The FAIRtax Helps Solve
The Student Debt Crisis
The Student Debt Crisis
There’s a disturbing discussion on the amount of student loan debt here on the Student Loan Hero website. Some of the points are:
* Total U.S. student loan debt is a whopping $1.64 trillion
* 44.7 million Americans are carrying student loan debt
* 11.1% of student loans are 90 days or more delinquent or are in default
* Monthly student loan payments (among those not in deferment) usually range, on average between $200-$299
* 69% of college seniors graduating with a 4-year degree in 2019 had student loan debt
* Average debt at graduation from public and non-profit colleges was $29,900 in 2019, a 2% increase from 2018
* 66% of graduates from public colleges had loans as of May 2018 (average debt $25,550)
* 75% of graduates from private, non-profit colleges had loans as of May 2018 (average debt $32,300)
* 88% of graduates from for-profit colleges had loans as of May 2018 (average debt $39,950)
* Students borrowed an estimated $259 billion for the 2018-2019 academic year and 5% of this amount was private loans
* 48% of borrowers who attended for-profit colleges default within 12 years, compared to 12% of public college attendees, and 14% of non-profit college attendees
Student Loan Interest Deduction
Not Principal Deduction
Not Principal Deduction
The Internal Revenue Code provides a deduction for all the interest paid, up to $2,500, on student loans for people making up to $65,000. That deduction phases out as income increases.
* A person who borrowed the average student loan, $29,900, for 30-years at 4% will make monthly payments of $143.
* Because the interest is compounded daily, they will pay $100 in interest in the first payment with only $43.00 applied to the principal
* In the first year, an average borrower will pay $1,186.00 in interest and $530 in principal
* If the loan is paid off on time over 30 years, the borrower will have repaid the $29,900 in principal, plus an additional $21,488 in interest for a total of $51,388
* They will not have to itemize their deductions to take advantage of the interest deduction for student loans but can use it on their 1040
* In the first year, the borrower can deduct the $1,186 in interest paid from their taxable income
* Assuming a tax rate of 22%, this will save them $261 in federal taxes ($1,186 X 22%)
The $29,900 of principal eventually paid back isn't deductible but is paid for with “after-tax” dollars, meaning the amount you have remaining after your taxes are deducted. In addition, the $925 left owing after deducting the $261 from the $1,186 will have to be paid for with after-tax dollars as well.
In addition, like a home mortgage, as time goes on, the amount of each payment going to interest will decrease and the amount going toward the principal will increase. This means the interest deduction gets smaller every year with more and more the of payments coming from after-tax dollars.
Calculating After-Tax Income
The Tax Foundation released a paper entitled, “The U.S. Burden on Labor” by Garrett Watson.
Some of the key points are:
* Average workers in the United States face 2 major taxes on wage income: the individual income tax and the payroll tax (levied on both the employee and the employer)
* Although slightly more than 1/ 2 of a U.S. worker’s payroll tax burden is paid by their employer, the worker ultimately pays this tax through lower take-home pay
* Before accounting for state and local sales taxes, the U.S. tax wedge, the tax burden a single average wage earner faces, was 29.8% of pretax earnings in 2019, adding up to $18,368 in taxes
* Of course, Mr. Watson isn’t including the additional costs incurred by the average wage earner buried in the cost of goods
Mr. Watson assumes the average worker would receive a 7.65% wage increase if the employer didn’t have to match the 7.65% in payroll taxes paid by the worker. While there are many economists who agree with Mr. Watson’s assumption, there are others who don’t. Many don’t believe employers would automatically pass all of their 7.65% saving on to the employees.
Let’s assume the worker wouldn’t get any part of the employer paid 7.65% and subtract that amount from the 29.8% of their pretax earnings paid in taxes. That leaves a tax burden of 22.1% which we’ll round down to 22%.
If a worker earned a gross income of $63,000, the average median income for 2018, then they would have $49,140 (78% of $63,000) after tax dollars to spend. That’s $4,095 a month to pay all of their monthly expenses, including their student loan payments.
How Does The FAIRtax Help
Solve The Student Debt Problem?
Solve The Student Debt Problem?
The FAIRtax taxes the retail purchase of new goods and services. Principal and interest repayments aren’t taxed.
Therefore, with The FAIRtax, an Individual looking to pay off their student loan will have not $49,140 available from which to make the payments, but $63,000, their full income. This means they now have extra money available to pay off the loan. If they decided to increase their payment from $143 to $300 a month, the loan would be paid off in 12 years instead of 30. Doing that would save them almost $10,000 in interest.
When you look at the true cost of repaying a student loan based on the fact it must be paid off with after-tax dollars, one would have to earn $35,380 to repay the principal amount of $29,900. Then they would have to earn another $20,447 to pay the $16,760 of interest that was still owing after using 22% of the $21,488 in total interest to reduce their taxes.
This means a student with a $29,900 loan will have to earn $55,827 after tax dollars to repay the loan.
This would apply not just to student loans, but to any loan on which the income/payroll tax system makes you pay the principal amount with after-tax dollars. With The FAIRtax, it could be paid off sooner, saving you a lot of interest. In the case of a home mortgage, you would own your home outright a lot sooner.
Of course, those of us who have outstanding loans we are now paying with after-tax dollars could pay them off even faster under The FAIRtax because prices will come down under The FAIRtax. Few will argue, if you take the embedded costs of the income/payroll tax system out of retail prices, those prices will decrease by at least 10%.
This is like giving everyone a 10% raise. A person earning $63,000 would find they could purchase almost $70,000 worth of goods and services. Remember, The FAIRtax only applies to the retail purchase of new goods and services.
If someone spent some of their money to purchase a previously occupied home or a used car, there would be no FAIRtax collected on those major purchases.
Conclusion
The FAIRtax will be better for anyone who has a student loan or any loan for that matter. Remember, for most loans, like mortgage loans, interest is deductible only if you itemize and then only if your itemized deductions exceed the standard deduction.
Since only about 10% of us will be itemizing now, this means 90% of taxpayers will be paying their mortgages and other loans, both interest and principal, entirely with after-tax dollars.
With The FAIRtax, all of these loans would be paid with “before-tax” dollars. And, loan payments aren’t retail purchases, so those payments wouldn’t be subject to The FAIRtax.
Again, The FAIRtax applies only to the retail purchase of new goods and services. And thanks to the prebate, you don’t pay a dime of The FAIRtax out of your own pocket until your spending rises above the poverty level for your household. With The FAIRtax, you feed your family before you feed the government.
Plus, you control the amount of federal taxes you pay, not some bureaucrat in Washington D.C.
As more and more people recognize the true cost of purchases, not just what they pay after-tax, but what they pay out of their earnings, they will demand the oppressive and corrupt income/payroll tax system be replaced with The FAIRtax!
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Demand Congress to pass The FAIRtax—the only “Fair tax”!
The author George Bernard Shaw said these words in a play he wrote, You see things; and you say “Why?” But I dream things that never were; and I say “Why not?”
Isn’t it time for us to ask, “Why not?”
President Trump, “Embrace The FAIRtax, the only real tax reform! Stand up to the Swamp. They will oppose you anyway because they see you as a threat. What have you got to lose?”
The truth is the truth! Remember, if we don't continue to tell the truth and demand a change, then George Orwell's "1984" quote may foretell our children's future: “If you want a picture of the future, imagine a boot stamping on a human face, forever"
Thank you for staying FAIRtax strong!
Yours In Liberty! Yours In Freedom!
Steve Hayes
Chairman, Americans For Fair Taxation
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