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What if you could pay higher taxes for the rest of your life in exchange for $0 in student loan debt immediately? We posed that exact question to over 1,100 student loan borrowers from the Student Loan Planner® community in October 2019. About 70% of these borrowers owed over $100,000, so the results from this survey would reflect the feelings of borrowers with six-figure balances.
Nearly 60% of the respondents said they would prefer paying a tax for the rest of their lives over having student loan debt now.
The results of this survey suggest what the future of student loan reform could look like in America.
What tax would borrowers pay in exchange for no student loan debt?
It’s one thing to say that you’d accept a tax, but what tax rate would you accept?
We asked 1,105 borrowers this question. We excluded respondents who said they would not agree to pay a tax for loan forgiveness.
The average tax rate that borrowers said they would pay: 15.6%.
Republicans have proposed a tax on borrowers before
In 2017, Republicans controlled the House of Representatives. They proposed a plan called called the Prosper Act that would require borrowers to pay 15% of their income.
That “tax” would last until you had paid back the amount of principal with interest, however long that would take.
That’s essentially a lifetime tax in exchange for providing student loans, with the ability to opt out of the system by paying back the debt.
Many borrowers with large balances and low incomes would have had to pay back their loans for their entire lives.
The upside? There would be no additional tax on any forgiven loan balance.
Does political party influence people's willingness to pay taxes for loan forgiveness?
We found that Democrats were far more likely than Republicans to support personally paying higher taxes in exchange for immediate student loan forgiveness.
Independents were in favor of the idea but not by a huge margin.
| Would you pay more taxes to have loans forgiven now? | Democrat | Republican | Independent |
|---|---|---|---|
| Yes | 71% | 31% | 56% |
| No | 29% | 69% | 44% |
| Number in sample | 619 | 244 | 240 |
This result makes sense, as Republicans tend to oppose taxes more than Democrats do.
Tax rates borrowers would pay are similar regardless of political party affiliation
The table below excludes borrowers who said they would not want to pay any tax in exchange for loan forgiveness.
If you only include borrowers who would pay a tax for loan forgiveness, the average tax borrowers said they would pay was strikingly similar across party lines.
| Political party | Percent tax |
|---|---|
| Democrat | 16.5% |
| Republican | 15.8% |
| Independent | 14.6% |
About 15%, or the percent borrowers pay under income-based repayment (IBR), seems to be the average tax high-debt borrowers would pay.
Once borrowers owe at least $50,000, paying a 15% tax seems more attractive
Of the borrowers who said they’d pay a tax for loan forgiveness, here’s the average tax rate they said they would pay, sorted by the amount of student debt they owe.
| Student debt owed | Minimum tax borrowers would pay for no student loans | Sample size |
|---|---|---|
| $1 to $30,000 | 14.1% | 30 |
| $30,001 to $50,000 | 11.8% | 40 |
| $50,001 to $100,000 | 14.4% | 139 |
| $100,001 to $200,000 | 15.0% | 273 |
| $200,001 to $400,000 | 15.5% | 302 |
| Over $400,000 | 21.7% | 102 |
Perhaps there are too few borrowers in the “below $50,000” category to make a judgment, but once borrowers owed a high five-figure amount, the maximum tax they’d pay on average was very similar to those who owed a low six-figure amount.
Once a borrower owed more than $400,000, they said they would pay a 21.7% tax on average for student loan forgiveness.
That makes sense as these high-debt borrowers would, in some cases, be in deep financial distress without loan forgiveness.
This finding suggests that the average income tax borrowers would pay for loan forgiveness does not depend greatly on the amount borrowed once the total debt exceeds $50,000.
Paying extra taxes for student loan forgiveness already exists, but few people understand it
We already have a system that gives borrowers the option to have their loans forgiven in exchange for higher income tax payments.
The Pay As You Earn (PAYE) plan, for example, allows borrowers to pay 10% of their income for 20 years in exchange for student loan forgiveness. Additional taxes are due on the forgiven loan amount at the end of that 20-year period, however.
Of course, you can save for that “tax bomb” over time with regular contributions to an investment account.
Once you do the math, that works out to an additional 5% to 10% of your income that you would need to put away for student loan forgiveness. That contribution is not required, though, and many borrowers are not contributing this amount in preparation of that tax bill.
