Student loans and home deductions - we need to do better

Lots of other news has been coming out of DC these days, so you may have missed where the top operating officer at the Office of Federal Student Aid called for hundreds of billions of dollars of student loan debt to be written off.

A. Wayne Johnson made the statement was a Republican appointed by Education Secretary Betsy DeVos, and said the current system is “fundamentally broken” with large amounts of defaults and financially hamstrung graduates.

Indeed, five years into repayment, half of student loan borrowers haven’t paid even $1 toward their debt’s principal, according to the Education Department’s own data. And 40% of student loan borrowers could default by 2023, according to an analysis by the Brookings Institution.

“We run through the process of putting this debt burden on somebody … but it rides on their credit files — it rides on their back — for decades,” Johnson, who wrote his dissertation at Mercer University on student debt, told the Journal.

“The time has come for us to end and stop the insanity,” he added.

Johnson proposes forgiving $50,000 in student debt for all borrowers, about $925 billion, according to the newspaper. For people who’ve already repaid their debt, he suggests offering them a $50,000 tax credit. The plan would be paid for with a 1% tax on corporate earnings.

At the same time, Johnson announced he’d be running for an open Senate seat in Georgia.

And a “1% tax on corporate earnings” would be a mere fraction of what corporations got as part of the GOP Tax Scam that was passed in late 2017. Just sayin'.

This graphic from CNBC gives you an idea about student loan debt has kept climbing in the last 15 years. And notice how people over 40 especially have had larger amounts of debt in recent years.

A smaller plan would write off less debt, but would also potentially have big benefits, given the large number of people with relatively small debt loads but are still paying (or not able to pay).

Cancelling $10,000 of every federal student-loan borrower’s debt would wipe out the federal student loans for about 40% of borrowers who aren’t in a grace period or aren’t in school, according to an analysis from the Center for Responsible Lending, a consumer advocacy group.

The $10,000 benefit would also totally cancel the federal student-loan debt of 61% of the more than 7 million borrowers who are in default on their loans, the analysis shows.

Even borrowers with some debt remaining would receive a relatively significant benefit, according to CRL. Borrowers in repayment with debt levels in the third quintile would see their balance drop by 80%, borrowers in the fourth quintile would have 42% of their debt cancelled and borrowers with the highest debt levels would see 17% wiped away.

In addition, a 1990s tax provision intended to help students that have taken on loans now seems to be backfiring. The IRS notes that student loan interest deduction can get someone to write off up to $2,500 in income, IF they are below certain income thresholds.

For 2018, the amount of your student loan interest deduction is gradually reduced (phased out) if your MAGI [Modified Adjusted Gross Income] is between $65,000 and $80,000 ($135,000 and $165,000 if you file a joint return). You can’t claim the deduction if your MAGI is $80,000 or more ($165,000 or more if you file a joint return).

Here’s the Catch-22 – if you got a good-paying job after taking out a loan to get more schooling (a gap that has grown significantly in the last 20 years), you may well not get that deduction. This comes straight from last week’s release from the Bureau of Labor Statistics.

Median annual income (using weekly wage) by education, US
Bachelor’s Degree $66,612
Advanced Degree $81,068

75th percentile
Bachelor’s Degree $98,800
Advanced Degree $119,964

You can see the median person with a Master’s is already above the limit for writing off the student loan interest, and a person with a Bachelor’s that’s in the middle of the upper half for income also gets nothing.

One could say “Well, you’re making a lot of money, so what’s the problem?” Except the loans that paved the way to the higher incomes now are preventing a higher standard of living because more of that money has to be used to pay off the loans.

Even if they don’t want to entirely remove student loan debt like Johnson or Elizabeth Warren or Bernie Sanders do, it seems like a logical move for Dems (who get the majority of votes of people with Bachelor’s and Master’s degrees) to use next month’s budget debate to reward those who took on loans to improve their education. They can do so by raising the student loan interest cap to $100,000 single and $200,000 married/joint filer and/or raising the $2,500 limit on student loan interest (which hasn’t gone up in years). It would be a relatively small price tag, and could be easily paid for by bumping up some of the corporate/rich giveaways in the GOP Tax Scam.

In addition, a double-whammy has hit many people with educations and homes since the end of 2017. A recent ProPublica analysis went into how the GOP’s Tax Scam has hurt homeowners in many states (including Wisconsin), because of the limitation on State and Local Taxes (SALT), which is reducing what used to be a big incentive to own a house.

The SALT deduction was capped at $10,000 starting last year, is the same for single and married joint filers (VERY stupid), and many people with high education and higher earnings go over that total. Here was a map that showed which areas of America were most susceptible to hitting against the SALT cap.

On top of that, the Tax Scam raised the standard deduction to $12,000 for a single person and $24,000 for a married couple, which made married couples especially worse off if they took the SALT deduction, as many don’t have $14,000 in other deductions to add in.

As a result, those people got zero in deductions for both SALT and mortgage interest for both this year and the foreseeable future, which makes home ownership less worthwhile. Moody’s chief economist Mark Zandi told ProPublica that the results of the Tax Scam likely has put a lid on home values.

Zandi says that because of the 2017 tax law, U.S. house prices overall are about 4% lower than they’d otherwise be. The next question is how many dollars of lost home value that 4% translates into. That isn’t so hard to figure out if you get your hands on the right numbers….

Here’s how it works. Zandi took what financial techies call the “present value” of the property tax and mortgage interest deductions that homeowners will lose over seven years (the average duration of a mortgage) because of changes in the tax law and subtracted it from the value of the typical house. That results in a 3% decline in national home values below what they would otherwise be.

The remaining one percentage point of value shrinkage, Zandi says, comes from the higher interest rates that he says will result from the higher federal budget deficits caused by the tax bill. He estimates that rates on 10-year Treasury notes, a key benchmark for mortgage rates, will be 0.2% higher than they would otherwise be, which in turn will make mortgage rates 0.2% higher.

And that effect is notably higher in places in that chart in the darker blue….which often corresponds with places that have a higher percentage of high-educated people. Granted, we haven't seen that much in Wisconsin yet (our bigger problem is housing affordability, especially in Dane County), but if things go bad, the lack of write-offs might speed that decline.

I know the “upper-middle class educated person in a big metro area” isn’t a sympathetic group in 2019 America. But they’re also caught in a significant squeeze these days, which helps to explain why so many of us with decent incomes feel like we’re not much better off despite an allegedly strong economy. Because the costs that have been taken on in order to get to that higher level still are being paid for, while ending up on the wrong end of much of our flawed tax system. Meanwhile, the super-rich have gotten more tax breaks, and the poor (rightfully) got somewhat of an expanded safety net.

A big reason Dems controlled the House of Representatives after the 2018 elections was through gains in places that got hit the worst by the SALT cap (6 in California, 4 in New Jersey, 3 in New York, 3 in Virginia, and 2 in Illinois). It seems that fixing that flaw in tax policy and giving more assistance in dealing with student loan debt wouldn’t just be good economic policy, it also would lead to even more Dem wins in 2020.

MAKE IT SO.