Deductibility of Student Loan Interest on Federal Tax Returns

Current Law:

• Students may deduct interest they have paid on student loans on their tax returns, but only for the first 60 months the borrowers are in repayment.

• The maximum deduction was $1,000 in 1998 and $1,500 in 1999. The maximum deduction is $2,000 for 2000, and $2,500 for 2001 and beyond.

• The deduction is phased out for joint filers with adjusted gross income between $50,000 and $75,000 and single filers with adjusted gross income between $40,000 and $55,000.

Issue:

• The benefit is limited to those students who are just entering repayment. Those that have been in repayment for more than 60 months receive no benefit-they are penalized. And, these are the students most likely to repay and least likely to default. They deserve similar consideration.

• Limiting the amount that is deductible penalizes those with higher debt who may be the ones most in need of the assistance.

• Borrowers who consolidate their student loans are faced with the difficulty of determining what percentage of the consolidation loan is eligible (i.e. what percentage is within the 60-month period.

Proposed:

• Follow the Massachusetts example in making interest deductible for the life of the student loan, with no income caps, and no limit on the amount of the deduction for both graduate and undergraduate students.

Possible Objections:

• This change would reduce IRS income.

Counter Argument:

• Creates an incentive (or reward) for repayment of federal loans.

 Federal Tax Returns