The Republican-controlled House of Representatives recently came out with a tax reform plan that slams student borrowers with additional tax burdens. There are three main elements to the proposal that would directly impact student borrowers:
- Elimination of tax deduction for student loan payments. Under current law, borrowers who are making payments on their student loans can deduct up to $2,500.00 in interest payments per year on their tax return. This modest tax benefit gradually phases out for higher income earners. The House proposal would eliminate this tax deduction entirely, which would effectively raise taxes on low-and-middle income earners who are making payments on their student loans.
- Elimination of tax deduction for tuition payments. Under current law, students or their parents can deduct certain tuition-related expenses on their tax return, thus reducing their tax burden. This is a modest but helpful deduction for people that can lower the cost of education and reduce the need to borrow student loans. The House proposal would eliminate this tax deduction.
- Imposition of taxes on Public Service Loan Forgiveness. Under current law, loans forgiven pursuant to the forgiveness provisions of Income-Based Repayment (IBR), Income-Contingent Repayment (ICR), and Pay-As-You-Earn (PAYE) would likely be treated as “taxable income,” which could impose a tax burden on student borrowers. Advocates and policy makers, including the Obama administration, are working to change this so that the forgiven balances are not taxable. In contrast under current law, loans forgiven pursuant to the Public Service Loan Forgiveness (PSLF) program would not be subject to a tax burden; thus PSLF offers tax-free loan forgiveness. The House tax plan eliminates this exception. Under the House proposal, any federal loans forgiven after 2014 would be treated as taxable income. This would impose a huge tax burden on borrowers who elected to get on the PSLF track based on the promise of full loan forgiveness.
It is astounding to me that during a time where there is near-universal agreement that our student lending system is broken, and that student debt has become a huge burden on our economy, that we are talking about imposing additional financial burdens on student borrowers. The tax reforms outlined above would have measurable and, in some cases, devastating impacts on people, and this is significantly more troubling to me than the proposed reforms recently announced by the Obama administration.
As with the Obama administration proposal, however, even this draconian plan from the House is unlikely to make it into law anytime soon, given our divided government. However, this is a warning bell for all student borrowers: changes may be coming, and you must stay informed and make your voice heard.
