For Middle Class, Student Loan Debt a Powerful Economic Indicator

Published 3rd Oct 2016
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Americans owed nearly $1.2 trillion in student loan debt as of March 2015. That’s trillion with a T.

While that number is massive, student loan debt doesn’t impact all areas of the country equally. It is pervasive, in that there is someone in nearly every neighborhood paying back loans, and yet, it is concentrated among a relative few.

We used our proprietary data set – culled from anonymized public sources – to look at the number of people claiming the student loan interest deduction at the ZIP Code level across all 50 states. The data includes the number of households who filed taxes, the number claiming student loan interest, and how much interest that ZIP Code paid.

This data set provides an important window into middle class student loan burdens. High student loan interest deductions – the deduction maxes out at $2,500 – are indicative of a larger student loan payments, because borrowers typically pay both interest and principal. Student loan interest is not deductible in households making $160,000 per year or more, and its deductibility declines in households with incomes above $80,000. That means that student loan interest could be an important part of the puzzle when analyzing areas with middle class incomes.

Who pays student loans?

So, which areas of the country are hit hardest by student debt? That depends on how you calculate the impact.

There were 168 zip codes in the U.S. – out of more than 36,000 – in which more than half of the filers claimed student loan interest on their taxes. For the most part, these are very small ZIP Codes, concentrated in the northeast. But the percentage of people deducting student loan interest falls fairly rapidly when we get past those 168 zip codes. In the top 10 percent of ZIP Codes, more than 14.6 percent claimed student loan interest.

To put those numbers in perspective, consider that nationally, about 8 percent of filers claimed student loan interest. And in 151 U.S. ZIP Codes, residents reported no student loan interest on their taxes – mostly in small ZIP Codes with lots of older people or retirement communities.

There was no ZIP Code in which the per capita deduction amounted to more than $2,000. The zip code with the highest average student interest deduction? That honor went to the 11371, a tiny zip that includes LaGuardia International Airport and part of Rikers Island. Twelve people filed taxes there, 11 of them claiming student loan interest, with a per capita expense that stood at $1,964

In about 60 zip codes, filers claimed more than $1,000 per year in student loan interest – about 40 of them were in New York, with the rest in New Jersey or Washington, DC.

In general, as incomes rose, so did the size of the student loan income deduction.

The relationship between income and the size of deductions is weak at best. It’s clear that both wealthy and less affluent towns have borrowed for education, but it’s difficult to say definitively that deductions rose with incomes. Of the top ten zip codes with the highest deduction, only two had household incomes above $100,000 and only three had incomes between $50,000 and $100,000.

A tale of two zip codes

In the heart of Silicon Valley, Palo Alto’s ZIP Code – 94301 — had one of the country’s highest average household incomes at $1.9 million. Residents there collectively paid about $436,000 in student loan interest in 2015. But breaking this down, we can see that the loans fell to a relatively small sliver of residents. Out of 8,600 tax returns filed in this ZIP Code, just 400, or 4 percent, claimed student loan interest deduction. The average burden for people paying student loan interest in Palo Alto was about $1,055.

But Silicon Valley’s seemingly low rate of student loan interest deductions is likely in line with the rest of the country.

That burden looks a lot similar to the one borne by residents of the 48212 ZIP Code near Detroit, Michigan, where about 583 people – out of nearly 13,000 – claimed $546,000 in student interest. That amounted to a $937 deduction for every filer who claimed student loan interest. There’s just one big difference between Silicon Valley and Detroit – income. Household income in Wayne County, while not the lowest, was far below that of our nation’s tech capital. Workers in 48212 brought home an average of $19,300 for every household.

Because of the income-based exclusions on claiming student loan deductions and because filers’ neighbors tend to have similar incomes, this ZIP Code-level data set is an extremely powerful tool to evaluate the finances of middle class borrowers and their neighborhoods. It would be useful to policy makers and lenders, and there might be applications in other industries. Retailers working on site selection, for example, might be able to use it to learn where incomes are most squeezed by student loan debt.

Powerlytics also offers this and other data sets at an extremely granular level – down to ZIP+4 level, giving decision makers and analysts accurate information in matters ranging from health to wealth.

Average Student Loan Interest Deduction by State