their education are usually lower down the income spectrum. Compared to high-income students who can handle payments, low-income student borrowers have other tools available to them to ease the burden of their student debt, but high-income borrowers are just likely to be stuck with a higher tax bill at the end of the year.
The Joint Committee on Taxation published estimates regarding the current relief available to student debt holders. Approximately 3.5 million Americans claimed the rebate who earned over $100,000 per year on average. A similar number, 3.4 million, claimed the rebate who earned less than $100,000 on average. The claim totals are quite different between these groups. The $100,000+ club saved an average of $860 from the student loan interest deduction, while the lower-income group only got back $538 on average.
The government stands to collect millions in new taxes after the elimination of the existing rebates and deduction programs. However, the bill is not final yet, so in time, it will be seen whether this tax change will have an impact on the student loan industry, which has grown to account for $1.4 trillion in debt.