The Disastrous Tax Reform Act of 2014: Attacks on Student Borrowers

March 20, 2014

We wrote earlier this week about President Obama’s budget proposals that will impact student loans. Chief among them is making all student loan forgiveness tax free and expanding PAYE to all borrowers. These are great proposals and would greatly help those struggling with student loans. But, excepting a few pieces of promising legislation by Elizabeth Warren and other student loan champions, Congress has moved from apathy toward student loan debtors to outright aggression.

Congress takes aim at higher education

Tax Reform Act of 2014 handicaps student loan borrowers

Congress’ proposed Tax Reform Act of 2014 recommends a number of changes that will be intentionally harmful to families with children in college and those with student loans. These aspects of the budget are reprehensible and should be combated. Unfortunately there are too many objectionable aspects to cover in one day’s post, so we’ll be discussing this tomorrow as well.

Today let’s look at the direct hits to student loan borrowers and students in this tax act:

#1 Eliminate Student Loan Interest Deduction

This proposal is a slap in the face to those struggling with student loans and an assault on higher education. The tax “reform” act would completely eliminate the student loan interest deduction. Currently, it caps at $2,500 per year, which you would rise to only if you had roughly $50,000 in loans at 5% (or a lesser amount at a higher rate or vice versa). The average individual student loan debt of $29,400 at 5%-7% interest would incur $1,650 (give or take) in interest that is currently tax deductible. With so many already struggling and loan delinquencies on the rise, why take away an incentive to pay your debts on time? Again, shame, shame on the legislator(s) that added this to the tax act.

#2 Eliminate Deduction for Qualified Tuition and Fees

Currently this deduction maxes out at $4,000 and reduces the amount of your taxable income (rather than a credit that reduces the amount of your assessed tax). No mention is made in the legislation about nullifying the American Opportunity credit or the Lifetime Learning credit, so if the same expenses should be eligible to be taken under one of these, why eliminate the deduction? We can’t trust Congress to close off this deduction because they may next try and shut off the credits we mentioned. It seems like they are just hacking away at the tax code provisions that would benefit those pursuing higher education. This is needless and another slap at students and their families.

#3 Eliminate Tax Free Aspect of Public Service Loan Forgiveness

PSLF was established back in 2007 and the first forgiveness won’t kick in until October of 2017, but Congress is already trying to handicap the program. They propose to make PSLF forgiveness taxable, but what about all those debtors who have been relying on the promise of tax-free forgiveness to make their financial decisions? IBR and PAYE payments are eligible for PSLF, but can result in less paid toward principal and a higher forgiveness balance. Had eligible borrowers known their forgiveness would be taxable, they likely would have adjusted payments based on this knowledge. This is a raw deal for those dedicating their lives to public service only to have a major aspect of this benefit snatched away right as it came online. Not cool, Congress…

Join us tomorrow for a look at the other deplorable proposals in this monstrous legislation. In the meantime, contact your legislators and tell them to shut down the Tax Reform Act of 2014. This is not the kind of #taxreform any of us need. Be sure to sign up for your free Tuition.io student loan account to track and optimize your debt and read tomorrow’s blog to learn about the other provisions of this act harmful to higher education.