Full-Court Press to Extend 3.4% Interest Rate for Subsidized Loans

Republicans and Democrats have both agreed to provide one-year extension to the 3.4 percent interest rate on subsidized Stafford loans; now they have until July 1 to agree on a way to pay for it.

This week, President Obama and House and Senate Democrats launched a full-court press to delay the scheduled doubling of the interest rate. Obama spoke at campuses across the country, appeared on national television and promoted the Twitter hashtag, #DontDoubleMyRate. Presumed Republican nominee Mitt Romney also unexpectedly came out in support of the extension this week.  The support of both candidates prompted swift action on Capitol Hill.

  

Tuesday, Senate Democrats introduced a bill (S.2343) that would amend tax law by closing a small business tax loophole for some shareholder-employees of S Corporations to cover the cost of extending the 3.4 percent rate. On Wednesday, the Republicans unveiled a plan to keep the subsidized Stafford Loan interest rate at 3.4 percent for one additional year by repealing the Prevention and Public Health Fund, a disease prevention fund created by the Affordable Care Act.

Unless Congress acts, the interest rate on subsidized Stafford loans will double from 3.4 percent to 6.8 percent on July 1. In 2007, Democrats in Congress wanted to relieve some of the burden on student loan debt and enacted the College Cost Reduction and Access Act (CCRAA), which phased in cuts to the fixed interest rates on newly originated subsidized Stafford loans for undergraduate students -- from 6 percent in 2008-09, to 5.6 percent in 2009-10, 4.5 percent in 2010-11 and 3.4 percent in 2011-12. Democrats initially wanted to reduce interest rates on all federal student loans, but the phased-in cuts to subsidized loans allowed Congress to provide some relief and remain budget neutral with the savings created by the cuts to lender subsidies.

In his State of the Union Address in January, Obama called for Congress to extend the reduced 3.4 percent interest rate for another year. The Congressional Budget Office (CBO) estimates this one-year extension would cost $6 billion, but without targeted savings in the FY 2012 budget to cover the cost, members of Congress have been looking elsewhere for cuts to shore up the funds.

The Democratic Senate bill would eliminate tax benefits for some small businesses that file their taxes as so-called "S corporations," which Democrats say allows "wealthy, self-employed lawyers and lobbyists to slash their tax liability." Current law states that S Corporations avoid paying corporate taxes by passing on earnings to shareholders who report the income on their taxes, however if the shareholder is an employee they can report the earnings as profit rather than wages, evading payroll taxes.

The Republican proposal would pay for the interest rate extension by repealing the Prevention and Public Health Fund in the Affordable Care Act. The fund provides for an "expanded and sustained national investment in prevention and public health programs (over the FY 2008 level)" to support programs authorized by the Public Health Service Act,  including prevention research and health screenings, such as community grant programs, outreach campaigns and immunization programs.

Both plans would raise $6 billion over a 10-year period to fund the one-year extension. The bills are expected to see movement in their respective chambers as early as today.

NASFAA has advocated heavily against funding the one-year extension through cuts to other student aid programs, and is pleased to see that the proposed offsets come from areas outside education.

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