Because of this financial burden, future borrowers will need to be bailed out anyway as few will have the ability to pay six figures in income taxes for a forgiven student loan balance.
Current student loan reform proposals would attract more borrowers who pay their debt as a tax
Many Senate Democrats, House Democrats and Senate Republicans have suggested opening up the terms of the PAYE plan to all borrowers.
In these proposals, you would pay 10% of your income for 20 years, but there would be no tax on forgiven student loan amounts.
If you set the payment length of forgiveness at 20 years and the income tax rate at 10%, many borrowers would opt for the 20-year forgiveness “tax” instead of paying back their loans directly.
That’s especially true based on these survey findings, as borrowers on average would pay 15% of income forever instead of 10% of income for 20 years.
So, any future student loan reform that allows for 10% of income as the payment amount with no tax consequence is likely to have an enormous unanticipated cost long term.
Vice President Joe Biden suggested having borrowers pay 5% of their income in his student loan plan for 2020.
These survey results suggest that the government would be paying much of the cost because many borrowers would view the tax option as a more attractive alternative to paying back their loans directly.
What tax rate would be too high for student loan forgiveness?
If Congress set terms of repayment at 20% of income, many borrowers would opt to pay back their loans instead.
The current Income Contingent Repayment (ICR) plan has existed for many years without very many borrowers signing up in comparison to the other, more generous options. That’s because ICR is 20% of your income.
Only 700,000 borrowers use the ICR plan, while about 2.8 million each use IBR and REPAYE, and about 1.4 million use the PAYE plan, according to the Department of Education.
The only logical use of the plan is for the Parent PLUS loan program because ICR is the only income-driven option allowed.
So, 20% of your income as a tax forever would be so high that most borrowers would opt to pay back their debt instead.
Why the future of student loan reform could be a battle over tax rates
The average borrower would pay 15% of their income in exchange for no student loans. Borrowers would, of course, like to pay as little as possible, however.
Eliminating the tax consequences of student loan forgiveness is likely a good policy move as many borrowers will not be able to make that lump-sum income tax payment after 20 to 25 years. With that in mind, candidates running for president in 2020 have outlined various student loan reform proposals to try to appeal to voters who have student loan debt:
- Senator Bernie Sanders has suggested eliminating student loans, a plan he would fund via a wealth tax.
- Senator Elizabeth Warren has suggested loan forgiveness limited to lower-earning families.
- Senate Republicans have suggested taxing borrowers on 10% of income for 20 years.
- House Republicans proposed 15% of income as a tax in exchange for giving borrowers federal student loans.
Student loan reform proposals have all made student loans payable more as a direct tax rather than the indirect tax we currently have.
Here are three probable scenarios policymakers will need to choose from:
- Do borrowers pay the tax burden themselves? If yes, that tax would need to be 15% or greater.
- If you set the tax at 10%, as many bipartisan proposals have suggested, then the student loan program will require revenue subsidies from the government to function. Presumably that money would come from cutting programs, borrowing more, or increasing taxes.
- If you forgive student loans in part or in full, tax rates for high-income earners or possibly all taxpayers would need to be increased.
Scenario No. 2 seems the most likely. Most proposals, however, do not project how many borrowers will rationally opt for a 10%, 20-year tax without a cap on the amount of federal loans one can borrow.
Borrowers would prefer an easy-to-understand income tax add-on instead of a tax bomb
The current percent of income for IDR — 10% of income — is affordable for most borrowers. The tax on forgiven debt, however, is extremely confusing and anxiety inducing.
Creating a 15% income tax with no taxes on forgiven student loan debt would likely have a neutral cost as many borrowers would opt to pay their debt back instead.
Setting the tax higher than that rate would likely create a profit for the government, and setting the tax lower than 15% would likely increase the cost of forgiveness.
What do you think a fair tax would be for student loan forgiveness? Comment below.
Methodology
We surveyed 1,254 high-earning student loan borrowers from the Student Loan Planner® email list, 96% of which are registered voters, on their thoughts about the upcoming election. Sixty-four percent (64%) of respondents identify as female, 35% as male, and another 1% identify as non-binary or prefer not to say. Sixty (60%) percent of borrowers owe between $100,000 and $400,000 in student loan debt.
