Thursday, May 10, 2012
Student Loan Interest Rates
Mr. REED. Mr. President, unless we act quickly, students across the country will face the largest increase of subsidized student loan interest rates in more than 40 years. In the last 40 years, the interest rates on subsidized student loans have never doubled from one year to the next. Yet that is what is happening unless we act before July 1--just 52 days from now.
Unless my colleagues on the other side of the aisle relent and allow legislation to fix this problem to come to a vote, we will see a doubling of the student loan interest rate from 3.4 percent to 6.8 percent for all borrowing going forward for education in the United States related to the subsidized Stafford loan program. I know the Presiding Officer of the Senate, Senator Brown of Ohio, has been taking an active leadership role on this front, along with Senator Harkin, to ensure we can move effectively to prevent this doubling of the interest rate.
We are now in a time where, if you look across the financial industry, borrowing rates are at historical lows. We are essentially providing banks, through the Federal Reserve, with near zero percent interest loans. So it is incomprehensible that at this time, we would actually double the loan rates we would charge students who are going to college. Students and families cannot absorb these increases. It is a tough economy, and they are facing rising tuition and dwindling State support for higher education, making it more difficult and more complicated. To add to their burden by doubling this loan rate is bad public policy.
This will not only directly affect middle-income Americans, but in the longer run, it will affect the competitiveness, the productivity, and the success of our economy in a very competitive global economy.
We have to ensure also that we are not piling more and more debt on students. We have reached a point where student debt is becoming so extraordinarily difficult to bear that it inhibits people from going to school and it inhibits them from pursuing various professions after they graduate from college. If we add to this mountain of debt, we will create a huge financial problem going forward not just for the individual borrowers, the student borrowers, but for our economy.
According to Georgetown University's Center on Education and the Workforce, over 60 percent of jobs going forward will require some postsecondary education by 2018.
That underscores the essential need to go to college. In 2010, only 38.3 percent of working-age adults had a 2-year or 4-year degree. So we are looking at a gap of the prepared individuals with a college education versus those jobs in the not-too-distant future that will require a college education. In order to fill that gap, we have to get more and more young people into school, into higher education and beyond, and by doubling the rate we will not be achieving that goal and that objective.
That is why I introduced the Student Loan Affordability Act in January to permanently keep the interest rate low, and that is why I was joined by Senator Brown of Ohio and Senator Harkin and many others, to step up and to make it quite clear that we cannot afford--for our country's sake and for the sake of many working-class families across the country--to double this rate.
We should be debating today the Stop the Student Loan Interest Rate Hike Act. This is a fully paid-for 1-year extension of the current rate, to extend it for a year so we can look for a more permanent fix. My colleagues on the other side of the aisle insist they agree that we have to do this, yet they continue to filibuster this legislation. They continue to prevent us from bringing it to a vote. It is clear they have an alternative view in terms of how we pay for it. Well, let's put that to a vote, but let's not stop dead in its tracks a policy that both sides claim has to be fixed and that we have to avoid the doubling of this interest rate.
What we have done is propose to fix this problem and pay for it in a fiscally responsible manner by closing a glaring, egregious loophole in the Tax Code that enables certain wealthy individuals to shirk their responsibility to pay payroll taxes. This loophole predominantly benefits professional service providers such as accountants, lobbyists, and lawyers who derive all of their income from their professional labor. But because they choose to mischaracterize their income as a distribution from a subchapter S corporation instead of wages, they avoid paying payroll taxes.
In 2005, the Treasury Inspector General for Tax Administration issued an audit report calling for action on this loophole which was described as a ``multibillion dollar tax shelter.''
The report also described a disturbing trend of businesses changing their status to the subchapter S corporation for the purpose of avoiding payroll taxes--not for the purposes of expanding employment, not for the purposes of a new or more efficient way to use capital, but essentially a tax dodge to avoid payroll taxes.
