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Proposed Tax Bill to End Student Loan Interest Deduction

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Paper sheet with text TAX DEDUCTIONS and individual tax return form on table

Republicans proposed a tax bill that would end the student loan interest deduction on borrowers that are working to pay back $1.4 trillion in student loan debt. The sweeping tax bill, proposed by the House on Thursday, also proposes a new tax on investment income for private colleges and universities.

The 1.4% tax does not apply to state schools in its current form.

Students deduct student loan interest rates from their student loans with the ability to deduct up to $2,500 in interest. The deduction can be applied to federal and private loans. The deduction, in its current form, reduces the taxpayer’s income tax with standard deductions or itemized deductions.

Income limits apply to the deductions. People earning $80,000 as a single filer or $160,000 as a joint filer were not eligible to claim the deductions.

Deductions averaged $1,100 per taxpayer in 2015. Savings equated to $272. Average savings for students claiming the deduction this year is $202. The loss of the deduction is largely offset by the proposed doubling of the standard deduction.

Loss of the deduction will slightly raise a person’s income, which may lead to a student being in a higher tax bracket.

Students opposing the change ask why the change was made in the first place. Students graduating with $35,000+ in debt call the deduction “miniscule.” The highest tax deduction from the 20-year-old rule that can be claimed is $625 per year.

House and Senate members still need to approve the new bill. President Donald Trump has stated that the new tax bill will be signed into law before Christmas. Reports claim that student loan interest deductions cost the government $2 billion in revenue in 2016.

Opponents of the change question why the American Opportunity Tax Credit has remained in the proposed tax plan. The tax credit allows $2,500 in deductions for families that pay out-of-pocket for their child’s education. The tax credit costs the government in excess of $18 billion per year in revenue.

The removal of the deduction is expected to make it harder for Americans to afford the rising cost of higher education.

Federal tax changes will not impact a person’s state deductions. There are 37 states that currently have student loan interest deductions that will remain following the sweeping tax reform.

Trump’s tax reform plan has promised to lower taxes for Americans despite changes to student loan deductions.

Economists suggest that it’s too early to fully understand the effects that removing the deduction will have on student loan borrowers.

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