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Don't fret over the student loan deduction - millennials will be much better off under tax reform

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By by consolidating tax benefits for current students and eliminating the Student Loan Interest Deduction, the Tax Cuts and Jobs Act will benefit all generations through its policies in the short and long run. (AP Photo/Seth Wenig, File)

The minute Republican congressional leaders dropped the Tax Cuts and Jobs Act last Thursday, the predictable, fright-inducing response rang out from the mountain tops.

The Fairness Project, a liberal outfit, proclaimed in an email: “House Republicans just unveiled their tax overhaul plan, and as expected, it’s full of dangerous reforms that will ONLY benefit the extremely wealthy.” Among the list of several items that will come “at the cost of the hardest-working, lowest-paid” was that it will make “paying back student loans next to impossible.”

They seem to be referencing the TCJA’s provision rescinding the student loan interest deduction. They might also be concerned that the bill declines to restore the recently-expired Tuition and Fees Deduction and eliminates the Lifetime Learning Credit and Hope Scholarship Credit. However, the TCJA does maintain – and even expands – the American Opportunity Tax Credit. Generally-speaking, these are steps in the right direction that will benefit, not harm, Americans of all stripes.

Consider the tax credits and the Tuition and Fees Deduction. First, having multiple tax benefits to choose from is unnecessarily complex and burdensome. Tax deductions and tax credits themselves are inherently costly – that’s why the IRS calls them “tax expenditures” – and are of little to no economic benefit, and they muddy the waters of the tax code.

Since filers can only claim one of these tax benefits, they must compute their income, school expenses and potential tax savings for each to ascertain which offers the greater return. By essentially narrowing the benefits down to one tax credit, the system becomes simpler and more sensible.

Second, the intention of each of these tax benefits was, and remains, to help make it easier for lower-income people to afford college. Unfortunately, it has not been serving this end in the real world. A 2007 study by the National Bureau of Economic Research analyzed the behavior of these types of credits. They found that such credits didn’t make it more likely that a student would go to college, but that they primarily helped those who were already likely to attend college. Tuition tax credits offer tax savings only if a student goes to college, which increases demand and boosts college prices. This undermines the very premise behind the tax credit.

Given these factors, it makes the most sense to eliminate all higher education tax incentives altogether, but unfortunately the TCJA does not do this. Instead, Republicans propose to keep and expand the AOTC. The AOTC, which is a refundable tax credit, lets students receive up to $2,500 back if they spend $4,000 on tuition and fees—or as much as $1,000 in a refund—for no more than four years of enrollment in a degree or certificate program. The TCJA extends the credit for a fifth year, wherein a qualifying student could get $1,250, or up to a $500 refund. Though not ideal, consolidating the tax benefits into one credit is at least a step in the right direction.

Meanwhile, concerns over the effects of eliminating the student loan interest deduction are massively overblown. Under current law, borrowers working to pay off their student loans can deduct only up to $2,500 in interest paid on those loans. This means that the maximum a graduate can subtract from his or her tax liability thanks to this deduction works out to $625. The average savings is just $202, according to an American Enterprise Institute analysis.

Millennials constitute the majority of student loan borrowers today. According to ValuePenguin, those in their 20s or 30s account for almost 65 percent of all student loan debt in 2017, yet make an average salary of less than $40,000 per year. In other words, most millennials are paying a low marginal rate and aren’t likely benefiting much from the deduction anyway. Meanwhile, chances are strong that they are taking the standard deduction, as 69 percent of taxpayers do, and will therefore gain much more from the doubling of the standard deduction under the tax reform plan than they will lose from the disappearance of this tiny deduction.

Either way, the idea that the TCJA will make “paying back student loans next to impossible” is preposterous. Most people who find themselves paying back student loans at present will be much better off if tax reform passes.

In all, by consolidating tax benefits for current students and eliminating the Student Loan Interest Deduction, the Tax Cuts and Jobs Act has sensible provisions that will promote economic growth through tax code simplification and therefore will benefit all generations in the short and long runs through more jobs and higher wages.

Jimmy Sengenberger is the President and CEO of the Denver-based Millennial Policy Center and the host of Business for Breakfast on KDMT Denver’s Money Talk 1690 AM.

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