Student loans could be fully tax deductible if that happens.
Here’s what you need to know.
Senator Rand Paul (R-KY) plans to introduce new legislation to Congress – the Tax Free Education Act – next week. This new bill:
- make education costs 100% deductible;
- Allow students to deduct the cost of their studies from their income tax;
- Include student loans as “education expenses”;
- Apply to all colleges and technical schools; and
- Apply to the cost of K-12 education.
“I think making college taxes deductible would help a lot of families,” Paul told WDRB in Kentucky. “A lot of families are in difficulty. College tuition fees have doubled over the past decade. Loan repayments are increasing. I meet people in their 30s who are still trying to pay off their loans.
If Congress passed this law, student loan borrowers could save thousands of dollars, even tens of thousands of dollars, depending on the cost of their university and the amount of student loans. While student loan cancellation is possible, Paul’s proposal could be an alternative that at least some members of both parties could support.
Student loans: this proposal would make it possible to repay student loans more quickly
The Tax Free Education Act would not be Paul’s first effort to help student borrowers pay off their student loans faster. In 2019, Paul proposed the Higher Education Loan Payment and Enhanced Retirement (HELPER Act) to help student loan borrowers pay for their retirement and repay their student loans. The HELP Take action:
- allows an individual to take, tax-free and without penalty, up to $ 5,250 from their 401 (k) or IRA each year to pay for their education or repay their student loans;
- rather than paying off student loans with after-tax dollars, this proposal would allow student loan borrowers to pay off student loans tax-free;
- allow tax-free student loan payments or payment of tuition and expenses for dependents and spouses;
- repeal the limit on the deduction of interest on student loans; and
- would allow employer-sponsored student loan payments and tuition fees to be tax exempt up to $ 5,250.
How it compares to canceling a student loan
How does that compare to a large-scale student loan cancellation? It depends. For some student loan borrowers, a tax deduction from the total cost of college education could generate savings greater than $ 10,000 student loan cancellation, or even $ 50,000 student loan cancellation. (The student loan discount will not be available for these borrowers). While Biden has now canceled $ 11.5 billion in student loans, Congress is unwilling to adopt a full-scale student loan forgiveness. (That said, Biden is making major changes to the civil service loan cancellation). However, there are alternative proposals that Congress could adopt on a bipartite basis. (Congress can do 5 things to enact a student loan forgiveness for student loan borrowers). For example, Paul is a Republican. Most congressional bills for large-scale student loan cancellation have been proposed by Democrats with little or no Republican support. Paul’s bill may be able to generate some support among moderates and conservatives interested in combining potential tax savings and higher education reform – without canceling student loans. That said, Democrats might balk at this proposal because it would limit funding for federal spending and generate less revenue for the federal government.
Student loan relief for the Covid-19 pandemic will expire soon. With large-scale student loan cancellation blocked in Congress, lawmakers will have to explore alternative proposals. Don’t expect a student loan forgiveness now. Make sure you understand all of your student loan repayment options. Here are some popular ways to save money: