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Good riddance to the 'useless' student loan tax break

  • The GOP tax reform plan eliminates the student loan interest tax deduction.
  • That deduction never proved to have any positive effect.
  • But it did fuel tuition inflation, and that's the best reason to give it the ax.
Students walk to class at the University of Colorado in Boulder.
David A. Grogan | CNBC

There's been much anger in response to Thursday's revelation that the GOP tax reform plan would eliminate the tax deduction for student loan interest.

But before anyone grabs their protest signs and megaphones, let's look closer at what this means.

On its face, the tax deduction on student loan interest supposedly makes college costs more affordable and thus increases access to the American educational dream.

One problem: It doesn't.

An extensive study of the deduction published in 2015 and touted by the Tax Foundation showed that the deduction had no significant impact on college attendance.

Worse, the deduction is just one of a slew of increased government subsidies and programs that have contributed to tuition inflation in recent years. After all, these colleges aren't stupid. When they hear about tax breaks and loans, etc. they use that news as an excuse to jack up tuition.

And jack it up they do. According to a study by CNBC, the cost of college tuition has risen by six times more than the rate of inflation since the 1970s.

This isn't the first attempt to reverse this trend made by the Republicans or the Trump team. In May, the White House presented a plan to eliminate a program that subsidizes loans for low-income students by having the government pay the interest on their loans while they're still in school.

To many, it looked like the White House was trying to take something away from poorer people. But in reality, what this does is take away the ability of schools to continue using the poor to grab taxpayer money. Remember, all this program does is pay the interest. Colleges can keep jacking up the cost of tuition, which is the loan principal, all they want.

The student loan tax deduction basically does the same thing. It's just another enabler for tuition inflation. And since it doesn't increase the number of Americans entering school in the first place, good riddance to this useless deduction.

Of course, none of this will do much for students and families unless colleges start bringing prices down. Making that happen will probably include more radical changes to the tax code like eliminating the tax free growth of college endowments unless they keep tuition inflation in check. That's something Republican Senator Charles Grassley of Iowa has been pushing for years.

Another idea is to force tuition reductions by putting colleges on the hook for 50 percent worth of all education loan defaults from their former students.

On their own, the colleges can start to help students by reducing some of the massive amounts of money they're spending on hiring new administrators at high salaries. According to the Department of Education data, administrative positions at colleges and universities grew by 60 percent between 1993 and 2009. There are better uses for that money. One would be to set up emergency grants and aid for existing students who may not have been eligible for financial aid when they started school, but face new financial issues as time goes on. That kind of unexpected financial challenge a year or two into college is a big reason why so many students are forced to drop out. Administrative bloat is the place to start.

Surely America's universities are run by enough smart people to know that halting their own spending sprees will hurt a lot less than losing some of their permanent tax breaks.

Perhaps those ideas will get more traction now that at least the congressional GOP and the White House seem to get how the colleges are gaming the tax system to get rich off of students and their parents.

But this is another good early step to burst the government-aided tuition bubble. And the only way to keep this going is to make it clear that getting more Americans an education does not mean the cost of that education has to rise so high. Instead of making it easier for families to pay for ever-rising college costs, Washington should start figuring out how to reduce those costs in the first place.

With this GOP tax plan, it just made progress.

Commentary by Jake Novak, CNBC.com senior columnist. Follow him on Twitter @jakejakeny.

For more insight from CNBC contributors, follow @CNBCopinion on Twitter.