The History of Student Loan Interest


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This week, I hit a pretty big milestone: I finally paid off my undergraduate student loans.

Hold the champagne: I can now get rid of the much larger graduate loans.

Don’t read too much into it, it’s not a complaint in the true sense of the word. I’ve always viewed my education as an investment and I’m well aware that I couldn’t have gone to college and law school without my loans (even though I did pretty well with grants and scholarships) . I didn’t grow up in a wealthy family and the cost of an education is quite staggering. US News and World Report estimates the current cost of attending a private college at about $35,000 per year. This equates to $140,000 for a bachelor’s degree. I have a bachelor’s degree and two law degrees, so do the math.

These numbers mean that student loans are quite a lucrative business for lenders since Congress has practically given them police powers to collect outstanding balances. It is now a lucrative business; we have come a long way since the days when student loans were introduced to help students pay for the cost of an education because we believed in an education.

The first loan program in the United States was established at Harvard University in 1840, more than a quarter century before the establishment of the Department of Education in 1867. The purpose of the DOE in its early days n It wasn’t so much about administering college loans as collecting information about schools and teaching that would help establish effective school systems.

Things changed a lot after the 1950s. A college education began to be viewed not so much as a luxury as a necessity for getting a job. Many people regard the GI Bill (and subsequent related laws) as a key factor; the bill allowed veterans to use the benefits to pursue education. In 1976, nearly three-quarters of Vietnam veterans had used their benefits to pursue education.

However, those not entitled to benefits under the GI Bill – that is, civilians – had to save or borrow. With the rising cost of a college education, borrowing has become almost a routine part of post-secondary education. So in 1966, the National Association of Student Financial Aid Administrators (NASFAA) was formed to oversee what would become the financial aid industry.

Now, the DOE has the third-largest discretionary budget of the departments, behind the Department of Defense and the Department of Health and Human Services. As part of its functions, the DOE makes $120 billion in new loans annually. All these loans generate a lot of interest. Tax-deductible interest (at least for federal purposes).

Interestingly, the student loan interest deduction was not originally intended to be a special deduction. It was, like any interest, deductible by the mere fact of its existence. The interest deductibility provision was actually part of the first modern income tax system imposed on the United States in 1894. After this tax was struck down as unconstitutional, Congress got back to work, creating a new federal income tax system that has been enacted. in 1913.

Interest on student loans – like interest on credit cards and interest on mortgages – remained deductible until 1986. In that year, under President Ronald Reagan, sweeping changes were made to the tax code (whose name was officially changed after the tax law). 1986 code). In addition to the part we know best – the dramatic reduction in the top rate of tax – under the Tax Reform Act 1986 (“TRA 1986”) a number of deductions have been removed. Specifically, Section 511(b) of the TRA 1986 repealed the deduction for personal interest, including interest on student loans.

For the next ten years, interest on student loans was treated as non-deductible personal interest. Then, in 1997, under President Bill Clinton, a student loan interest deduction was specifically included in our tax laws, much like the mortgage interest deduction. Section 202 of the Taxpayer Relief Act of 1997 (“TRA 1997”) provided that interest paid for student loans would be deductible. However, interest paid before 1998 remained non-tax deductible.

Under the 1997 TRA, taxpayers with student loans could deduct interest paid on those loans for themselves, their spouses or dependents as an “over the line” deduction. These deductions, called adjustments on your tax return, are subtracted from your income before any other deductions or exemptions, reducing your adjusted gross income (AGI). With an above-the-line deduction, you can take advantage of the deduction whether you itemize or not; this remains the case for the student loan interest deduction to this day.

There were certain limits on the 1997 YRT. In 1998, the maximum amount to be deducted was $1,000; the amount increased to $1,500 in 1999, $2,000 in 2000, and $2,500 for 2001 and subsequent years. Further, under the 1997 TRA, the deduction was only available for interest payments made in the first five years in which interest payments were required on the loan.

In 2001, the law changed again. Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the five-year rule was lifted, making all interest paid on a student loan deductible, although it was still subject to the limits in dollars. However, when the five-year rule was removed, it was only temporary.

The Tax Relief Act of 2010 (“TRA 2010”) deferred the ability to continue to deduct interest regardless of when the loan was taken out. But, like many of those “extending provisions” passed last year, it’s not permanent. After 2012, tax law will revert to pre-EGTRRA rules and interest on a student loan will only be deductible for the first five years of repayment.

For now (i.e. 2011), the amount of interest deduction on your student loan is capped at $2,500. You can claim the deduction of interest paid on a student loan for you, your spouse or a dependent as long as the loan was taken out for eligible expenses (almost tuition, fees, room and board, books and supplies) . The deduction is subject to a phase when the modified AGI is $55,000 for single taxpayers and $110,000 for married taxpayers filing jointly. The deduction is completely eliminated for single taxpayers with AGI of $70,000 or more and married taxpayers filing a joint return with AGI of $140,000 or more – other restrictions and limitations may apply, so check with your tax advisor if you have any questions.

It is important to realize, however, that after 2012 (yes, next year), unless Congress does something, tax law will revert to pre-EGTRRA rules and interest on a student loan will not. will be deductible only during the first five years of repayment. History has proven that Congress can be finicky when it comes to student loan interest deductions. This can be difficult for parents and graduates who understand that education can be valuable, but also costly.

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This is the first part of my series on the history and evolution of popular tax deductions. The series will continue throughout the month of June. To celebrate – because I’m really a tax geek – I’m hosting a giveaway. You can enter to win a Kindle by letting me know your favorite tax deduction – details can be found here.


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