Student debt

Republicans Want to Make It Harder for You to Pay Off Student Loans

The GOP tax plan creates both winners and losers, and if you deduct student loan interest, you're likely a loser.

by Harry Cheadle
Nov 3 2017, 4:45pm

A Los Angeles man protests student debt in 2011. AP Photo/Jacquelyn Martin

The Republican tax plan introduced in the House on Thursday is a complicated beast. The bill would slash corporate taxes; help the rich by, among other things, gradually abolishing the tax on large inheritances; and cut taxes (by a little) for the middle class. But even though Donald Trump reportedly wanted to call it the "Cut Cut Cut Act," the bill actually includes a host of tiny tweaks and alterations to the tax code that could actually raise your tax bill. And one of those changes would make it harder for millions of people with student loans to repay their debt.

The vast majority of Americans who graduate college do so with student loan debt, and that debt accumulates interest. Under current law, if you make less than $80,000 (or $160,000 if you're filing jointly with your spouse), you can deduct student loan interest payments from your income when you pay taxes. The amount you can deduct is capped at $2,500, and the way the math works that means you could save a maximum of $625 on your tax bill. Most people save less, maybe a few hundred, if that. But if you're earning less than $80,000 and trying to pay off loans, a few hundred bucks can make a difference.

Under the GOP plan, that deduction would disappear, effectively making student loans more expensive for the more than 12 million (as of 2015) borrowers taking advantage of it.

It's apparently part of a push to eliminate what Republicans deem "special interest deductions," which also include a tax credit for adopting children and some deductions for medical expenses. (Republicans say this will help simplify the tax process.) The mortgage-interest deduction is also set to be more limited, which may speak to a broader GOP belief that "personal interest or non-business interest is not supposed to be deductible," Duke law professor Lawrence A. Zelenak, an expert in tax policy, told me.

The proposed elimination of the deduction could also reflect the Republican Party's "anti-student" bias, accroding to Alan Collinge of the group Student Loan Justice. When I called him to get his take on the tax bill, Collinge told me it would just exacerbate the broader problems with the system. A 2016 Wall Street Journal story said that 43 percent of the 22 million Americans with federal student loans weren't making payments, and there were more than a million defaults on student loans last year amid allegations of malfeasance by lenders. A recent survey found that just 14 percent of borrowers were confident they could repay the loans. Unlike other types of debt, it's virtually impossible to wipe away student debt by declaring bankruptcy, and a few debtors have taken drastic steps like leaving the country to dodge collection agencies. There's an open question on how much of the country's $1.45 trillion student debt will end up ever being repaid.

Numbers like that are why some are calling the student loan situation a "crisis," one which few members of Congress—Democratic or Republican—seem overly concerned about.

"This lending system is flirting with dissolving into a mist of illegitimacy," Collinge told me. "At what point does the public lose faith in the lending and simply stop making payments?"

Zelenak pointed out that the student loan interest tweak was one of several education-related changes contained in the GOP bill. For instance, under current law, universities often pay for the tuition of their employees' children, a perk that doesn't count as taxable income. This bill would wipe that exemption out, he said.

"It's a good illustration of who knows how many things are buried in there like that," Zelenak told me. "I was surprised… that considering that given this is supposedly a tax cut bill, how many tax increases are in there."

House Republicans plan to introduce a "tax calculator" to help people figure out whether this bill will help or hurt their individual bottom lines. As the example of the student loan interest deduction shows, that's a complex question, and there are going to be a lot of debates and compromises to be had as the bill proceeds through Congress.

"Many people will find themselves in a situation where parts of this bill save them money and parts of this cost them money," Zelenak cautioned. "There will be winners and losers."

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