Taxpayer's Tab: Legislative Spotlight: Student Loans

Vol. 4 Issue 21, June 14, 2013

Legislative Spotlight: Student Loans

As the July 1st deadline approaches, Congress is considering proposals to prevent the expiration of reduced interest rates for taxpayer-subsidized student loans.

America's student loan system is on shaky ground. As of March 2013, outstanding student loan debt in America is at $986 billion, and increasing rapidly. Congress is currently debating whether or not to extend low interest rates on certain student loans. The rates were originally reduced in 2007 with the passage of the College Cost Reduction and Access Act and expire this year. If no action is taken, those rates will effectively double beginning July 1.

But the issue should not only concern students: taxpayers could be significantly affected as well, given that the federal government is on the hook for many of these loans. In this edition of The Taxpayer's Tab, NTUF examines the federal student loan system and the budgetary effects of the latest attempts in Congress to reform it.

The federal student loan system is set up in a way that is designed to offset current spending -- the loans themselves -- with future re-payments (usually made with interest). When the government issues student loans, administrators rely on previously enacted legislation that dictates how much interest should be charged for such loans. Currently, government-issued student loans lead to incremental "profits" from interest because the rates charged to students are higher than what the government pays in interest on U.S. Treasury securities. As more loans are issued, the government can issue more securities because loans will eventually be paid back and the low securities interest brings in a net "profit". The system works as long as the government can borrow money at a cheap rate.

However, the Congressional Budget Office (CBO) projects that securities interest rates will more than double over the next five years, decreasing the amount of offsetting receipts coming in from student loan interest. Under this system, it is possible that securities interest could exceed student loan interest and require special action by Congress to make up for the deficit. In such a scenario, lawmakers may have to raise taxes or make cuts to other programs to compensate.

As with entitlement programs, large-scale reform of the student loan system has not been on the forefront of legislators' agendas. Much debate has centered on whether or not to allow interest rates to increase on certain government-backed loans. If the current rate is not extended, interest would effectively double beginning July 1. Both parties are in agreement that extending rates at lower levels (currently at 3.4 percent) is preferable, but many Republicans want additional spending offsets to make the extension revenue neutral. Congress will need to address which student loans will be affected by the interest increase and what that could mean for students now and in the future.

CBO examined the current state of the student loan system and reported that a rate increase would affect only new subsidized undergraduate college loans (for a summary of the different types of student loans, check out this NTUF blog post). Many are concerned that college graduates hit with the rate increases would be overly-burdened by repayment requirements if the rates went back to "normal" at double their current reduced percentage. However, CBO found that "a student who needed to repay $23,000 ... in subsidized loans over a typical 10-year repayment period would owe about $38 less per month than if the interest rate was 6.8 percent."

Photo Credit: Cimino & Benham

Below is a summary of some of the bills NTUF scored recently to extend or reform student loans.

Extending Current Loan Rates

The Bill: H.R. 1433/S. 707, the Student Loan Affordability Act of 2013

Annualized Cost: $2.1 billion ($8.3 billion over four years)

Sponsored by Congressman Joe Courtney (D-CT) and Senator Jack Reed (D-RI), the Act would extend the current interest rate for subsidized federal loans until 2015. Student loan programs are discretionary activities and because the interest rate increase has already been factored into budgetary baselines, the extension would be counted as new spending.

CBO estimates that S. 953 -- a bill calling for the same extension -- would increase spending by $8.3 billion in the FY 2013-2016 period. The increased spending results from the government receiving less income in the form of student loan repayments, which have been counted as offsetting receipts. CBO counts such receipts as changes in budgetary outlays and not as revenue.

To learn more or discuss this bill visit


Extending Current Loan Rates with Offsets

The Bill: S. 953, the Student Loan Affordability Act

Annualized Cost: $2.1 billion ($8.3 billion over four years)

Senator Jack Reed (D-RI) also introduced S. 953 to extend the 3.4 percent interest rate for subsidized federal student loans until 2015. As introduced, the bill is similar to S. 707, but unlike the other proposal, the Student Loan Affordability Act included revenue provisions to help offset the spending increases that would result from an interest rate extension.

