Almost 44 million Americans have student loan debt, and nearly three in 10 of them stand to be affected by the proposed elimination of a deduction in House Republicans’ Tax Cuts and Jobs Act.
IRS records show that more than 12 million taxpayers claimed a deduction on student loan interest in 2015. Currently, up to $2,500 a year can be claimed as an above-the-line deduction, meaning itemization isn’t necessary. The deduction is gradually reduced based on income.
While experts don’t foresee a huge impact on the economy or higher education if that deduction is cut, its loss could contribute to a cumulative hit, particularly on young professionals.
“The whole piece &mdash they’re trying to say it may end up helping young professionals with student loan debt; but overall, it will end up hurting people like me who have tens of thousands in student loan debt,” said Joshua Harris, a Clemson University finance lecturer. “That small amount could be the difference between someone looking to buy a home or looking to buy a car. Or they may already have a home, like I do, so they’re banking on that mortgage interest (also a target of GOP tax cuts) as well.
“It’s not necessarily the one deduction going away that’s going to impact most young professionals. It’s going to be the combination.”
According to a report from public policy research nonprofit The Pew Charitable Trusts, the student loan interest deduction cost the federal government $2 billion in forgone revenue in 2016. The number has more than doubled since 2007 as balances ballooned, even though the maximum deduction hasn’t changed since 2001.
Leading national financial aid, loan and scholarship expert Mark Kantrowitz told CNBC that claiming the full $2,500 annual deduction corresponds to $625 in reduced tax liability. But other proposed changes — including a part of the House proposal that would tax as income the tuition that is waived for graduate students — have education experts paying close attention.
“If they did that, then you’d have to pay taxes on that quote unquote income without any cash to pay taxes with,” said Donna Bobek Schmitt, an associate accounting professor at the University of South Carolina Darla Moore School of Business. “That has the higher education people a bit worried, and graduate students are worried about that, too.”
In addition, both the House and the Senate tax plans include an excise tax on large private college endowments, though the House Republican plan preserves the American Opportunity Tax Credit, which allows families paying for college out-of-pocket to claim up to $2,500 per student.
The proposed changes are not necessarily good or bad for higher education, Schmitt said. Neither she nor Harris thinks eliminating the student loan interest deduction would have a deterrent effect on college applications, “though maybe it will discourage people from taking out student loans, which I think would be a good thing, because that’s not really incentivizing education,” Schmitt said.
Jeanne Allen, founder and CEO of charter school advocacy group Center for Education Reform, said she wants Congress to help spur private investment in education. Her organization supports tax credits for contributions made to qualified apprenticeship and workforce development programs.
"Just about everybody on Capitol Hill these days understands the importance of connecting workforce and education," Allen said. "The good news is, they're aware of it. They're also trying to be very focused and not take the proposals of a thousand groups and put them all in a package. I’m sympathetic to the fact that they want to make this lean and mean, but at the same time, we have to pay attention to incentivizing private organizations to invest in education.”
Allen said lower tax rates would offset the loss of the student loan interest deduction and others of its ilk, as well as put “more money back in people’s pockets” to, among other things, pay off student loan debt — which Harris said averages $38,000 per person in South Carolina.
Schmitt, an accountant, said she re-calculated her 2016 tax return without the education-related deductions that the GOP plan — which President Donald Trump has said will be passed by Christmas — would eliminate.
“My taxable income went up by $30,000, but when I computed my tax liability, it basically didn’t change,” she said. “It was like $300 more.”
With fewer deductions, Schmitt said, federal, state and local governments will collect more revenue. This could wind up meaning more money for education, she said, while also helping to pay down debt.
“Everybody has their deduction that they like or their exclusion that they like, and nobody wants to give those up, which I understand completely. I don’t want to give mine up either,” she said. “(But) it’s a tradeoff. You’re trading off exclusions and deductions for lower rates.”