Senate Republicans would leave student loan interest tax deduction intact

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Senate Republicans reject at least one of the higher education tax changes their House counterparts would like to pass by keeping the interest deduction on student loans.

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Thursday’s decision signals that GOP leaders in the Senate could backtrack on other proposed provisions that have rattled students and universities, including an excise tax on college endowments and the taxation of graduate scholarships. Details of the Senate tax plan are forthcoming, but the proposal to preserve the deduction is welcomed.

“The Senate is sending a clear signal that it hears these benefits mean a lot to people,” said Jessica Thompson, director of policy and research at the Institute for College Access & Success (TICAS), a student advocacy group . “We can’t wait to see what’s included in the bill.

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The deduction allows people who repay their student loans to reduce their tax burden by up to $2,500. Since borrowers can claim the deduction even if they choose not to itemize, the tax benefit is available to anyone paying interest on student loan debt. The higher the interest payments, the larger the deduction, which is why the benefit is particularly valuable for people with large loans. However, there are income limits. Only singles earning less than $80,000 and married couples earning less than $160,000 can take advantage of the deduction.

Yet, with 44 million people saddled with $1.3 trillion in student loans, the student loan interest deduction has grown in popularity. According to the Internal Revenue Service, more than 12 million people took advantage of the deduction in 2015. That’s roughly 3 in 10 of the total number of Americans with student loans.

Terry W. Hartle, senior vice president of the American Council on Education, said the Senate provision preserving the deduction is “a welcome development for anyone concerned about rising levels of student debt.”

The council, which represents colleges and universities, estimates that repealing the deduction would mean an increase in the cost of student loans by about $24 billion over the next decade.

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Critics of the interest deduction say it’s a poorly targeted way to help borrowers. Thompson noted that TICAS previously proposed removing the tax benefit and redirecting the money to the U.S. Opportunity Tax Credit, which helps low- and middle-income students pay for college. Streamlining the jumble of tax credits, many of which are regressive in nature, would be welcome, but not at the expense of students and families, she said.

“It makes no sense to dump higher education tax benefits to pay lower corporate tax rates,” she said. “The field is ripe for improvement, and there is agreement across the ideological spectrum on this, but it has to be done the right way.”


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