Tax credits aim to help ease sting of student debt, encourage saving

Baubak Azar graduated from the Creighton University School of Medicine in 2011. He's now a family physician in Woodbury. He loves his job, but each month there's a stark reminder of the cost of his education.

"Right now I'm paying about $3,600 a month for my loans," he said.

Azar said his payments are higher than his monthly mortgage. He's got more than seven years left on the student loan repayments. In all he'll pay off around $300,000.

"They just do automatic withdrawal," Azar said. "I get statements every month and I quickly glance at them and file them away because it just makes me upset thinking about how much more I have to pay and the amount I've paid hardly makes a dent."

Minnesotans carry the fifth-highest student debt burden in the country. But a provision in the tax bill awaiting action by Gov. Mark Dayton is aimed at giving debt-laden grads some help. In a bipartisan effort, the Minnesota Legislature included a provision in the tax bill that creates a refundable credit of up $1,000 for individuals paying down qualified student loans.

"Higher ed costs have really gone up and if we could help on the back end, that's great," said state Rep. Greg Davids, R-Preston. "We thought if we put this in place that we might have a better chance of keeping our higher ed graduates in the state."

Rep. Jon Applebaum, DFL-Minnetonka, said the measure uses a formula to help people with large amounts of debt compared to their income. Basically, the credit is figured depending on what they have to pay in debt compared to their gross income. Start with someone making $40,000 a year.

"So 10 percent of their gross income is $4,000, they're paying $5,000 in student loan interest and debt payments per year, with a 50 percent adjustment of that credit, that person would get a $500 tax credit at the end of the year," Applebaum explained.

Those paying more than 10 percent of their income on students loans would be eligible.

The new law would give debtors a tax credit of half of what they pay over that 10 percent in debt and interest. And some might get a bigger break.

People who work in education or public service jobs would have the credit factor from a higher percentage. The credit maxes out at $1,000.

Applebaum said the credit could help about 52,000 people right away with an average credit of $698.

The Legislature also included a way to encourage more people to save for college by giving credits for participation in 529 savings plans.

For a family making less than $80,000 a year, the state tax credit would match 50 percent of what is put into the account each year.

That refundable tax credit maxes out at $500.

"I think people realize that they need more education as they leave high school, either a certificate, two-year degree, four-year degree," said state Sen. Greg Clausen, DFL-Apple Valley, "How to pay for that is a major issue confronting the state and a lot of families."

The percentage match is lower for high-income families. Another measure would give individuals up to $1,500 in tax deductions for contributing for 529 plans.

"I think this is a really good improvement to our approach for dealing with the cost of college because it's going to create an incentive for families to save in 529 plans and because it's a part of paying taxes there's going to be a reminder every year for families that if they save they can actually reduce their taxes," said Paul Cerkvenik, president of the Minnesota Private College Council.

Dayton is expected to act on the tax bill by the end of the week.

Correction (May 26, 2016): An earlier version of this story misspelled the first name of Rep. Jon Applebaum.