Congress set to grant tax relief for student loans that will benefit only the most affluent borrowers
Congress set to pass costly and inefficient new tax expenditure for workers with student debt as part of larger agenda vsoronavirus relief package. Rather than relieving distressed borrowers, the provision shower insteads tax cuts for high-income workers with good jobs who are already paying off their loans, and introduced a perverse new incentive for high income families to borrow for college rather than paying out of pocket.
The layout is similar to the Act respecting employer participation in reimbursement, presented by Senteurs Mark Warner (D-Go.) and John Money (RS.D.). He To allows employers at pay up to $ 5,250 every year tax–free employees with student loans. Employers would deduct this compensation of their taxes just like they make the wages, But this would not be taxed as income for the employee. As a result, the new tax benefit is lucrative, but only for workers who have a job, have enough income to put them in a high tax bracket, and work for employers savvy enough to build and deliver the new package. advantages. In short, the invoices is remarkably good specifically targeted at borrowers who need the least help.
Using data from most recent from the Federal Reserve Survey of Consumer Finances, I believe borrowers in the bottom 40 percent of the income distribution (those earning less than about $ 42,000) get about 5 percent tax benefit, saving about $ 5 per month, while the top 20 percent get about 46 percent total benefits. By providing student loan relief condition of having a work And working for a generous employer, and the amount of the allowance according to the tax bracket of the borrower, Congress is pursue a Politics it is even more regressive than outright debt cancellation.
Here are the details:
Under the bill, the employers could establish educational assistance programs, which currently allow employers to provide tuition fees help for courses taken by an employee, at provide up to $ 5,250 per year, per worker in tax-free aid for employees repay student loans. Instead of being treated as wages, these payments would be excluded from taxes on income and wages (both employee and employer share).
who does this help? First, only borrowers with a job. According to the 2016 Survey of Consumer Finances, 10 percent of all households with student debt have no wage income. Second, even if you have a job, you must work for an employer who offers generous benefits. In practice, surprisingly few workers are Free any employer benefits. Overall, 61% of indebted households are even offered a 401 (k) or retirement plan, and among those who are ooffered a plan, only two-thirds work for an employer who contributes or corresponds to their contribution. It means that only four out of each Ten households with debt work for an employer willing to establish a matching 401 (k) plan. The part that goes establish and contribute to a student debt repayment plan is surely lower. For perspective, aAccording to the National Compensation Survey, in 2007 (last year of the relevant survey), only 15 percent employers Free Eeducational Aassistance Programs this have been not related to work—the type used, for example, to reimburse employees for taking a course in a post secondary establishment and the relevant genre to make student loan repayments.
Without surprise, employers’ decision to provide benefits depends on the income and sophistication of their workforce. Households in the top 10 percent of income distribution have a 70 percent chance that their employer contributes to their 401(k). For middle-income households (those between 40-60e percentiles), only 34 percent work for an employer who contributes to their 401 (k).
Finally, the value of a tax exemption for income and wage tax allowances depends on whether the worker is in a high or low tax bracket. UBased on SCF data and 2018 tax rates, I estimate that typical borrowers in the bottom 20% of the income distribution face a total tax rate of around 10%., while those in the top 10 percent pay a rate of 43 percent. In other In other words, every dollar of student loan repayment funneled through these new accounts will save, on average, $ 0.10 for low-income borrowers and $ 0.43 for each high-income borrower.
Beyond being simply regressive, the bill targets loan relief to those who need it least.
Beyond being simply regressive, the bill targets loan relief to those who need it least. Low-income, unemployed borrowers who cannot make payments and default at high rates receive no relief. But borrowers who are already making payments – at the annual level of $ 5,250 or more – benefit fully.
Of course, the bill is widely supported by business leaders – it offers them an opportunity to appear socially responsible with little cost to themselves by allowing taxpayers to be “reimbursed” for student loans with the taxpayers’ money.
In addition to being ineffective in stemming the real problems of Student loan market, the bill threatens to do real damage to student loans and tax compliance.
First, provide generous tax breaks for workers Student ready could to encourage more students to borrow, increasing the indebtedness of future borrowers and the total cost of loan programs. In effect, this bill says that if you pay for your college education up front, out of pocket, you (or your parents) are paying with money that has already been subject to income taxes and payroll taxes. However, if you borrow this amount and repay the loan from your eemployer aassistance plan, then you pay for college with pre-tax dollars – a tuition discount that can be as high as 40 percent if you’re in a sufficient tax bracket.
Second, educational assistance programs were not intended to repay student loans. Employers don’t know which loans qualify, and there is no declaration or compliance system to ensure that tax-free payments made by the employer to workers are used for student loans rather than for other purposes. These are issues that matter little in current educational assistance programs because employer payments typically go directly to pay tuition and fees. But student loans from federal and private lenders can be used to fund not only tuition and fees, but also a range of living expenses like rent, food, or transportation. The risk of abuse is significant.
There are many other ways to provide relief to student borrowers., from targeted approaches that help struggling low-income borrowers to widespread debt forgiveness that also benefitss well-off and highly educated households– any of them is better. the best approach is to move to an automatic income-based reimbursement system and simultaneous rehabilitation of existing loans and waiver of penalties for delinquent and delinquent borrowers who have never had easy access to such programs.