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March 13, 2014

Congress Seeks to Increase Taxes on Student Loan Borrowers

Sigh.  According to the Joint Committee on Taxation, the feds can increase revenues by $13.0 billion over 2014-2023 by repealing the student loan interest deduction and shifting the full burden of student loan interest back to student loan borrowers.  And if Congress also required student loan borrowers who have committed their careers to public service to pay tax on loan forgiveness they earned, the Joint Committee on Taxation estimates they could increase tax revenue by an additional $1.1 billion.

The “Tax Reform Act of 2014” includes provisions that, if enacted, would:
  • repeal the deduction for interest on education loans for tax years beginning after 2014, and
  • repeal the exclusion for discharge of student loan indebtedness for amounts discharged after 2014.
The Act would also consolidate several existing education related tax credits.
 
Existing Student Loan Interest Deduction
Student loan borrowers have been eligible to deduct as much as $2,500 each year for interest paid on a student loan. In addition to the $2,500 cap, the amount of the student loan interest deduction has been further limited according to income.  Currently, if total income is under $65,000 (or $130,000 for married people filing jointly), then student loan borrowers can deduct the full $2,500 in student loan interest.  If income is more than $80,000 (or $160,000 for married filing jointly), then student loan interest cannot be deducted at all.  If income is more than $65,000 but less than $80,000 ($130,000 to $160,000 for married filing jointly), then the deduction is prorated.  
 
Graduate and professional students routinely borrow more than $100,000 in student loans and it is not uncommon for them to pay several times more than the allowable deductible interest payments each year.
 
Current Tax Treatment of Public Service Loan Forgiveness 
Discharge of indebtedness generally constitutes taxable income, but an exception currently applies to student loans that are forgiven based on the public service of the student loan borrower. The exception currently applies to Public Service Loan Forgiveness, the National Health Services Corps Loan Repayment Program, as well as many school-based loan and state-based loan repayment assistance programs.

Read more about your government at work:

Draft legislation
Section-by-section summary
 
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