House Passes Bill to Freeze Student Loan Rates

May 1, 2012

On Friday, the House passed the Interest Rate Reduction Act (H.R. 4682), a bill to extend the current lower interest rates on federal student loans. The bill would be paid for by eliminating the unobligated balance of a controversial public fund in the 2010 health care reform law. The current federal subsidized student loan rates of 3.4 percent will double by June 30 if Congress does not extend the rates.

Members approved the bill in a 215-195 vote, with 30 Republicans voting against the bill and 13 Democrats supporting it. The vote is one of the rare cases in which a bill was passed without getting a true majority of the House—218 votes. In this vote, 10 Republicans and 12 Democrats did not vote on the bill.

Specifically, without Congressional action, interest rates on federally subsidized Stafford loans will double from 3.4 percent to 6.8 percent in July, and while the Republican bill freezes the rate for one-year, the administration and Democrats fiercely object to the manner in which the Republican bill would pay for the freeze—tapping the Prevention and Public Health Fund that finances efforts to prevent tobacco use, obesity, heart disease and is used for screening programs, such as breast cancer and cervical cancer. However, Republicans argue that Democrats and the president signed off on using the same fund earlier this year in paying for the payroll tax bill.

Just before the vote, Obama threatened to veto the bill because of the proposed elimination of the fund.

The Senate is poised to begin debate on its own student loan bill the week of May 7; however, their version of an extension would be funded by raising taxes on some S-Corps. S. 2343 would pay for the interest rate extension by ending an exemption that allows high-income earners who run S-Corps to shield some of their income from payroll taxes.

Under S. 2343, the active shareholders of an S-Corp would be required to pay payroll taxes on all their income from the business—wage and business earnings alike—if the shareholder is a partner in a professional service business or if 75 percent or more of the gross income of the S-Corp is attributable to the service of three or fewer shareholders.

NSBA recently signed onto a coalition letter opposing the provision in S. 2343 to increase payroll taxes on S-Corps and partnerships by $9 billion. The letter states, that while we are sympathetic with efforts to ensure that taxpayers, including business owners, fully comply with the tax law, we are concerned that the new rules envisioned by S. 2343 are less clear and less enforceable than current law and will do little to increase compliance.

Additionally, the rules could increase the payroll tax burden on business owners who are already fully complying with the law. For those businesses, this provision represents a tax increase rather than a clarification of existing tax burdens. Businesses engaged in service professions have employees and capital investments. S. 2343 would apply payroll taxes to the income attributable to both, thus blurring the line between payroll taxes imposed on wages and salary, and income taxes applied to other forms of income.

Republicans have said the Senate Democratic proposal is a non-starter, even suggesting the measure will never get the 60-vote cloture needed to even begin debate. This will set the stage and battle over pay-fors for the student loan freeze that will likely loom for the coming months.