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Middle-class tax relief should address student loans

by Andrew Josuweit, opinion contributor - 11/22/17 4:41 PM ET

Tax reform is a hot topic in right now. Our representatives are taking aim at the tax code, promising to make it simpler, while at the same time benefiting the middle class. Congressional House leaders have released a tax bill, and relieving student loan debt burdens doesn’t really figure into the mix. If congressional leaders are serious about middle-class tax relief, help with student loan debt must be part of the equation.

As members of the House and Senate look at this tax bill and consider changes, they should note the impact tax reform could have on those working to repay student loans. With many millennials already struggling to stay on track and contribute to the economy, it’s vital that tax policy take into account the burdens placed on them by student debt.

{mosads}Here are three ways Congress can provide true middle-class tax relief by helping student loan borrowers.

Maintain and and expand the deduction for student loan interest

Currently, it’s possible to deduct student loan interest from your income without the need to itemize.

As the law stands right now, student loan interest is only deductible up to $2,500. Instead, it would be more helpful to allow taxpayers to fully deduct the amount of interest they pay. Compare this to the popular mortgage interest deduction, where you can write off up to $500,000 for single filers and $1 million for joint filers (although the caps could change if the current tax bill passes). However, because the mortgage interest deduction is itemized, research indicates that benefits to members of the middle class are limited because so many people take the standard deduction instead.

The student loan interest tax deduction, though, could provide more substantial tax relief, particularly if it remains in place without the need to itemize.

Seventy-one percent of students graduating from four-year colleges have student loan debt. With student loan balances on the rise, many graduates pay more than the $2,500 deduction cap each year in interest on their student debt. Making that interest fully tax-deductible would be a big help in lowering their taxable income and helping their finances.

Eliminate tax obligations on student loan forgiveness

Student loan forgiveness for those who pay on their loans for 20 or 30 years is one way to provide relief. However, in many cases the forgiven amount is taxable. Unless a graduate qualifies for Public Service Loan Forgiveness, there’s a chance that student loan forgiveness could mean hundreds, if not thousands, of dollars more owed to the IRS. That’s money they might not have.

After making payments faithfully for decades, for borrowers to be slapped with a tax bill they can’t afford could be devastating to their finances. The same applies to some debt relief scholarships and grants. Awards from organizations like Teach for America can also be taxed. This reduces the effectiveness of awards meant to help ease student debt in return for providing a valuable service to society.

True student debt relief through forgiveness won’t be complete until taxes are no longer levied on forgiven amounts of student loan debt.

Give employers tax benefits for helping workers pay down student loan debt

This idea has been floating around Congress for some time, but nothing has been done about it. Now is the chance for Congress to help borrowers and employers alike.

Consider: Years ago, the government decided it was in society’s interest for more people to save for retirement. In order to encourage employers to contribute to their employees’ financial well-being, a tax benefit was introduced. Now, employers receive benefits when they contribute to their employees’ 401(k) plans.

The same thing could be done for employers willing to help workers pay down student loan debt. Some employers already offer help with student loans as an employee benefit. However, they don’t receive a tax benefit for it. Adding this benefit could help employers as well as employees. Research indicates that employee stress reduces productivity, and 61 percent of millennials with student loans point to student loans as their biggest source of financial stress.

Help reduce that stress, and we could see an improvement in workplace productivity. That helps businesses and the economy as much as it helps student loan borrowers.

Fulfill the the promise of education

For years, young people were told to go to college and get a job. We were told college is an investment that pays for itself, and that the loans were worth it.

Unfortunately, thanks in part to wage stagnation in recent years, that promise hasn’t been fulfilled. Many of us did everything “right” — and still we find ourselves struggling with student loan debt.

Student loan debt is keeping some millennials from moving forward with life and financial milestones. Some have even put off starting their own businesses — entrepreneurship is lower in millennials than in previous generations.

The potential student loan crisis isn’t just about the more than $1.4 trillion in outstanding debt. It’s also about the economic decisions today’s millennials aren’t making. They aren’t buying homes. They aren’t spending money in the economy. They aren’t starting new small businesses. All because they feel crushed under the weight of the debt they were encouraged to acquire.

Now is the time to help these borrowers. True middle-class tax relief must address student loan debt. Providing student loan debt relief as part of tax reform would help put money in the pockets of those who are most likely to use it to spur economic growth.

Andrew Josuweit is the CEO of Student Loan Hero, a company that provides financial education to more than 200,000 borrowers seeking to manage and eliminate over $3.5 billion in student loan debt.