WASHINGTON, DC –  In an effort to protect taxpayers and shield college students from a sharp increase in federal Stafford loan interest rates, U.S. Senators Jack Reed (D-RI) and Tom Harkin (D-IA), who chairs the Senate Health, Education, Labor, and Pensions (HELP) Committee, along with Majority Leader Harry Reid (D-NV), are introducing a fully paid for bill to ensure student loan interest rates for more than 7 million undergraduate students do not dramatically increase this year. 

The current fixed interest rate on Stafford federal subsidized loans is 3.4 percent, but that rate will double to 6.8 percent on July 1, 2013 unless Congress takes action.  However, Congress is not expected to begin consideration of the reauthorization of the Higher Education Act, the primary law governing federal investment in higher education, until after the “doubling” deadline. 

The Reed-Harkin Student Loan Affordability Act of 2013 (S. 953) would freeze need-based student loan interest rates for two years while Congress works on a long-term solution to slow the rapid accumulation of student-loan debt, and is fully paid for by closing three egregious tax loopholes.  Specifically, the bill would: limit the use of tax-deferred retirement accounts as a complicated estate planning tool; close a corporate offshore tax loophole by restricting “earnings stripping” by expatriated entities; and close an oil and gas industry tax loophole by treating oil from tar sands the same as other petroleum products.

“This is an issue of fairness.  Instead of raising interest rates on families struggling to pay for college, Congress should close costly, special interest tax loopholes.  This legislation will protect taxpayers and keep student loan interest rates  affordable while ending wasteful subsidies for oil companies and reducing the amount of taxes lost to tax havens,” said Reed.  “A college education is an important investment in individuals and our nation’s future economic competitiveness.  The Student Loan Affordability Act is a fiscally responsible way to keep interest rates low and give Congress time to work on a bipartisan, long-term fix.”

“Today we have introduced a responsible solution to keep student loan rates affordable for middle-class students and families struggling to afford college.  Unless we act quickly, more than 7 million students, including 250,000 attending Iowa colleges and universities, will see their rates double on July 1.  With less than seven weeks left until the deadline, this two-year extension is the most viable way forward to protect students and fully pay for it,” said Harkin, who is Chairman of the Senate HELP Committee. “Unlike some proposals that would extract billions more from students by charging them higher interest rates or make them vulnerable to sky-high interest rates in the future, this legislation will help ensure that college remains within reach for students who rely on federal loans to pay for their education.  This bill will allow us to engage in a careful and thoughtful way on student loans in the context of the reauthorization of the Higher Education Act.  I believe we need to continue to work in a bipartisan way to maintain, not increase, student loan rates—and preserve our historical commitment to protecting students from outrageous interest rates.”

The rising tide of total student debt, which has crested above $1 trillion for the first time in our nation’s history, has passed credit cards and auto loans to become the second-largest type of consumer debt behind mortgages.  Research by FICO Labs found that in 2005 the average student loan debt was just over $17,000.  In 2012 it rose above $27,250 – a 58% increase in just seven years.

The ballooning student debt rate is creating a drag on the U.S. economy.  As student loan debt has risen, home ownership and car ownership have declined for young households.  Keeping the cost of borrowing low will help reduce the amount students owe and help give them purchasing power that can improve our overall economy.

Earlier this month, Senator Reed introduced a long-term legislative solution, the Responsible Student Loan Solutions Act of 2013, to overhaul the mechanism for setting interest rates on certain federal student loans.  Instead of setting a numerical rate in law, which may quickly become out of sync with economic conditions, the Responsible Student Loan Solution Act would determine interest rates based on the actual costs of operating the student loan programs.  This will help ensure students will benefit from the lowest interest rate the federal government can offer, while also ensuring the program covers its costs.

Late last night, the Senate began the “Rule 14” process of placing the Reed-Harkin Student Loan Affordability Act directly on the calendar to expedite consideration of the bill.

SUMMARY: The Reed-Harkin Student Loan Affordability Act of 2013

The bill would extend and fully pay for an additional two years of the current 3.4 percent interest rate on subsidized Federal Direct Stafford Loans, which is set to double on July 1st by closing several tax loopholes:

Closing a Loophole for Tax-Deferred Accounts: Under current law, holders of IRAs and 401(k)-type accounts are required to begin taking taxable distributions from those accounts once they reach age 70-1/2.  However, a loophole in the tax law allows taxpayers to stretch those distributions over many years if they leave their account to a very young beneficiary.  When the account holder dies, the taxation of the account is then delayed as it is spread over the life of the beneficiary.  The Student Loan Affordability Act would require the retirement savings accounts to be distributed within five years of the death of the account holder, unless the beneficiary is within ten years of the account holder’s age, an individual with special needs or disabled, a minor, or the account holder’s spouse.  This provision saves taxpayers approximately $4.6 billion over ten years.

Closing an Oil Industry Tax Loophole: The Student Loan Affordability Act eliminates a special tax loophole now enjoyed by the oil industry.  Specifically, the Act would include oil from tar sands among the petroleum products that are subject to taxes that support the oil spill liability trust fund.  In 2011, the IRS determined that the definition of crude oil for purposes of the oil spill liability trust fund does not include tar sands or oil sands.  Yet there is no good reason for this special exclusion.  Tar sands are refined using the same processes as those used in the refining of crude oil, and oil spill liability trust fund revenues are used to clean up oil spills from oil derived from tar and oil sands.  No distinction exists between finished products refined from crude oil or those refined from tar sands.  This provision saves taxpayers approximately $1.3 billion over ten years.

Closing a Loophole for non-U.S. Companies: Under current law, opportunities are available to inappropriately reduce the U.S. tax on income earned from U.S. operations through the use of foreign related-party debt.  In its 2007 study of earnings stripping, the Treasury Department found strong evidence of the use of such techniques by expatriated entities.  The Student Loan Affordability Act would tighten the limitation on the deductibility of interest paid by an expatriated entity to related persons.  The current law debt-to-equity safe harbor would be eliminated and the 50 percent adjusted taxable income limit that applies to net interest deductions would be reduced to 25 percent.  In addition, the carryforward for disallowed interest would be limited to ten years, and the carryforward of excess limitation would be eliminated.  This provision saves taxpayers approximately $2.7 billion over ten years.

In addition to Majority Leader Reid, the Reed-Harkin bill currently has 9 other cosponsors, including: U.S. Senators Dick Durbin (D-IL), Chuck Schumer (D-NY), Patty Murray (D-WA), John Rockefeller (D-WV), Tammy Baldwin (D-WI), Al Franken (D-MN), Sherrod Brown (D-OH), Christopher Murphy (D-CT), and Kirsten Gillibrand (D-NY).