Yesterday, I posted about President Obama’s congressional-bypass to change up the student loan rules. My post was specific to the adjusted minimum payment which was reduced from 15 percent to 10 percent of discretionary income¹. There was an additional gift provided by the president yesterday, and nobody knows how much it will cost.
Previous rules wiped-out student loan debt after 25 years as long as you kept making the minimum payment required based on your reported income. With yesterday’s announcement cutting the minimum payment to 10 percent, that would effectively lengthen the amount of time it takes to pay off the student loan debt. But – what I did not mention yesterday – is Obama also changes the forgiveness time from 25 years to 20 years. Warner Todd Huston at Big Government notes, with my emphasis.
Naturally, paying less per month will lengthen the loan repayment time. To “solve” that problem, Obama also has decided that if a student still owes money after paying for 20 years, the remaining amount will be wiped off the books–at the cost to the taxpayer, of course.
It is apparent, though, that the President simply made this decision without bothering to find out what the cost of forgiving so many loans will be to taxpayers.
Secretary of Education, Arne Duncan, admitted that they didn’t bother to calculate that ahead of time.
With a Pelosi-like policy that we will have to implement it to find out what it will cost, Duncan told the media, “We actually don’t know the costs yet. We’ll figure that out on the back end.”
Yeah, who cares what it costs…
A couple of things to note. There is a (maximum) $2,500 tax deduction already available for those paying student loans². This is not an “itemized deduction” listed in your Tax and Credits section of Form 1040, you can take the total amount you paid in interest (up to $2,500) right off your top income line when calculating your adjusted gross income. This is an important distinction since most (if not all?) states with an income tax base their tax on your adjusted gross income.
Second, does quoted interest rates on student loans mean anything at all now that the government has set a cap on minimum required payments – 10 percent of discretionary income – and set the maximum number of payments to 240?
¹ Your income minus the poverty guidelines for your family size.
² This deduction is available for those with a modified adjusted gross income less than $75,000, or $155,000 if you’re filing a joint return. I’m not providing tax advice here, so don’t take this post that way.