A Timely Proposal to Eliminate the Student Loan Interest Deduction
28 Pages Posted: 13 Feb 2013 Last revised: 8 Feb 2014
Date Written: January 16, 2014
Although increasing access to higher education has been a priority of the federal government for more than half a century, the government has largely shifted the way in which it offers assistance over the last two decades from grants to loans. In the aftermath of the dot-com and mortgage debt bubbles, skyrocketing student loan debt levels and default rates are creating public anxiety over the possibility of a student loan debt bubble. This article examines the tax deduction for student loan interest against the backdrop of these recent developments.
The deduction of interest generated on student loan indebtedness was eliminated in 1986 and revived almost a decade later through Section 221 of the Internal Revenue Code. Objective analysis of the provision suggests that it is a paradigm of inefficiency in its failure to increase access to education or meaningfully assist borrowers with the management of their student loan debt. Worse still, the deduction seems to function most efficiently as the capitalization of a cultural expectation. Interest generated by student loan debt, along with mortgage debt, are presently the only types of personal interest receiving favored treatment through the tax code. In the aftermath of the dot-com and mortgage debt bubbles, and facing the possibility of a student loan debt bubble, this article examines mistakes that have arguably been made by and through the mortgage interest deduction and asserts that the role of Section 221 in underscoring norms needs to be examined and adjusted.
National policy that generally encourages higher education must be refined and narrowed to instead encourage responsible borrowing for higher education and repayment of any underlying indebtedness. As it may be unavoidable that social and cultural expectations will be capitalized through the tax code, a realistic way to capitalize the correct expectation is proposed: the repeal of the student loan interest deduction in favor of an alternative provision that works cohesively with the income-based repayment plans implemented in 2007 and 2011.
Keywords: Tax deduction, section 221, Internal Revenue Code, access to higher education, student loans, debt bubble
JEL Classification: K34
Suggested Citation: Suggested Citation