To help future borrowers, the administration should work with Congress to make all educational debt payments tax deductible including private loans which cannot be forgiven by the government
When people carry education debt it can make it harder to budget basic needs, save money and qualify for financing to purchase a home.
Education debt and the cost of higher education also deters people from pursuing higher education https://getbadcreditloan.com/payday-loans-fl/ruskin/, which is unfortunate for both their own socioeconomic mobility and the overall economy. To address this problem, the incoming Biden administration may ask Congress to forgive up to $10,000 of federal student loans per borrower to help people currently buried in debt.
A tax deduction, or write-off, reduces the amount of taxable income one reports annually to the Internal Revenue Service (IRS). For example, if a borrower holds $50,000 of student debt at a 4 percent annual interest and makes monthly payments of $600, the borrower will pay $7,200 per year ($2,000 in interest and $5,200 in principal). The interest that the borrower pays on those loans is currently deductible from their federal income taxes, up to $2,500 if their income is less than $85,000. The payments the borrower makes on the principal of the loan is not currently deductible.
A bit of quick math demonstrates how deducting the full amount of loan payments will help borrowers. The borrower above making $60,000 annually in 2020 would pay taxes on $45,600 (subtracting a standard deduction of $12,400 and the $2,000 in educational loan interest payments). Applying the 2020 federal tax rates, the borrower would pay $5,828 in federal taxes.
But, with all educational debt tax deductible before adjusted gross income, the taxpayer could deduct the full $7,200 in loan repayments for a taxable income of $40,400. Continue reading