Lifting the Burden: Law Student Debt as a Barrier to Public Service

A recent Office of Personnel Management Report found that “[t]he student loanrepayment authority is a valuable tool that enables agencies to entice potentialcandidates into Federal service and keep talented employees in the Federalworkforce.” 87 The Report stated that the federal agencies identified lack of fundingfor the loan repayment program as the most common barrier to using the student loanrepayment incentive effectively. 88 The agencies recommended several changes in theFederal student loan repayment program, such as eliminating the tax liability toemployees, reducing the statutory three-year service requirement in exchange forstudent loan repayment, and increasing the annual payment limitation and thelifetime maximum payment limitation on student loan repayment. 89 One Federalofficial noted that although the General Accounting Office offered student loanrepayments to 187 employees, nearly 10% rejected the offer due in part, to theadditional tax burden that results from accepting the loan repayment. 90Making the student loan repayment benefit tax-free will greatly increase itsincentive potential. Furthermore, the ABA should support legislative efforts to reviewthe annual and aggregate caps so that they keep pace with rising educational costs.45Congress should amend the Internal Revenue Code to allow a full deduction forinterest paid on student loans obtained for the purpose of attending an institutionof post-secondary education.Borrowers who paid interest on a student loan may be able to deduct up to $2,500of the interest paid. This deduction is taken as an adjustment to income, so aborrower can claim it even if she does not itemize deductions. The amount of aborrower’s deduction depends upon his income level. If an individual’s modifiedadjusted gross income exceeds $65,000 (or $130,000 for a borrower filing a jointreturn), she may not take a student loan interest deduction.Congress should amend the Internal Revenue Code to allow a full deduction forinterest paid on student loans obtained for attending an institution of post-secondaryeducation, such as law school. With the cost of law school tuition rising, law studentsare borrowing more funds to finance their legal educations. With many law studentsborrowing $80,000 or more in loans, graduates are faced with monthly loan obligationsin excess of $1,000 (this figure may not include loans assumed to finance undergraduateand/or other graduate education). Especially in the years immediately followinggraduation, law students may pay in excess of $10,000 of interest on law school loans.By restoring the full deductibility of student interest loan payments, Congresscould help borrowers reduce the actual cost of repaying money borrowed for lawschool. This restoration will provide a strong incentive for law graduates to acceptlower-paying public service jobs by reducing their taxable income.No legislation to restore the full deduction is pending. However, on March 18,2003, Representative Miller (D-CA) introduced H.R. 1304, which proposes to changethe current student loan tax deduction benefit to a tax credit, which will deliver alarger rebate on the interest paid on student loans to borrowers than is affordedunder current law.Federal87OPM Report to Congress on the Federal Student Loan Repayment Program, supra note 45, 7.88Id. at 6.89Id. at 6.90Quote attributed to David Walker, Comptroller General, in “Few Agencies Repay Student Loan to Keep, HireStaff,” Federal Times, November 11, 2002.