Republican lawmakers are considering a number of proposals that could effectively increase taxes on students enrolled in school, as well as millions of student loan borrowers already in repayment.
The plans, which have not been finalized and are still under review, could become part of a major tax bill that GOP leaders hope to pass through the reconciliation process, which would allow a party-line vote that bypasses the Senate filibuster, which normally would require Democratic support to overcome. Republicans hold slim majorities in both the House and the Senate.
GOP lawmakers want to extend and potentially expand expiring tax cuts for corporations, households, and estates in the reconciliation bill. But they want to make significant cuts to federal spending to help foot the bill, which could cost the government more than $4 trillion in revenue by some estimates. Lawmakers are considering rolling back tax relief and imposing additional tax burdens on students and student loan borrowers to help offset these costs.
The consideration of tax proposals that could burden college students and student loan borrowers comes as the Trump administration was hit with a backlash and legal challenges this week following the issuance of an executive order and a memo that called for a broad freezes in federal spending across multiple federal agencies. The administration rescinded the memo on Wednesday, but the White House subsequently indicated that the funding freezes remain in effect.
Elimination Of Student Loan Interest Tax Deduction
One the proposals Republicans are considering is the elimination of the student loan interest tax deduction. Currently, student loan borrowers can deduct up to $2,500 in interest paid on their student loans. The benefit is phased out for higher income earners if a borrower’s modified adjusted gross income is between $96,800 and $111,800 ($145,200 and $175,200 for those filing a joint return).
“Student loan interest is interest you paid during the year on a qualified student loan,” explains the IRS in published guidance. “It includes both required and voluntarily prepaid interest payments. You may deduct the lesser of $2,500 or the amount of interest you actually paid during the year. The deduction is gradually reduced and eventually eliminated by phaseout when your modified adjusted gross income (MAGI) amount reaches the annual limit for your filing status.” Borrowers who paid $600 or more in interest would receive a Form 1098-E from their student loan servicer.
But Republican lawmakers are seriously considering eliminating this tax deduction for student loan interest.
“Eliminate Deduction of Interest on Student Loans,” reads a line-item on a House Budget Committee memo obtained by Politico earlier this month outlining various programs and benefits that could be cut to help offset the costs of extending tax cuts. “Taxpayers can deduct up to $2,500 of interest paid on student loans from their taxable income. This option would eliminate the deduction for student loan interest.” Lawmakers project that eliminating the student loan interest tax deduction would save $30 billion over 10 years.
No Extension Of Tax Relief For Student Loan Forgiveness
Currently, student loan forgiveness under all federal programs is tax-free federally due to a provision of the American Rescue Plan Act, which was signed into law by President Biden in 2021. Before that, most types of student loan forgiveness and debt cancellation were treated as taxable events, where the amount of cancelled debt would have to be reported on a borrower’s tax return and would be treated as “income” subject to taxes. Borrowers would receive a Form 1099-C reflecting the amount of canceled debt.
“The American Rescue Plan Act included a provision temporarily modifying the tax treatment of discharged student loan debt,” says the Education Department on StudentAid.gov. “Specifically, the law excludes from gross income qualifying student loans that are discharged between Dec. 31, 2020, and Jan. 1, 2026. During this period, the amounts of forgiven student loan debt won’t be subject to federal taxation. However, the amount forgiven could be taxable in some states.”
But so far, there are no indications that Republicans intend on extending this tax relief, which will automatically expire at the end of the year. Without an extension, student loan forgiveness under Income-Driven Repayment plans and several other federal programs could go back to being taxable events for borrowers. By way of example, student loan forgiveness of $30,000 that would be subject to an effective income tax rate of 20% could cost the borrower $6,000 in taxes.
Certain federal student loan forgiveness programs, like Public Service Loan Forgiveness, Teacher Loan Forgiveness, and Borrower Defense to Repayment, were already not considered taxable events under federal law prior to the American Rescue Plan Act’s passage. Barring any further changes made by Congress, that should continue to be the case, even if GOP lawmakers don’t extend the American Rescue Plan Act’s tax provisions.
The Total and Permanent Disability discharge program, which can cancel the federal student loan debt for borrowers unable to maintain substantial, gainful employment due to a medical impairment, was previously taxable. But Republicans included a temporary waiver of federal taxation for this program in the 2017 Tax Cuts and Jobs Act, which lawmakers are now trying to extend in the upcoming reconciliation bill. It is unclear at this juncture if an extension of this student loan discharge program’s tax waiver will be included.
Taxes On Scholarships For College Students And Student Loan Borrowers
Currently, scholarships and grants used to help a student pay for school are not considered to be taxable income. “If you receive a scholarship, a fellowship grant, or other grant, all or part of the amounts you receive may be tax-free,” says the IRS. But Republican lawmakers might change that.
“Eliminate Exclusion of Scholarship and Fellowship Income” from taxation, reads the House Budget Committee memo. “Qualified scholarships and fellowships are generally excluded from taxable income if used for tuition and related expenses. This option would make all scholarship and fellowship income taxable, increasing revenue by $54 billion over 10 years.”
This could significantly raise costs for millions of Americans and blunt the benefits of receiving a scholarship. Students may have to pay thousands of dollars in taxes on scholarships and grants received to help pay for their education.
Student Loan Borrowers Could Get Hit With Additional Costs
The proposed tax changes may have significant effects on millions of college students and student loan borrowers. But when taking into account additional reforms Republicans are considering, the impacts could be even more profound.
GOP leaders are considering repealing the SAVE plan, one of President Biden’s signature student loan relief initiatives that lowered monthly payments for millions of borrowers. The elimination of that plan would mean that many borrowers will have to switch to different repayment plans, all of which are more expensive. Coupled with new income recertification requirements, some borrowers could wind up having monthly payments that are several times what they had been paying under the SAVE plan.
“These dangerous cuts will cause chaos across the economy—causing monthly student loan payments to spike for millions of working families and making paying for college more expensive and risky,” said the Student Borrower Protection Center in a statement earlier this month.
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