College students and grads will be just fine under the tax bill
Author: Jimmy Sengenberger - November 7, 2017 - Updated: November 7, 2017
After Republican lawmakers released the Tax Cuts and Jobs Act, a predictable flurry of attempts came about to discredit the legislation and its push to eliminate numerous special-interest deductions and loopholes currently consuming the tax code. One of the prime expressions of fear-mongering is on student loans and higher-education costs.
Although imperfect and bearing many warts, the TCJA takes many appropriate steps to reform the tax code – including its higher education provisions. The liberal nonprofit Young Invincibles, representing left-leaning constituents ages 18-34, cried out that the “House GOP Proposal Raises Taxes on Students and Loan Borrowers,” asserting that the bill will “cut $65 billion from higher education over the next decade.” The suggestion is that large swaths of Millennials will be hurt by the TCJA — which is just not so.
The bill does a few things relative to student loans and higher ed support. First, it eliminates the Lifetime Learning and Hope Scholarship Tax Credits. Second, the legislation maintains — and even expands to five years — the American Opportunity Tax Credit (AOTC). Third, the TCJA rescinds the Student Loan Interest Deduction.
Currently, having three different tax credits from which to choose is unnecessarily complex, confusing and burdensome for students — and of little to no economic benefit. Because filers are only able to claim one of these tax benefits in a given tax year, they must calculate their income, school expenses and potential tax savings for each to conclude which offers the greater benefit. Essentially consolidating the credits down to one, expanded tax credit (the AOTC) simplifies the system and makes it less onerous.
In addition, the theory behind these tax credits has always been to make college more accessible for lower-income people. But it hasn’t worked out that way. A 2007 National Bureau of Economic Research study looked at the impact of these sorts of credits and found that they actually failed to increase the likelihood that a student would go to college. Rather, they help those who were already likely to continue their education. Tuition tax credits only offer tax benefits if a student attends college, which boosts demand and increases the price of college – thereby undermining the very idea behind the tax credit.
For these reasons, Congress would ideally eliminate all tuition tax credits. Instead, the TCJA keeps and expands to five years the AOTC, essentially consolidating the current three tax credits into one in the process. This is at least a step in the right direction that may help lower costs for students and certainly will reduce complexity in the higher education system, let alone the tax code.
As for eliminating the Student Loan Interest Deduction: the maximum benefit works out to only $625, and the average savings is just $202, according to an American Enterprise Institute analysis. Moreover, ValuePenguin has found that those in their 20s or 30s represent nearly 65 percent of all student loan debt.
Yet in a forthcoming Millennial Policy Center policy paper on tax reform, we find that, based on their income levels, most Millennials are paying a low marginal tax rate and aren’t likely benefiting much from the deduction anyway. Chances are they’re using the standard deduction. The TCJA doubles the standard deduction, from which Millennials will most benefit.
In the end, consolidating tax benefits for existing students and abolishing the Student Loan Interest Deduction will help allow for lower tax rates, thereby promoting economic growth and boosting wages and job creation, and it will help reduce higher education costs at the same time. This should be called a win-win for Millennials and others alike.