Expansion of IRC Section 221 Deductibility Parameters: Arguments for Expanding the Student Loan Interest Deduction (The New Mortgage)

• In Event: Public Interest/Taxation/International Accounting

Abstract

Student loan debt is the only kind of household debt that has continued to rise through the Great Recession and now has the second largest balance after mortgage debt (http://www.newyorkfed.org/studentloandebt/). The number of borrowers has increased by 70 percent between 2004 and 2012. Borrowers are paying more interest costs than ever with student loan indebtedness. In 1997, the Taxpayer Relief Act (P.L. 105-34) created an above-the-line deduction for certain individuals who have paid interest on qualified education loans, subject to a maximum annual limit of $2,500, phased out when incomes reach $75,000 for single filers ($155,000 for joint filers) (IRC §221). The student loan interest deduction of $2,500 has remained constant since 2001 (Joint Committee, 1997). The purpose of this paper is to examine the student loan debt crisis in the U.S. and its impact on the only relief taxpayers realize annually: the student loan interest deduction (IRC §221). In this paper, the author will examine the history of the evolution of federal student loans in order to understand how borrowing limits were established; also, the economic arguments for student loans will be examined. In addition, the paper will examine deduction amounts claimed since 1998 through a benefit claim index in order to understand how much taxpayer benefit is realized from the deduction. The paper will then address how student loan debt has become ‘the new mortgage,’ making the argument that the interest deduction under §221 should be increased above $2,500—to allow taxpayers to realize more of a return on their investment in the funding of their postsecondary education.

Author

• Benjamin Rue Silliman, St. John's University