The self-congratulatory enthusiasm of both Congress and the president over their budget and tax cut measure is quite a spectacle. Forgive me if I’m not as excited. As is so often the case with tax legislation, you see, if you’re not a member of one of the groups it favors, you’re simply out of luck.
I’m one of the millions of Americans who are single and have no children. We get no direct benefit from the tax cut unless we have investments. Unfortunately, I’m also one of the single, post-college Generation Xers who haven’t begun to think about investing because they’re too busy struggling to pay off huge student loan debts.
For one magic moment, I thought there might be hope that I, too, might share a little of that penny-on-the-dollar tax cut. Shortly after the bill passed, I noticed a promising item in a Congressional Quarterly bill summary. It briefly described a provision that would establish (well, technically reestablish, since a similar provision was eliminated in the 1986 tax reform legislation) an income tax deduction of up to $2,500 per year for interest paid on student loans. Simple math told me that, for a taxpayer in the lowest tax bracket (15 percent), that would be equivalent to a $375 tax cut. Not too shabby. Perhaps student-loan-burdened singles would get some tax relief after all!
I passed along the good news to several friends, but being a bit of a cynic, I figured I’d better take a look at the bill itself to get more details. Perhaps not surprisingly, our celebration was premature.
The Congressional Quarterly summary was correct about one thing. The full $2,500 deduction for interest on student loans will indeed be available … starting in the year 2001. The deduction will be phased in over four years, starting with a $1,000 deduction in tax year 1998 (rising to $1,500 in 1999, and $2,000 in 2000). So mark your calendars for April 15, 1999. That’s when you’ll be able to claim your first student loan interest deduction of a whopping $1,000. Or maybe not.
If you actually manage to take advantage of the fact that you’ve got a college education, and start earning a salary reflecting that degree, it’s another story. The full deduction will be available only to those with adjusted gross incomes (AGIs) below $40,000 ($60,000 for joint returns). The deduction will be gradually reduced until it reaches zero at $55,000 AGI ($75,000 for joint returns). Splendid news for anyone trying to pay off student loans while living in a high-cost area like New York or Washington and making $40,000 a year.
Fortunately those phase-out levels will be adjusted annually for inflation — starting in the year 2002. Unfortunately, the deduction itself will not be indexed for inflation.
Furthermore, the deduction applies only to interest paid “during the first 60 months (whether or not consecutive) in which interest payments are required.” Translated, apparently that means that periods of deferral or forbearance do not count toward the 60 months. Nevertheless, since most student loans have repayment schedules of 10 years, that provision essentially cuts the impact of the tax relief in half.
So, if you are young, single, childless and have no investments, once again you will be forced to “have none and like it.” In fact, if you also happen to be a smoker or an airline passenger, thanks to the revolutionary Clinton-Gingrich tax cut, you will actually be paying more.