US Senate Committee on Health, Education, Labor, & Pensions

Reed, Harkin, Brown Seek to Keep Student Interest Rates Low

66 days until student loan rates double

Wednesday, April 25, 2012

WASHINGTON, DC –In an effort to prevent the cost of college loans from doubling for millions of students, U.S. Senators Jack Reed (D-RI), Tom Harkin (D-IA), and Sherrod Brown (D-OH) have teamed up to introduce the Stop the Student Loan Interest Rate Hike Act, a short-term remedy that will freeze the interest rates on subsidized federal Stafford loans for one year. 

The current fixed interest rate on federal Stafford subsidized loans, held by 7.4 million low and middle-income undergraduates, is currently 3.4 percent.  However, the rate is set to double to 6.8 percent on July 1, 2012 (in 66 days) unless Congress takes action.  That could mean an increase of about $1,000 in interest payments for borrowers for every year that Congress delays in fixing the interest rate.

The Stop the Student Loan Interest Rate Hike Act, which is fully paid for, will keep the student loan interest rate from climbing by eliminating a tax loophole that the watchdog agency, the Government Accountability Office (GAO), has determined is a problem that currently allows some shareholder-employees of so-called “S corporations” to avoid paying their fair share of Social Security and Medicare payroll taxes.  

The GAO found that some professionals use the preferential tax structure provided by S corporations to mischaracterize their wages in order to avoid making Social Security and Medicare contributions.  Press reports show that in 2010, former Speaker of the House Newt Gingrich legally exploited this S corporation loophole to avoid paying $69,000 in Medicare taxes.  For 2010, Gingrich reported $444,327 of his earnings as wages from Gingrich Holdings and Gingrich Productions and classified another $2.4 million in profits or dividends.  It was also reported that when former U.S. Senator John Edwards was a trial lawyer in the late 1990s, he used the S corporation loophole as a tax shelter to avoid an estimated $591,000 in Medicare payroll taxes over four years.

The pay-for provision in the Stop the Student Loan Interest Rate Hike Act will apply only to a subset of S corporations.  Additionally, the offset only impacts filers with income over $250,000 (filing jointly) or $200,000 (single filer).

The GAO found that in the 2003 and 2004 tax years, filers used S corporations to under-report over $23 billion in wage income.  The median under-reported amount was $20,127.

“Keeping the student loan interest rates in check and helping families pay for college is a smart investment in America’s global competitiveness.   It is in our national interest to try and keep student loan rates low.  Congress has a July 1st deadline to pass this legislation and help millions of students nationwide.  Both parties must work together to find a fair and rational way of keeping the student loan interest rate in check or answer the question “why is the federal government doubling interest rates?” said Senator Jack Reed.

“With today’s tough economy, especially the high unemployment rate among young Americans, it is unacceptable to ask middle-class students and families to shoulder sharply higher student loan interest payments,” said Senator Tom Harkin, Chairman of the Senate Health, Education, Labor and Pensions Committee.  “We are offering a pragmatic and fiscally responsible solution to this problem by introducing legislation that keeps interest rates low for 7.5 million students.  I hope that, just as we did five years ago when we decided to lower interest rates for students, we can find common ground and enact this legislation with bipartisan support.” 

“Earlier this week, a new report revealed that half of young college graduates are either jobless or underemployed. It’s clear that we need to do more to educate young people for the jobs of the 21st century and connect them with businesses who are looking to hire. Allowing the interest rates on federal student loans to double is a step backwards. American students – and our economy – can’t afford this sucker-punch at a time when we need to be doing more to get our economy back on track,” said Senator Sherrod Brown.

Former Massachusetts Governor Mitt Romney has stated he supports freezing the student interest loans rates.   According to an op-ed in the Boston Herald: “When Mitt Romney became governor in 2003, subchapter S corporations that were owned by Massachusetts business trusts were taxed at 5.3 percent… By the time Romney left office, the tax rate on these corporations had climbed to 9.8 percent, with Romney declaring the tax increase to be merely “closing loopholes.””

The Federal Reserve Bank of New York estimates that about 15 percent of Americans, or 37 million people, have outstanding student loan debt, and roughly two-thirds of student loan debt is held by people under 30.

Since 1985, the cost of a college education has increased by 559 percent.  The increase in college costs have caused the amount of student loan debt held by Americans to spike and for the first time in U.S. history the national student debt burden has surpassed $1 trillion – more than credit card debt.

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