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Two state bills propose tax breaks for student loan debt

2014-02-27

State lawmakers are taking aim at student loan debt with two key bills looking to lessen the burden for borrowers after college.

In one bill, sponsored by Del. Kirill Reznik (D-Montgomery), taxpayers shouldering student loan debt after graduation would be able to claim a tax credit on their state filings of up to $2,500, mirroring a federal law for federal tax filings.

Another bill, sponsored by Del. Eric Luedtke (D-Montgomery), would eliminate the requirement for taxpayers who had their student loan debts canceled or forgiven to report it as income in state filings and pay the added tax.

Both bills look to address the growing issue of student loan debt, which at the end of 2013 neared

$1.1 trillion nationally — a $114 billion increase from 2012, according to data from the Federal Reserve Bank of New York.

“It’s really an effort to help out the folks that are burdened with huge student debt right now,” Reznik said.

Reznik’s bill would provide an income tax credit of up to 50 percent — not to exceed $2,500, or 20 percent of the average annual tuition for state institutions — on the amount paid on a loan in a given tax year. It also would add a provision to the tax code that’s already available when filing taxes at the federal level.

“There is no corresponding credit on the state income tax,” Reznik said.

“It’s one way to lessen the burden and the hardship of having to pay back student loans at the state level.”

In addition to $48,000 in implementation payments, the bill would cost the state $363.3 million in lost revenue as a result of taxpayers claiming the credit, according to an analysis by the state’s Department of Legislative Services. In the years after, the amount the state would lose in revenue is predicted to increase steadily.

The other bill looks to alter the state’s provisions on income tax in relation to forgiven student loans. When a lender forgives or cancels a student loan, the amount that was left to be paid must be reported as income, which is subject to taxation.

But if an individual was unable to pay off the student loan debt in the first place, Luedkte said in a committee hearing earlier this month, he or she is “clearly not going to be able to pay the tax bill that follows from it.”

In 2013, this bill unanimously passed the House of Delegates, but it never reached the Senate floor. This year’s bill adds a provision that says the student loan must be discharged as a result of permanent disability or death.

The language in last year’s bill was too broad, making it difficult to pass through the General Assembly, said Robin McKinney, director of the Maryland CASH Campaign, an advocacy group aimed at helping residents achieve financial security.

People who default on student loans are already in obvious financial straits, McKinney said. Without this bill, she said, “We’re also creating a tax burden for them on top of it.”

This bill is expected to cost the state $500,000 a year in lost revenue for people claiming this deduction in addition to the implementation costs.

For Reznik, the problem of student loan debt can be felt throughout the economy as it spreads to other sectors such as the housing market, with fewer students able to save money to be first-time home buyers.

“It is holding up a lot of other things,” Reznik said. “It’s holding up the economy. It’s holding up the job market. It’s holding up everything because this massive burden is sitting on the shoulders of 20-somethings in the country.”

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