The Miser’s 3 Things:
- The GOP’s final tax bill does not eliminate the student loan interest deduction or the graduate school tuition waiver, as a previous version of the legislation had done.
- Millions of young Americans take advantage of these tax breaks every year.
- There are now tax calculators available to see in general terms how the tax bill will affect you.
House and Senate Republicans have released their final tax bill, and it drops some provisions that would’ve affected millennials in a major way.
The final bill still needs to win approval in both the House and Senate, so it’s not a done deal. But Republicans say they expect to pass the measure before Christmas.
The bill keeps two tax benefits that the House wanted to eliminate: the student loan interest deduction and the graduate school tuition waiver.
Americans now owe more on student loans than credit cards, leading millennials to delay major life decisions and purchases. With more people going to college than ever before — and with the cost of college well outpacing the rate of inflation — this threatens to become a crisis if student loan repayment isn’t made a priority by policymakers.
Student loan interest deduction
People who make less than $80,000 (or $160,000 if filing as a married couple) and pay interest on their student loans are currently allowed to reduce their taxable income by up to $2,500 per year. Of the 44 million Americans with student loans, 30 percent took advantage in 2015.
The more interest you pay, the more you are able to deduct. This especially helps people who are saddled with high-interest loans. Here’s an explanation.
It’s a valuable deduction because it’s available even if you don’t itemize your taxes. (Many other deductions are only available if you itemize, not if you take the standard deduction.)
A couple other things to keep in mind:
If your parents took out the loan and are paying it for you, they’re eligible for the deduction as long as they meet the income qualifications.
Qualifying education expenses don’t just include tuition and fees. If you took out a loan to pay room and board, books or supplies, or transportation, you can also benefit from the deduction.
Yes, income-based repayment plans are already available to help reduce the burden of student loans. These plans cap student loan payments, generally to 10 percent of a person’s discretionary income. You’re required to make payments for 20 years for debt incurred for undergraduate study.
(Discretionary income = your annual income – 150 percent of the federal poverty level. Let’s say you’re a single person making $40,000 a year. Subtract $18,090, leaving $21,910. You’d be responsible for 10 percent of this, or $2,191.)
This is still a payment of almost $200 per month, on top of rent and other responsibilities. And if you have private loans, you don’t qualify for these repayment plans.
Graduate school tuition waiver
Colleges and universities provide tuition waivers to campus employees who are attending classes. These waivers mean the free or reduced tuition isn’t counted as income.
The House had also proposed eliminating this benefit, arguing that well-paid professors who are getting advanced degrees shouldn’t get special tax treatment.
But this disregarded graduate students serving as teaching assistants. These people often make very little money, and the main benefit for their work is the tuition waiver.
Taking it away would almost certainly lead to fewer people considering graduate school, because taking a teaching assistant position is a well-known way to help pay for these advanced degrees.
For those universities that provide discounted tuition to lower-paid employees, like janitors, that tuition would also remain tax-free under the final bill.
Other changes in the tax bill
I’ve focused on these two issues and their impact on millennials, but the tax plan will affect just about everyone.
There are several websites that now show how the plan would affect your federal income tax liability. Here’s one that’s simplistic, but allows you to compare the current system with the system under the GOP tax bill.
For a single person earning $65,000 in adjusted gross income a year (that’s income after 401(k) contributions are made) who does not itemize, doesn’t have investment income, and doesn’t have a mortgage, the impact is this:
Now: $65,000 adjusted gross income – $10,400 ($6,350 standard deduction and $4,050 personal exemption) = $54,600 taxable income. With current tax brackets, federal tax liability is $9,389.
Plan: $65,000 adjusted gross income – $12,000 ($12,000 standard deduction and $0 personal exemption) = $53,000 taxable income.
Under proposed tax brackets, federal tax liability is $7,600.
That’s a $1,789 tax cut. But keep in mind, the income tax cuts are temporary, and long-range estimates show a slight tax increase for this person in the year 2026.
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