Tax Allowance for Interest Payments on Educational Loans: Data and Discussion of Issues.

A review was done of information on data and issues surrounding a possible tax allowance for interest payments on educational loans. The tax reform of 1986 eliminated the itemized deduction of interest paid on educational loans, effective in 1991. However, rising educational costs and continued reliance on borrowing for education has led Congress to consider proposals for tax relief in this area. An estimate of interest on the average amount of educational debt suggests that for an 8 percent 10-year loan of $7,500 the interest paid would be $582 annually. One argument in favor of favorable tax treatment of educational loan interest payments is that current law allows taxpayers who take home equity loans for consumer purposes to deduct those interest payments. In addition, if education is viewed as an investment in human capital, an educational loan interest payment should perhaps be deductible since the cost of investments in physical capital are deductible or depreciable. Another argument suggests that direct spending programs might be expanded for what a tax allowance for educational loan interest payments would cost. Finally, examination suggests that a deduction for educational loan interest payments would benefit only taxpayers who itemize rather than use the standard deduction. An annotated bibliography lists 10 suggestions for further reading. (JB)