Playing politics with student loan interest rates

President Obama and congressional Democrats have leaped on the student loan issue as a partisan talking point, yet it’s looking like the GOP has outflanked them.

At issue is whether new recipients of a particular kind of financial aid for college, called subsidized Stafford loans, will pay twice the rate of interest on loans issued after July 1 as the ones issued now. Congress had passed a law in 2007 gradually reducing the rate from 6.8% to 3.4%, but the law expires in a little more than two months.

On Tuesday, the Senate’s top Democrat, Harry Reid of Nevada, introduced a bill to extend the lower interest rate for one more year. To cover the roughly $6-billion cost, it would -- wait for it -- raise taxes on the wealthy. In particular, it would stop lawyers, architects and other professionals in small firms from avoiding payroll taxes by characterizing some of their income as shared profits instead of salary.

Mitch McConnell, the Republican from Kentucky who is the Senate’s minority leader, responded tartly on the Senate floor Wednesday. “Let’s be honest,” McConnell said. “The only reason Democrats have proposed this particular solution to the problem is to get Republicans to oppose it, to make us cast a vote they think will make us look bad to the voters they need to win the next election.”


It’s hard to argue with him on that point, considering how many fights Senate Democrats have picked with Republicans over tax increases for upper-income Americans. It’s also worth noting that President Obama has spent the week traveling to college campuses and urging Congress not to let the Stafford loan interest rate go up. Those aren’t technically campaign events, but they sure seem like them.

House Republicans responded, predictably, by offering a solution that Democrats won’t like. Specifically, the bill introduced by Rep. Judy Biggert (R-Ill.) would pay for a one-year extension of the lower interest rates by eliminating the Prevention and Public Health Fund created by the 2010 healthcare reform law.

The liberal Think Progress blog tries to cast this move as hypocrisy, noting how the GOP has touted the benefits of preventive healthcare in the past. That’s a stretch -- opposing federal grants isn’t the same as opposing what the grants were designed to support.

More important, Congress has already cut $5 billion from this fund to help pay for this year’s extension of unemployment benefits, reduced payroll taxes and higher fees for Medicare doctors -- with broad support from Democrats. And Obama’s budget proposal this year proposed cutting $4 billion more from the fund by prioritizing investments. So even proponents of the healthcare reform law don’t consider the fund sacrosanct.


Democrats, too, could be accused of bleeding healthcare programs to pay for student loan subsidies. In fact, McConnell has said as much. The Senate student loan bill would offset the cost of the subsidies by bringing in more payroll tax revenue, which technically is dedicated to Medicare and Social Security.

Granted, their bill wouldn’t reduce the amount flowing to the trust funds for Social Security and Medicare -- the point is just to make the numbers add up in the unified federal budget, where revenue into the trust fund counts against spending on other programs. But at a time when the long-term health of Social Security and Medicare is in question, it seems politically foolish to use payroll-tax revenue to offset anything other than the cost of those programs.

The political maneuvering is far from over on the student loan issue, and Democrats are still looking for ways to make the GOP look worse than they do themselves. The next move should come Friday, when the House is slated to vote on Biggert’s bill. House Democrats are pushing an amendment that would replace the cuts in the Prevention and Public Health Fund with -- wait for it -- higher taxes on big oil and gas companies!

Which begs the question, are there only two pages in the Dems’ playbook?

You have to wonder why there’s a fight over this issue at all. Both sides seem committed to keeping the interest rate on subsidized Stafford loans low for another year, and neither is willing to increase the deficit to do so. That’s a pretty good starting point for a compromise. Ultimately, they’ll have to come up with a better mechanism for setting rates so borrowers aren’t constantly wondering about the cost of their next year’s loans. And that might take some work. But a one-year deal should be easy. The fact that it isn’t is just another sign of the dysfunction on Capitol Hill.


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