GOP Tax Proposal Threatens More than Just Student Loan Foregiveness
As part of a sweeping effort to offset the cost of a massive tax cut and immigration package, House Republicans are floating several controversial proposals to reshape the tax code. Among the options reportedly under consideration is eliminating the student loan interest deduction, a tax break that has provided financial relief to millions of low—and middle-income borrowers.
While the Trump administration’s actions regarding student loan forgiveness have been the subject of considerable attention, the potential elimination of the student loan interest deduction also warrants scrutiny. This tax break has served as a small but meaningful buffer for student loan borrowers facing ever-growing debt burdens.
The Student Loan Interest Deduction: A Brief History
Up until 1997, student loan interest was nondeductible. In 1997, as Kelly Phillips Erb noted, a “deduction for student loan interest was specifically included as part of our tax laws, much like the home mortgage interest deduction. Section 202 of the Taxpayer Relief Act of 1997 (“TRA 1997″) provided that interest paid for student loans would be deductible.” This provision enabled borrowers to deduct up to $2,500 annually in interest paid on qualified student loans from their taxable income.
Notably, the student loan interest deduction is considered an “above-the-line deduction,” which means individuals could take it regardless of whether they itemize their tax return. The consequence was that it was one of the few tax breaks that was widely accessible to middle—and lower-income borrowers.
The student loan interest deduction is not a game-changer given that the maximum potential savings is $550 on an individual federal tax return (this assumes a borrower who paid at least $2,500 in interest and was in the 22% tax bracket, which is the maximum brack eligible for the entire loan interest deduction); however, it is designed to reduce the financial strain of student loan repayment. The income phaseouts (e.g., $85,000 for individuals) help target the benefits to those most in need.
The deduction has played a vital role in supporting student borrowers. In 2020, the IRS reported that 12.7 million taxpayers claimed the deduction, collectively saving over $1.6 billion. While modest compared to the total student loan debt of $1.77 trillion, the deduction provides real relief for those struggling to balance loan payments with other financial obligations.
What Happens If the Student Loan Interest Deduction Is Eliminated?
Eliminating the student loan interest deduction would increase the financial burden on millions of borrowers, especially when student debt levels are at historic highs and loan forgiveness is in the current administration’s crosshairs. Losing the deduction would effectively increase repayment costs.
The proposal could also have broader economic and social ramifications. Borrowers who lose access to this tax break may face incredible difficulty saving for emergencies, buying homes, or contributing to retirement accounts. According to data from the Pew Research Center, “a quarter of college graduates ages 25 to 39 with loans say they are either finding it difficult to get by financially or are just getting by, compared with 9% of those without loans. And while only 29% of young college graduates with outstanding student loans say they are living comfortably, 53% of those without loans say the same.”
The elimination of the student loan interest deduction could also exacerbate mental health concerns among borrowers. In an interview with Harvard Law School’s The Practice in an article titled “Debt Takes a Toll,” Jason Houle, an associate professor of sociology at Dartmouth College, noted that “to the extent that debt is a problem for our health and well-being, it is because it’s this noxious, chronic stressor that over long periods can cause health problems.” The Practice also highlighted a recent analysis of Twitter and Reddit language from the University of Georgia that found “a high incidence of posts mentioning poor mental health, concluding that ‘higher volumes of negative sentiments and emotions of sadness, fear, and anger warrant immediate attention of policymakers and practitioners to reduce the cognitive burden of student debts.'”
A Continued Focus On Reducing Deductions?
This is not the first time the GOP has targeted tax deductions as part of a broader reform package. The 2017 Tax Cuts and Jobs Act (TCJA) capped the mortgage interest deduction at $750,000—down from $1 million—and limited state and local tax (SALT) deductions to $10,000. These changes primarily affected high-income taxpayers.
By contrast, the student loan interest deduction targets middle-income Americans and plays a more direct role in alleviating financial hardship. Eliminating it would compound the steady erosion of federal support for student borrowers. For example, interest subsidies on subsidized federal loans have gradually been scaled back, and graduate students lost access to subsidized loans in 2012.
Conclusion
The stakes for student borrowers could not be higher. The elimination of the student loan interest deduction would come during a period of tremendous uncertainty about the future of student loan repayment policies, including the Supreme Court’s pending decision on President Biden’s debt relief program. While the savings from the deduction may be small compared to the nation’s debt crisis, they are significant for the millions of Americans who rely on them.
For now, the proposal remains just that—a proposal. But its inclusion in discussions about tax reform signals that no provision is safe as lawmakers seek ways to fund sweeping tax cuts and an immigration crackdown.
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