Comparing costs

By Anna Landsverk

    In an atmosphere fraught with change, many news outlets are scrambling to cover the most recent developments.

    However, the long-term realities and plans of the Trump administration are just as important. Trump is working to deliver more of his campaign promises, and his financial policies will directly impact students across the country.

    An expected financial shift is in tax policy, which affects all Americans. On the campaign trail, Trump called for a major simplification of the tax code for families and businesses, and with them, significant tax cuts for almost every income bracket. While Trump proposed more than just tax cuts, MSUM political science professor Dr. Barbara Headrick, believes the tax cuts would be passed the quickest and relatively soon.

    “I think tax cuts are a focus that (Trump) and the Republicans agree with, so that’ll be an easy area of agreement,” Headrick said. “I think that there will be a tax cut sometime this year. Whether they wrap it with other activities or not, or just do a tax cut bill separate by itself, it depends on how much the House and the Senate and the president agree.”

    The reduction of tax code restrictions, however, will not be nearly as fast of a process. Trump’s campaign speeches suggest he wants to cut the number of brackets for income tax, as well as reduce itemized deductions in favor of increasing standard deductions.

    “Right now we have seven tax brackets. And in very general terms, he’s talking about going down to three,” MSUM accounting professor Kim Mollberg said. “Another thing that he’s talking about is increasing what’s called the ‘standard deduction’ from, let’s say for a single person, from roughly $6,000 up to $15,000. He’s talking about taking away most deductions, personal deductions, except the charitable contributiondeduction and the home mortgage interest deduction.”

    This means that instead of trying to itemize, or add up individual tax deductions to get a bigger refund (which students typically don’t do), students can get a set percentage deduction based on their income without having to complete any paperwork or meet any requirements.

    One result of this plan is a substantial simplification of the tax filing process. Mollberg has a part-time CPA practice, and in his professional readings, he has heard that the IRS might be able to do simple tax returns for people with little to no involvement.

    “If you use the standard deduction, the IRS can calculate your tax, send you your refund or tell you what you owe, and you don’t have to get involved in the filing process. That’s one thing that they’re talking about with simplification,” Mollberg said. “Many individuals may be in a situation where they’ll just get a bill or a check in the mail from the IRS.”

    The other major component of cutting brackets and itemized deductions is that many people will get bigger refunds or owe smaller amounts without having to do as much paperwork.

    “I think people are going to get refunds,” Mollberg said. “I don’t know how it’s all going to get paid for. But I think—what I’ve seen—people are going to have more disposable income, students included, if they have a bigger standard deduction.”
Mollberg explained that removing all but two deductions from the tax code would remove a $4,000 education deduction, as well as a $4,050 dependency deduction parents get while paying for over 50 percent of their child’s expenses.

    “But,” Mollberg said, “the kids still get a standard deduction under the current law. So if this new law comes through, the students will have a big standard deduction and in a lot of cases pay less.”

    Even with most deductions removed, there would still be two tax credits in place: the American Opportunity tax credit and the Lifetime Learning tax credit.

    Another indirect effect of simplifying the tax system that has universities worried is the elimination of tax deductions for large donors to non-profits. Since both public and private colleges and universities rely heavily on donor support, it is a major concern that those donors would no longer receive cushy tax deductions for their generosity.

    Besides tax law, there are many other financial changes that could impact students. These range from the very direct effects of student loan interest rates to more indirect consequences, such as corporate tax holidays and international import taxes.

    Last year on the campaign trail, Trump suggested increasing student loan forgiveness programs in the face of unusual public-to-private interest rate ratios.

    “During one of (Trump’s) rallies, he highlighted some proposals regarding the student loan plan,” Mollberg said. “Government would cap payments at 12.5 percent of the borrower’s income and if the borrower keeps up with the payments for 15 years, they would forgive the remaining loan balance.”

    This contrasts with existing loan forgiveness programs that offer forgiveness after 20–25 years of on-time payments.

    Trump, according to Mollberg, also seems to be unhappy with the state of student loan interest rates, which have been exceedingly high in recent years.

    “One thing with respect to student loans that he didn’t really like is that it’s a very profitable business for the federal government; the rates they charge aren’t real low,” Mollberg said.

    Headrick agreed, citing that many students are now turning to private lenders when traditionally, government loan interest rates have been far below the corporate banking average.

    “The interest rate for student loans should’ve been really low for the last several years,” Headrick said, referencing the Federal Reserve’s drastic cut of interest rates following the Great Recession. “In fact, some students got private loans instead, or used private loans to pay off the higher rate—they got a lower rate from the private loan and did it that way.”

    Trump’s solution would likely lean towards increasing privatization of student loans, instead of pushing government agencies to reduce the current interest rates.
However, Headrick is unsure that student loans will be particularly high on the president’s very full to-do list, given he did not emphasize student loans as much on the campaign trail as other issues.

    “It certainly doesn’t look like that’s a priority. I don’t think they’re going to add a lot of money to loan forgiveness programs or Pell grants or anything else—I don’t think you’re going to see added money—but again that’s budgeting questions, which they’re trying to put together, which they don’t have to finish until October first,” Headrick said. “We’ll have to see how that fits in with everything else; there’s going to be a lot of arguments about what gets cut and what doesn’t get cut.”

    If the Trump administration does decide to allow greater privatization, it could make interest rates for student loans as volatile as other private lender interest rates.

    “I think if we go to privatization, you won’t have the government option anymore. The free market system will kind of eliminate it—because the government keeps the private people maybe in check a little bit,” Mollberg said. “Their rate is kind of geared as, ‘Well we’ll give you a better rate than the government will.’ Well if the government gets out of the business, they can go wherever.”

    Beyond direct tax and loan changes, Trump is also working to change the economic climate of the United States through several large-scale actions. The goal of these actions is to free up more capital for businesses so they can continue to expand and spend money in the U.S., hopefully providing more jobs and opportunities to Americans.

    In order to do this, Trump has proposed a plan beyond slashing corporate and individual tax rates: a tax holiday for businesses. The tax holiday would offer a one-time opportunity for businesses to bring money they are holding in subsidiary companies outside the U.S. back in, tax-free, in order to be used here at home. That way, U.S. global corporations are given the chance to bring funds from their foreign branches in without the normal penalty of high tax rates.

    A second often-discussed plan is Trump’s proposed import tax on countries like China, where many American companies source cheap products from. This would drive up prices for consumers.

    “I know from some of the stuff that I’ve read that Wal-Mart is very concerned that prices are going to go up, and what impact is that going to have on them,” Mollberg said. “I mean it’s going to have an impact on all of us.”

    Some economists argue this could mean consumers trade income tax for sales tax and increased prices from the import tax. For some, this could result in more money in their pockets.

    But, since students and recent graduates typically make very little money and rely on cheap products (think ramen noodles) to get by, it could disproportionately affect students and other low-income populations.

    For students with thousands of dollars in student loans, the issues are more important than they may think, and will make a big impact on what they owe down the road.

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