The inspector general reported:
In fact, advising small businesses to shelter earnings from self-employment taxes through the formation of S corporations has become a cottage industry. A search of the Internet yields multiple sites that offer advice, assistance, and encouragement to sole proprietors to convince them to become S corporations. The sole proprietors are advised that they can save thousands of dollars a year in employment taxes simply by incorporating. It is also possible on the Internet to gauge the size of the savings using computer-generated savings amounts based on the user's entries for anticipated profits and chosen salary levels. Not surprisingly, the lower the salary chosen, the higher the savings become, reaching maximum savings at a salary level of $0.
Essentially what is being done in these professional corporations--or at least professional partnerships, these professional associations--is that they have glommed onto a very clever tax shelter. You incorporate as a subchapter S; you have your employer pay the subchapter S corporation; that subchapter S corporation pays you a modest minimal salary, and the rest is dividends taxed at a different rate and not subject to the payroll tax. We are trying to close the tax loophole. Following the indications of the inspector general, a simple Internet search confirms this finding.
For example, one Web site has a section entitled ``How to Reduce Your FICA Taxes If You Own an S-Corporation.'' That section provides a step-by-step instruction on how to use this loophole and even provides advice on how to avoid being caught up in an audit. The Web site advises owners of S corporations to pay themselves the lowest possible salary to reduce their FICA taxes--even if the distributions they take are a product of their labor.
Here is how the Web site explains how to take advantage of this loophole: It explains that as an employee of your S corporation, your salary is subject to Social Security and Medicare taxes, but the net profit of the S corporation is not subject to payroll taxes. The Web site goes on to explain:
..... the idea is to pay yourself the lowest possible salary to minimize social security and Medicare taxes. Then you take the remaining net profit as a distribution, which is not subject to payroll tax.
This is a loophole we are trying to fix. This loophole should be fixed regardless of how we use the proceeds; but, frankly, we have a situation now where we have a pressing need to help families across this country avoid a doubling of the interest rate on student loans, and we have an egregious loophole that will allow us to responsibly pay for the maintenance of the lower interest rates. This seems to be an issue where public policy is well balanced.
We are told by our colleagues they agree with us you can't double the interest rate. They should also agree with us you can't continue to tolerate this loophole; and this is not only an appropriate way, but, indeed, it seems to me the best way to achieve our objective of preventing the increase to doubling of the student interest rate.
We are working very hard to try to get this bill up for a vote. If there are other proposals with respect to tax loopholes or the ways in which we can pay for this other than the proposal the House has suggested--which is go into the prevention funds for health care reform, which to me is adding to and compounding not only our fiscal problems but also going forward to our health care problems we are open to discussing them.
We are right now recognizing that unless we aggressively have prevention programs, our health care costs will explode going forward. Every day, people talk about
the increasing cost of obesity in this society. Well, how do you get essentially a handle on that? You have to have resources for prevention, for counseling, for education, for nutritional programs. When we take those funds away, we run up the bill for health care. That bill ultimately is being paid, in many cases, by the same families who are struggling to find a way to send their children to college.
I urge all of my colleagues to move to get this bill on the floor. If we want to debate about different methods about payment, that is fine; let's take votes, and let's move on to passage.
I think we understand that time is running out. On July 1, the interest rate will double. We have seen progress going back a few months. Our colleagues on the other side were proposing budgets that recognized--indeed, supported--the doubling of this interest rate. In March and throughout the spring, they were assuming and they were supporting measures to double the interest rate. The good news now is they have said, no, you can't do that, we have got to keep the rate at 3.4 percent at least for the next year.
We are one step closer to a solution, but the final step is going to have to be responsibly paying for this proposal. And we have--Senator Brown, Senator Harkin, myself, Senator Harry Reid, and so many others--not only a responsible way to pay for it, but we have underscored and highlighted what is an egregious loophole, a tax shelter, a very clever ploy to avoid paying taxes on your wages through the mechanism of a subchapter S corporation magically converting them into dividends.
I think we can accomplish two important public policy goals in this legislation: keeping interest rates on student loans at the current level, helping families send their children to school; and closing a glaring loophole for tax dodgers in our tax system.
Mr. President, I yield the floor, and I suggest the absence of a quorum.