Daily Deduction

from the Tax Policy Center

Graduating with Student Debt and Dealing with Mortgage Interest

By :: May 15th, 2014

It’s an election year: Senate Democrats want to help college graduates, surely Republicans want to, too? A new bill would allow student borrowers to refinance their federally subsidized loans at a rate of 3.86 percent—the current rate for new loans approved by Congress last year. The bill would be financed by the “Buffet Rule,” which would ensure that the wealthy pay a minimum amount of tax. It’s generally a dead-on-arrival idea with Republicans. The Hill reports that New York Democrat Senator Chuck Schumer offered to deal: “We’re open. We welcome suggestions on how [Republicans] would pay for it.”

Help would be good: Student loans are dragging down the economy. Low loan rates and even student loan interest deductions are not enough to lighten the weight of student debt. A new report from the Brookings Institution and TPC by Bill Gale, Benjamin Harris, Bryant Renaud, and Katherine Rodihan, shows that between 1989 and 2010, the share of households with  student loans jumped from 9 to 19 percent, and inflation-adjusted median student debt rose by more than 50 percent. Meanwhile, the Pew Research Center reports that [corrected] the median student debtor has total loans equal to about two years’ worth of household income — loans that include mortgage, vehicle, and credit card debt, on top of student debt. The Federal Reserve Bank of New York reports that student debtors are not buying houses.

If college grads did buy, maybe they’d prefer a tax credit to a mortgage interest deduction. A new report by Amanda Eng updates TPC analysis of ways to replace the mortgage interest deduction with credits designed to improve incentives for homeownership. They include: 1) a nonrefundable credit of up to 15% of eligible mortgage interest, 2) a nonrefundable credit of up to 20% of eligible mortgage interest, 3) a refundable credit of a fixed percentage of property taxes paid, and 4) a flat-amount refundable credit for all homeowners.

And on the Hill this morning: The Senate Banking Committee holds an executive session to consider a bill that would provide secondary market reform: The Housing Finance Reform and Taxpayer Protection Act of 2013.

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  1. Michael Bindner  ::  4:27 am on May 16th, 2014:

    Much of the Buffett rule problem is gone with raising capital gains and dividend taxes to 25% through the ATRA, ACA and Pease. The way to fix the rest is to credit each worker with the same employer contribution to Social Security. There might be a little variation in benefits, but not much. It is not the rate so much as the amounts borrowed, and the only way to fix that is to give free college for the first two years and have the employer pay for the second two, plus grad school, with loans only existing if the employment situation does not work out. It has been far to easy to defer repayment (something now changing) but not easy enough under bankruptcy law to forgive it, Say if someone is not working in the field where they got their education or attempted to get it – so if someone starts a PhD and quits – most of us – they should be able to discharge this debt. What grads want is a job – of course if the employer pays the last two years plus grad school and pays a salary for school, they might also pay for the apartment (no more sharing rooms) for both school and early working time. Once the education repayment period is done, the employer could then fund the mortgage at zero interest – without the tax system being touched. Of course, that makes so much sense it likely won’t happen. For larger families, a larger child tax credit will help at all stages – from college through worklife. The Senate Bill on mortgage market reform has a scary title – it implies that mortgage forgiveness of underwater loans is nowhere in the pipeline. Pity. Seems like we will stay in this slow economy for a while.

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