These revenue measures include: limiting how pensioners can use tax-deferred retirement accounts in relation to the estate tax; further limiting tax credits available to corporations with offshore facilities or assets; and changing the classification of tar sands to be the same as other petroleum products, thus making them applicable for higher tax rates. (Note: BillTally only tracks changes in spending.)

CBO estimates that S. 953 would increase spending by $8.3 billion in the FY 2013-2016 period. The bill was passed by the Senate by a vote of 51-46.

To learn more or discuss this bill visit


A Different Source of Funding

The Bill: H.R. 1979/S. 897, the Bank on Students Loan Fairness Act

Annualized Cost: Unknown

H.R. 1979 and S. 987 would extend the lower interest rates for subsidized student loans by one year and would make other changes to the federal loan system. Sponsored by Congressman John Tierney (D-MA) and Senator Elizabeth Warren (D-MA), the Act would require the Federal Reserve to transfer funds to the Department of Education to help subsidize the loan programs in for the 2013 and 2014 calendar years. The Federal Reserve would then have possession of the loans and the loan re-payments.

A cost estimate is not currently available.

To learn more or discuss this bill visit


Reforming Interest Rate Determination

The Bill: S. 682/S. 1003, the Comprehensive Student Loan Protection Act

Annualized Cost: $6.4 billion ($32 billion over five years)

Senator Tom Coburn (R-OK) introduced S. 682 and S. 1003, which would change how the interest rates for federal student loans are calculated. If enacted, subsidized and unsubsidized loan interest would be pegged to the borrowing rate of U.S. Treasury securities, plus three percent. A new subsidized loan holder would be required to pay 4.72 percent interest, as opposed to the current 3.4 percent (and soon, barring any legislative action, 6.8 percent) rate. The bill also calls for consistency in student loan benefits so that the government and loan recipients are not disadvantaged by changes in market conditions.

For PLUS loans, the Act would structure loan rates similar to 15- and 30-year fixed mortgages. Rates would depend on yearly financial conditions and fluctuations in securities interest rates.

According to CBO, S. 682 would increase federal spending by $32 billion over five years. Beyond the five-year FY 2013-2017 window (which is outside the scope of BillTally's analysis), spending would decrease for each of the following six years by an average $7.9 billion. S. 1003 calls for the same reforms as S. 682 and was voted down by the Senate 40-57.

To learn more or discuss this bill visit


Change All New Loan Interest Rates

The Bill: H.R. 1911, the Smarter Solutions for Students Act

Annualized Cost: $66 million ($330 million over five years)

Representative John Kline (R-MN) introduced H.R. 1911, which would require Direct Subsidized, Direct Unsubsidized, and Direct PLUS loan interest rates to be set according to a market-based index. Rates would be adjusted once per year based on the 10-year U.S. Treasury note. For Direct Subsidized and Unsubsidized loans, interest would be the rate on the 10-year Treasury note plus 2.5 percent (with a cap at 8.5 percent). For PLUS loans, the rate would be that of the Treasury note plus 4.5 percent (with a cap at 10.5 percent).

According to CBO, the bill would increase federal spending by $330 million through FY 2017. After the first five years, however, the bill's provisions are projected to decrease federal spending. CBO scored the legislation as a $3.7 billion reduction in spending over FY 2013-2023.

The Smarter Solutions for Students Act passed the House of Representatives on May 23 and is currently awaiting action in the Senate. The Obama Administration has made it known that should the bill be presented to the President in its current form, it will likely be vetoed.

To learn more or discuss this bill visit


A summary of many of these highlighted bills is also available in a report by the Congressional Research Service.


 New BillTally State Delegation Summaries 

For a complete listing of NTUF's state delegation summaries, go to our homepage.

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