October 31, 2014
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Close tax loophole to keep 3.4% student loans, says Reed

Senator Jack Reed wants to close what he calls a $23 billion “tax loophole” to stop the interest rate on federal college loans from doubling from 3.4 to 6.6 percent on July 1. The increase could cost a student borrowing about $25,000 an added $4,000 to $5,000 in interest payments, according to calculations provided by the Rhode Island Student Loan Authority.

“We’ve got a month to get this fixed,” Reed said in an interview Friday. And the “battle,” with Republicans, as Reed sees it, is over who’s going to pay for it. The rate increase is projected to affect 7 million young men and women with federal loans.

In 2007, when Democrats cut the loan interest rate from 6.8 to 3.4 percent, Reed said no one imagined the economy would still be in a slump five years later, when it automatically reverts to 6.8 percent. As that was forecast to happen, the nearly $6 billion it is projected to generate annually became part of budget revenues. Now, both Republicans and Democrats want to be seen as saving the 3.4 percent rate, but they can’t agree on where to makeup for the $6 billion.

The House approved a Republican bill that would eliminate a preventive health care fund created as part of the 2010 health care law. A version of that bill is now in the Senate.

Reed calls the bill “a non-starter,” as it would strip away funding aimed at promoting health and reducing health care costs.

“Without it, we’re not going to get a handle on health care costs,” he said.

Republicans would rather do away with the fund.

Reed believes there is an alternative that would both keep health care and preserve the 3.4 percent rate for at least another five years.

He said there is an “egregious loophole” to Subchapter S Corporations that allow principals in these companies to legally take out bonuses. The principals pay taxes on the bonuses, but, because they are not treated as wages, the corporations avoid paying employer taxes. Reed said according to the Government Accountability Office (GAO), those “avoided” taxes total $23 billion.

Reed said change in the tax law would not affect mom and pop operations but those that purposely use Subchapter S provisions to circumvent employee taxes.

“This is a tax dodge; close the tax loophole,” he said.

Reed sees maintaining the 3.4 percent interest rate as a critical element to making higher education affordable and addressing the issue of rising student debt, which has been called the next credit bubble [after the housing market] to burst.

“Don’t make it any worse by doubling the interest rate,” Reed said.

It’s not only higher borrowing costs that trouble Reed.

“There’s growing recognition that colleges have to rein in costs,” he said. “They can’t just keep on increasing tuition.” On the state level, Reed said he has talked with Ray Di Pasquale, CCRI president and commissioner of higher education, as well as other Rhode Island educators.

He said they are “caught up in other problems.” He cited diminishing state aid to higher education and increasing costs, especially health care. Yet, he also feels if the college community were to “do things differently,” it could reduce costs.

“The model of higher education has worked magnificently for the United States,” he said. Nonetheless, he added, “We have to rethink that.”

“We’ve got to do as much as we can to keep the costs down,” he said. He noted that whereas 40 percent of jobs currently require at least an associate degree, by 2020 that will increase to 60 percent.


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