Making Student Debt Payments Tax Deductible?

Michael Lux Blog, News, Student Loans 1 Comment

Today the Wall Street Journal published a business blog article suggesting an “innovative idea for reducing student loan debt.”  The author, a CFO for a number of startups, suggested that making entire student loan payments tax deductible would not only help the 70% of graduates with over 30k in student debt, but it would help businesses attracted better employees.

In his words:

“As an employer, I constantly look to offer benefits that provide value for my workforce in tax-efficient ways. It makes it easier to attract, retain and motivate talented people, which is usually the hardest part of creating a successful company.”

Currently, a small portion of student loan payments are tax deductible for some people.  If you make too much money, you cannot claim a student loan payment deduction on your taxes.  Additionally, only the portion of payments that applied to interest can be deducted from your taxes.  Finally, the maximum deduction for student loan interest is $2,500.  The author proposes that all people be able to deduct all of their payments.  In this proposed plan, if a borrower makes 60k a year and pays off 10k in student loans, that borrower is only taxed for 50k of income.

The reaction from most Wall Street Journal readers was not very positive.  As one commenter noted:

“One bloated taxpayer subsidized program to pay for another bloated tax payer program. Paid thanks to the lower educated lower middle class tax payer who is unable to take advantage of this program.”

What many of the naysayers fail to account for is the potential improvement to the economy as a whole.  Without question, student loans have had a negative impact on the housing market and the auto market.  Helping graduates pay off their loans faster could be a major boon for the economy.

Additionally, the vast majority of student debt is owed to the federal government… over a trillion dollars worth.  If borrowers make huge payments to the federal government their taxes will be less, but the government will still be receiving a bunch of money.  The difference is that it will come in through the Department of Education rather than the IRS.  In the long run the government certainly wouldn’t generate the same profits, especially considering that they will lose out of years of interest.  However, in the short term, it shouldn’t make much of a difference at all.

If we really want to dig into this topic, making student loan payments tax deductible would also likely reduce the default rate.  The more incentives borrowers have to make payments, the more likely they will be to make the payments.  This is especially true if employers are jumping on board to help makes these payments.

The Bottom Line

At some point, the government decided that borrowers should get some help from Uncle Sam paying off their student loans.  It is the reason that a portion of the interest on student loan payments is tax deductible.

With a growing student loan problem, why not expand the tax deduction to all student loan payments?  It would benefit borrowers, employers, and lenders.  It could also provide a boost to the economy that benefits everyone.