The voices of Urban Institute's researchers and staff
March 2, 2017

Don’t let student borrowers off tax free

March 3, 2017

A version of this post was originally published on Education Next.

A bipartisan proposal announced yesterday would allow employers to help pay off their employees’ student loans tax free. But this move would provide a regressive handout to the wealthiest borrowers and do nothing to help those who are struggling to repay their loans. Congress should instead focus on fixing the real problems in student lending rather than wasting taxpayer dollars on borrowers who need help the least.

The proposal, introduced by Republican representative Rodney Davis and cosponsored by 19 Democrats and 12 Republicans, would allow employers to pay off up to $5,250 of an employee’s loans each year without the income being taxable. This builds on a current policy that allows employees to have the same amount of education expenses (e.g., college tuition) paid tax free by their employer each year.

This proposal has three key problems. First, it provides benefits only to workers who have student loans and are employed at companies that can afford to offer this benefit. It does nothing for low-wage workers at firms without educational benefits or unemployed borrowers, who are most likely to struggle to repay their student loans.

Second, it provides larger tax benefits to higher-income workers because tax rates rise with income. The federal income tax savings on the full $5,250 pretax loan payment would be worth $789 to a recent college graduate with $35,000 in taxable income. But the same payment made for a lawyer with $200,000 in taxable income would be worth $1,733.

Finally, it delivers public subsidies in an arbitrary and potentially unfair manner and would encourage employers to do the same. In particular, the largest benefits go to workers with the most student debt, who are least likely to default on their loans. A worker with $10,000 in debt could only use the benefit for two years, whereas a worker with $100,000 in debt could use it for 20 years.

An employee who worked her way through a low-cost public college to minimize her borrowing would receive far less in benefits—both from her employer and the federal government—than a colleague who borrowed heavily to obtain an expensive undergraduate or graduate degree. That hardly seems fair.

Poorly targeted subsidies are often politically popular because they benefit affluent people, who tend to be vocal and politically active. Federal policy is littered with examples, ranging from tuition tax credits to 529 college savings account to generous loan forgiveness programs. Congress should limit arbitrary and regressive subsidies, even when they are politically popular, rather than pander to demands for even more of them. 

Photo via Shutterstock.

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