Monday, March 23, 2009

Open Thread: Student Debt and Tax Credits

On March 9, Craig opened a successful thread allowing students to discuss the idea of whether the federal government should, in addition to giving trillions of dollar in bailout money to other industry actors, forgive student loan debt. Absent the obvious moral hazard implications noted in the commentary of that thread, the idea was quite popular. Indeed, we even had the privilege of having Rob Applebaum, the creator of the Facebook group that started it all--and, unsurprisingly, that has now been featured on CNN and the Huffington Post--answer our readers' questions, and discuss the merits of his proposal. We have received numerous requests for a follow-up. So, here we go.

I spoke with one of our readers who suggested a new related idea for discussion on the matter of providing some relief to students with loan debt: namely, whether providing tax benefits for paying back student loans is a technically feasible and desirable policy in our current economic climate. Specifically, he noted that the government should consider:
making paying back an educational loan like contributing to a 401k for tax purposes . . . [This] should make sense.  Any money you put into the loan payback is typically untaxed and not included in your salary.
Our reader considered this idea:
ever since President Obama started discussing higher taxes on salaries while running for President.  [He] figured that it just did not make sense for graduates with huge loans.  They should be able to pay off all of their loans before being taxed at such a high rate.
Accordingly, this proposal should be considered in the context of graduate students who can be expected to earn taxable income over the level at which President Obama has proposed to raise the marginal rates.

Thoughts?

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See The Wallet Pop Blog for a discussion of a similar idea

19 comments:

  1. I posted in the last thread that I think an idea like this is far more feasible than the previous one. This would be a fantastic approach to take, I think.

    ReplyDelete
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    ReplyDelete
  3. there would have to be some sort of cap on this

    ReplyDelete
  4. what kind of cap?

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  5. This is crazy talk. Why should I, who decided not to take any loans, suffer for my choice while 20-something kids get a free ride from uncle sam by cancelling or tax crediting these loans? How about tax crediting things that benefit EVERY one like healthcare.

    ReplyDelete
  6. jeff, do you even listen to yourself talk? Wasn't it you in the DP thread?

    ReplyDelete
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    ReplyDelete
  8. What we cannot do is allow these loans to pile up. Law school structure must change--there is no reason for the third year at all.

    ReplyDelete
  9. on balance, the benefits of enacting such a scheme far outweigh the costs. People will benefit substantially from loan tax benefits (i think), and will be incentivized to pay off their loans quicker.

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  10. I reiterate my previous post..and feel sorry 5:13 that you do not understand simple math. I just simply don't think that people who made good decisions (me) should have to contribute to people (like you) who took out massive debt to go to law school....there are not economic benefits to forgiving your loan debt on any level whatsoever...so, PLEASE stop telling me what I have to do

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  11. How are people who make god decisions (you) having to contribute to people (like me) who took out massive debt to go to law school? I mean, I understand your point when it comes to the government paying off these loans for students, but you also addressed your point to "tax credits." Certainly you couldn't have meant all tax credits. For instance, a non-refundable tax credit surely wouldn't constitute a "contribut[ion]" from you, would it? While the government loves to tax, I don't see that with all the tax breaks given these days, why "paying off your student debt" shouldn't create one of them.

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  12. The argument Robert makes is that canceling student debt will stimulate the economy because people will spend the money. The only valid argument is that it won't. (unfortunately if you read his original idea it is full of randomness and that's why people argue on the basis of moral and ethical grounds) So let's get back to the original idea. Canceling 500B worth of loans is equivalent to dumping 500B worth of cash into the system. That spells inflation. Also, his argument is that it will stimulate the economy because people will start spending money. That assumes that people have no mortgages, credit card debt and they don't want to save. These three are the biggest reasons why people won't be spending money and in that case there is no stimulation of the economy. He also argues that people will start buying houses (another housing bubble?). People won't. It will take them months to save up for a down payment which banks now require to be around 20-25%. Again, while the idea is nice it is not plausible.

    ReplyDelete
  13. Thanks for this post guys. I am so thankful for this article to provide me such a great Opportunity to comment on this article. on balance, the benefits of enacting such a scheme far outweigh the costs. People will benefit substantially from loan tax benefits (i think), and will be incentivized to pay off their loans quicker.
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  14. I am so thankful for this article to provide me such a great Opportunity to comment on this article. on balance, the benefits of enacting such a scheme far outweigh the costs.
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  15. As a student, your most common types of debt are student loans and consumer accounts, better known as credit card debt. These debts are handled differently when it comes to getting debt help. Credit card debt must be repaid in full for it not to have a serious negative effect on your credit.


    http://studentsblog2.blogspot.com/2009/11/student-debt-and-role-of-credit-card.html

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