Monday, April 21, 2003

Taxing Affair
The federal tax code allows for a student loan deduction applied to your gross income, not to exceed $2,500. The amount of your deduction is equal to the amount of interest paid on the loan(s). By deducting this from your AGI, your tax liability is less than it would have been for your earnings. And while this sounds good, it does not go far enough for the reasons stated below.
First, the ceiling may be too low. I do not have any specific data on how many people pay more than $2,500 per year in interest payments, but my guess is that there are quite a few. And I would further posit that those who fall into this category are primarily children of families in the lower socio-economic brackets, as they are the ones most likely to borrow to fund their education. (One might also make the counter-argument that many people who are paying in excess of $2,500 per year in interest attended a professional school, such as law or medicine, and are therefore not in need of tax relief.) Without hard data, it is impossible to analyze the cost of lifting the ceiling in terms of lower tax revenues, but from a theoretical standpoint it makes much sense. Why should people who have had to borrow more, because of their socio-economic status, be punished by capping their student loan interest deduction?
The second problem I have with this scheme is that it deflects attention from other policy alternatives. For example, why should full time students pay any income tax? While some students are exempt or receive a full refund, the majority of students incur some tax liability. While it can be argued that students, like all members of society, consume public services and benefit from a civil society, the counter-argument is that these individuals are investing their time and money in an education that will in fact have benefits that will accrue to society and not just the individual. Most students struggle to make ends meet with summer jobs, work study positions and a boatload of loans. Why not take some of the weight off of their shoulders and allow them to earn up to a certain amount tax free- say $15,000 or 20,000. It would have a benefit to the economy, too because students spend most, if not all, of their disposable income. This money in real people's hands, rather than the US Treasury, would stimulate the economy and help to create jobs.
But, alas, students and young people 18-35 don't tend to vote. And if you do not vote, you do not have power over your elected officials. And so public policy will continue to be driven by middle aged and elderly individuals who vote and give campaign contributions.


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