Tax Analysts Blog

Hasn’t the Government Done Enough to Mess Up Higher Education Finance?

Posted on Nov 20, 2013

The worst tax idea of the month comes out of Michigan, where legislators “determined to do something, somewhere, somehow” proposed a tax credit for student loan payments. Under the proposal (SB 408), graduates of Michigan universities, both private and public, would receive a tax credit equal to 50 percent of their student loan payments if they live in the state.

Hasn’t the government done enough to mess up higher education finance? I know the sponsors of this inanity are well meaning. They always are. But providing this credit is wrong for several reasons. First, the benefits will inure to upper-income folks. Upper-income people go to university more than the hoi polloi. I am not sure why they need the help. Second, the legislators are kidding themselves if they think the tax credit will provide an incentive for graduates to stay in Michigan. People choose where to live and work based on many factors. If there are no jobs in Flint, no amount of tax credit is going to keep a smart, ambitious person hanging around there. Third, the credit is expensive; it will eventually cost the state $170 million a year. Since the money will go to people who have already decided to stay and work in Michigan, this is the equivalent of flushing $170 million down the proverbial toilet. And finally, I ask again, hasn’t the government done enough to mess up higher education finance? The federal government guarantees student loans, which contributes directly to education inflation. Providing this credit will only provide an incentive to borrow rather than save, since the Michigan government will subsidize your loan. That's just dumb.

Read Comments (2)

edmund dantesNov 19, 2013

Only idiots save for higher education. Doing so results in a massive "tax" in
the form of sharply reduced financial aid.

There was an item on this in the NYTimes recently, and the comments were
revealing. More and more "responsible" families are learning that they must
pay the price for affluent families who've learned to game the system.

I am deeply skeptical of that $170 million per year number. The Michigan
income tax is 4.25%. Let's stipulate that a taxpayer pays $10,000 in a year,
which seems way high. That's a credit of $5,000, so the "tax cost" is $212.50
(the 4.5% tax not collected on the $5,000 credit). That implies 800,000 former
students paying off loans, nearly 10% of the state population. If the average
annual repayment is $5,000, that implies 1.6 million former students claiming
the credit. Not credible.

Am I missing something?

Having said all that, I agree it's a bad idea. Colleges should charge what the
education costs, and stop being agents of wealth redistribution.

AMT buffNov 21, 2013

Here's an idea. Require everyone to buy a college education or else pay a
penalty in reduced income. Charge vastly different prices according to family
income, creating high implicit tax brackets. Use the overpayments from
high-income families to subsidize underpayments from low-income families. This
way the entire redistribution scheme never appears on any government budget.

Oh, wait... I think we already implemented this idea! It worked so well that we
applied the same concept to health insurance.

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