Congressional Digest

    Paying for Student Loan Rate Cuts Is Point of Contention

April 29, 2012
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Approximately 7.4 million students will see their Federal student loan rates double on July 1 if Congress fails to pass legislation to keep rates at the current 3.4 percent. A law passed in 2007 reduced the interest rate on subsidized Stafford Loans to undergraduate students for four academic years. Unless the interest rate break is continued, the average student will pay an additional $1,000 in interest each year.

On his recent visits to universities, President Obama called on Congress to extend the rate cut. Although his presumptive Republican opponent, Mitt Romney, also urged lawmakers to act, the issue has since become a point of contention between the two parties. On April 27, the Republican-led House passed a bill, 215 to 195, that would continue the current interest rate for one year and pay for the extension by eliminating the Prevention and Public Health Fund, a program created under the 2010 health care reform law. The fund provides money for programs to prevent tobacco use, obesity, heart disease, and cancer.

The White House threatened to veto the House-passed bill, issuing a Statement of Administration Policy that read, in part:

“… rather than finding common ground on a way to pay for this critical policy, H.R. 4628 includes an attempt to repeal the Prevention and Public Health Fund, created to help prevent disease, detect it early, and manage conditions before they become severe. Women, in particular, will benefit from this Prevention Fund, which would provide for hundreds of thousands of screenings for breast and cervical cancer. This is a politically-motivated proposal and not the serious response that the problem facing America’s college students deserves.”

In testimony before the House Education and the Workforce Committee the day before the vote, Health and Human Services Secretary Kathleen Sebelius called the prevention fund a “long overdue investment” and said that “failing to invest in long-term strategies that will lower our health care costs will doom future generations to paying higher and higher health bills and getting mediocre results.”

Representative Judy Biggert (IL-R), sponsor of the House-passed bill defended the House action, saying that the prevention program was “nothing more than an open-ended fund that has no clear oversight or purpose.” Representative John Kline (R-MN) agreed, calling it “a slush fund that is provided to the secretary to spend as she sees fit.”

The Congressional Budget Office estimated a savings of $12 billion over 10 years if the fund is repealed. Under the House bill, $6 million would pay for extending the rate cut and the rest would go toward deficit reduction.

In the Senate, Majority Leader Harry Reid (NV-D) has said that he intends to bring up a bill on May 8 that would pay for the one-year student loan rate cut extension by ending a tax break on S corporations ― companies that pass their income, losses, deductions, and credits through to shareholders for Federal tax purposes. Under the proposal, shareholders who are also employees would be subject to Social Security and Medicare payroll taxes on their dividends and shares of the company’s profits in addition to their wages.

An alternative introduced by House Democrats would pay for the extension by ending tax subsidies to oil and gas companies.

Despite the heated rhetoric, it’s likely that the two chambers will come up with a compromise to prevent what would be a politically damaging outcome for both sides in a presidential election year. In addition, the chairmen of both the House and Senate education committees have signaled that they want to use the expected one-year extension to come up with a long-term solution to the larger issue of student loan debt. For more background on this issue, see the November 2009 issue of Congressional Digest on “Federal Student Loans.”

 

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