Make interest on student loans deductible

Tax reform is coming fast in the nation’s capital, both Republicans and Democrats agree. The concept of lowering tax rates and eliminating tax breaks is appealing to almost everyone. But it will be hard to find consensus in the details. What deductions go and which stay? That’s where the fight will be.
All sides should lay down their arms on one set of issues: Investments that clearly benefit society and economic growth. In particular, post-secondary education should not only be spared but it should actually get a new tax break as part of an overhaul of the tax code.

The idea is simple. Interest paid on student loans should be made tax deductible.

The change in tax law would make post-secondary education more affordable by reducing the net cost of taking out student loans. This, in turn, would provide a real boost to the U.S. economy by improving the skills and education of our workforce. U.S. colleges and universities are envied around the world, but, sadly, too many average Americans can’t afford to attend them. It’s well past time for a bold approach to correct this terrible shortcoming.

Too many Americans who want to attend college, graduate school or professional trade institutions are blocked by the hefty price tag. And those who decide to go often run up gigantic student loan liabilities. Believe it or not, student loans now amount to more than $1 trillion in total. That’s second only to home mortgage loans.

According to federal statistics, roughly 66 percent post-secondary graduates begin their careers an average of $25,000 in debt. That hampers their ability to make a go of it in the “real world,” as college grads like to say. There’s certainly a better way. And the federal government has found one before when it came to education.

Following the Second World War, the G.I. Bill gave millions of returning veterans a chance to improve themselves without impoverishing their families. Once again we need to treat education for what it is – an investment in the future that deserves incentives from Washington.

Surely post-secondary education is as worthy – if not more worthy – than home ownership when it comes to getting a tax break. Mortgage interest is deducted, of course, and has been for many years, as a way to advance the American Dream. Isn’t education as much a part of that dream as owning a piece of property?

And who knows? The deductibility idea may prove to be no more costly than the current system of subsidizing student loan interest rates. It will certainly be less bureaucratic, more direct, more transparent and more sensitive to consumers’ needs.

The analogy of this proposal to home ownership is apt. In the same way that the government instigates home ownership by making mortgage interest deductible, this proposal would make investment in post-secondary education more attractive and affordable. And that investment will pay off in productivity, higher incomes for average families and a more stable future for millions of hard working Americans.

The federal government now spends billions of dollars keeping interest rates on student loans low. This is done by regulation and direct government involvement. A more market-based approach – and therefore a more sensible one – would be to use the gentle incentives of the tax code to get the same result.

To be sure, this proposal will carry costs, but the investment will provide returns over the long term. The positive effect on the economy overall and on labor markets will be large and potentially transformative. Tax reform will provide a chance not just to end unwanted tax breaks but to add new ones that will make a real and positive difference.  Empowering more Americans to achieve a higher education can and should be one.
 
Sobhani is chairman and CEO of Caspian Group Holdings, LLC and a former candidate for U.S. Senate from Maryland.
 

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