Student Loan Bill Caught in a Web of Politics
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The Fiscal Times
May 9, 2012

Senate Republicans on Tuesday blocked Democrats from acting on a bill aimed at preventing a doubling of interest rates on federal student loans this summer. While both sides and the Obama administration insist they favor legislation that would spare millions of students and graduates a huge boost in their college debt, a festering feud over how to offset cost of holding the interest rate at 3.4 percent is threatening to scuttle the efforts.

The Senate voted 52 to 45 along party lines to move ahead with the legislation, but the majority Democrats came up eight votes shy of the  60-vote super majority  needed to proceed with debate and a final vote. “The very last thing our students right now need is for interest on this critical loan program to double,” said Sen. Patty Murray, D-Wash., a chief sponsor of the legislation. “We cannot afford to allow that to happen. At a time when mortgage rates are under 4 percent, we should be doing everything possible to keep interest rates low for students today.”

House Republicans on April 27 passed a version that would cut into preventive care funds for women and children in the Obama health care reform program to offset the projected $7 billion of income the Treasury would forego if the interest rate on Stafford student loans remained the same for another year instead of shooting up to 6.8 percent. Obama threatened to veto that legislation. Senate Democrats are proposing to offset the cost of holding the interest rate steady by closing a tax loophole used by some wealthy individuals to avoid Medicare payroll taxes.

The election year dispute highlights a major philosophical and political divide between the two parties, with Democrats insisting that wealthier Americans be required to pay more in taxes to cover necessary spending and to help reduce the deficit, while Republicans insist that any tax increase would hurt the economic recovery  and should be avoided at all costs.

Professionals such as  lawyers and doctors can avoid payroll taxes by first organizing their business as an S-corporation under the federal tax code and then characterizing most of their income as business profits rather than as wages or salaries. The U.S. Treasury’s inspector general for tax enforcement once called this  a “multibillion dollar employment tax shelter.”

Democrats say that repealing the loophole  would do little harm other than forcing wealthy people  --  including former Republican House Speaker Newt Gingrich and disgraced  former Democratic senator John Edwards of North Carolina -- to meet their full tax obligation. “This is so obviously a wrong-headed loophole,”  Sen. Al Franken, D-Minn., said during a debate today before  the vote. “It’s a loophole that  I don’t think anyone can really defend."

Washington Editor and D.C. Bureau Chief Eric Pianin is a veteran journalist who has covered the federal government, congressional budget and tax issues, and national politics. He spent over 25 years at The Washington Post.