The Simple Step That Congress Could Take To Ease Your Student Loan Burden

November 23rd 2014

Let me start of by asking you a question. If you’re paying back student loans, do you qualify for the student loan tax break? If you don’t know the answer, you might be leaving money on the table.

The government might owe you this money.

Here’s how it works. If you’re paying back student loans, you’re not only paying back the amount you borrowed for school, but you’re also paying back the interest that has accrued on those loans. The good news is that you can take that interest you pay each year and deduct it from your taxable income. Which means you’ll pay less in taxes.

But here’s the bad news: compared to the rest of the tax code, which is filled with juicy tax breaks, this one is puny. The deduction is capped at $2,500, which means even if you’re paying more than $2,500 in interest -- and you probably are because the average student borrower is nearly $30,000 in debt -- your tax break only applies to $2,500 of those interest payments. If there was no cap, you’d save a lot more.

And it’s also subject to limits as your income increases. If you make more than $80,000 or if you’re married and jointly make more than $160,000, you can’t take this deduction.

So, yea, this is a very small tax benefit.

Couldn’t it be much better for students?

Of course! 

Just look at the home mortgage interest deduction. It’s the same idea, but it applies to interest on your mortgage. The difference with mortgage interest, though, is that there are very few restrictions and limits. The result is that, in 2012, homeowners claimed about $68 billion in benefits. 

So why does our government encourage us to own big houses but not pursue education?

The argument for the home mortgage interest deduction is that it encourages homeownership, which helps Americans build wealth and confers societal benefits. Critics say that the deduction just encourages people to buy the most expensive house they can, thus making housing more expensive. What is true is that people who benefit from the deduction are Americans making enough money to own houses. Also, it tends to help you more as you get wealthier. For instance, Americans making more than $100,000 collected 71% of the benefits paid out in 2012. This makes sense considering the deduction is structured to increase the reward as you pay more interest, which itself depends on how much you spent on the home.

But regardless of how you feel about the mortgage interest deduction, why don’t we encourage education in the same way?

Expanding this tax break will bring immediate help to our student loan problem

Student loan debt is ballooning -- up to $1.1 trillion. And some people think this debt is starting to have an effect on the economy because Millennials are not buying houses or cars due to a student loan burden that’s sucking away their income. If you believe, as Mark Cuban does, that student loan debt is hurting the overall economy, a stronger interest deduction would instantly put money back in Americans’ pockets.

So, get it done. Republicans like tax cuts. Democrats like affordable education. Win-win, right?