Yesterday was Career Day at my kids’ school. So, around 9:00 a.m., I found myself standing in front of a room full of kids, touting the virtues of staying in school. I recited the saga of being the first in my family to go to college. I talked about how I loved what I do and how I couldn’t have done it without an education.
Here’s what I left out. I didn’t tell that I borrowed so much money that my mom cried. I didn’t say that I owe more in student loans than I owe on my home. I didn’t go on about how deeply flawed – and in some instances, dirty – the administration of student loans can be.
And I didn’t tell them that our collective national student debt passed one trillion dollars this year.
Congress is currently debating whether to allow existing rates on student loans to be increased. They’ve already made it harder to default or discharge student loans in a bankruptcy than other forms of personal debt, making it easier to be irresponsible at Macy’s than it is to pay off your student loan obligations.
In short, they’re making it harder for the middle class to go to college.
But we’re making it easier to buy a house.
Here’s the thing. If you discount the alternative minimum tax (AMT), there are practically no restrictions on the amount of deductions you can take for buying a home. Under the rules, if you itemize you can deduct the interest you pay on the loan for your home (or homes) up to $1,100,000 (including home acquisition and home equity debts). There are no caps or limits on income or filing status (again, subject to AMT restrictions).
But your investment in education? That’s significantly limited.
You may not claim student loan interest if your income level exceeds $150,000 for married couples filing jointly or $75,000 for individual taxpayers. Additionally, the amount of your student loan interest deduction is capped at $2,500. Considering that the average student loan debt load (not including graduate loan debt) is nearly $30,000. Graduate and professional students have debt typically ranging from $30,000 to $120,000. With interest rates for many federal loans at between 7.8% and 8.5% (depending on the kind of loan), the maximum interest deduction available taps at the very bottom of what most students pay. It’s not uncommon for those with graduate and professional degrees to pay four to five times the allowable deductible interest payments.
Can you imagine what the housing market would look like if we capped interest deductions at $2,500? Where are our priorities?
Somehow, we have decided, as a society, that it’s more important to own a flat in Manhattan or a McMansion in Fulton County than it is to have a college education. That is what we decided, right? Because that’s what Congress seems to think (for a history of the student loan interest deduction, check out this prior post).
I’m not a fan of creating tax incentives to solve or encourage behaviors. But the fact is, we do just that all of the time. We do it to kickstart the housing market, to encourage spending and to target hiring. If we’re going to accept that tax incentives are used to drive behavior, what better behavior could we seek than encouraging students to pursue an education? Why have we seem to have decided that investing in houses (as well as stocks and bonds) should be more tax-favored than investing in education? And more importantly, what does that mean for our children?
““Educate and inform the whole mass of the people…they are the only sure reliance for the preservation of our liberty.
– Thomas Jefferson”