Both Republicans and Democrats are working hard to fix a flawed Federal student loan system as a July 1 deadline approaches that would see interest rates doubled from 3.4% to 6.8%. The rate was cut in half in 2008 as the recession hit and the increase is a return to its previous level.
But the current interest system is problematic because the rates are fixed and not tied to the market. It’s a difficult balance for legislators to work out a system that’s sensible and cost-effective without being too friendly or too punitive to borrowers, and there’s common ground between Republicans, Democrats and the President on solutions.
As the legislative efforts continue, a bill has been introduced in the Senate to freeze interest rates at 3.4% for 2 years as a solution is forged — but the funding to continue high Federal subsidy for loan interest will come from :
The 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.
Student loan debt, which has topped $1 trillion in the United States, is behond only mortgages for total consumer debt, having outpaced credit card debt and automotive loan debt. Research by FICO Labs showed that the average student loan debt in 2005 was around $17,000, and in 2013 that number grew to over $27,000 for an increase of nearly 60% in 7 years.
The bill would also draw funding from closing a tax loophole in individual retirement accounts. As Sen. Patty Murphy’s (Democrat, Washington State) office explains:
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.