Last Thursday, Republican leaders unveiled a new bill titled the Tax Cuts and Jobs Act. This plan proposes several major overhauls to the U.S. tax code, including eliminating a number of interest deductions. If the bill goes forward, one of the deductions that may be cut is the student loan interest deduction, affecting millions of student borrowers in repayment.
According to the Joint Committee on Taxation, this deduction costs the federal government roughly $2.4 billion a year. Under the current tax plan, individuals can deduct a maximum of $2,500 of interest paid toward private or federal student loans. This deduction is commonly referred to as an “above-the-line” deduction because it applies directly to an individual’s taxable income without needing to be itemized.
Of course, not everyone qualifies due to certain income restrictions listed in the tax code. The current tax code disqualifies individuals that earn a gross income of $80,000 or more and married couples that earn $160,000 or more.
But according to data from the Internal Revenue Service (IRS), 12 million people took advantage of this deduction in 2015. According to CNBC, the average savings for borrowers is $202 and individuals that can claim the full $2,500 tax credit would save $625.
Responding to criticism, Republicans denied that by eliminating this deduction they are effectively raising the cost of education, saying that the overall plan “makes it easier for families to use tax benefits toward the cost of education.” They also stated that their plan will simplify education benefits since the current system is “so complicated that they are ineffective because many taxpayers cannot determine the tax benefits for which they are eligible.”
If this tax plan is approved, the loss of this deduction most likely will not affect the average borrower in repayment. To receive the full benefit of the deduction, a borrower would need to owe an average of $54,000 in student loan debt. The average borrower currently owes $28,000 in student loan debt.
Plus, income-based repayment plans have given federal borrowers access to affordable monthly payment plans. This is something that did not exist when the student loan deduction was created in 1997.
However, the biggest impact of getting rid of the student loan deduction may be the impact on a borrower’s overall tax bill. For instance, deducting $2,500 from a borrower’s total taxable income could move them into a lower income bracket, which means they would pay less in taxes overall.
Ultimately, it is difficult to know what the full effect of eliminating the student loan deduction will be for borrowers. It seems that the individuals who could be negatively impacted the most are low-income undergraduate and graduate students, or even those whose debt is mainly from private student loans.