On May 8 the Senate rejected a motion to proceed to legislation aimed at keeping the interest rates on federal student loans from doubling this summer. The bill, Stop the Student Loan Interest Rate Hike Act of 2012 (S. 2343), would extend low interest rates on federally subsidized Stafford loans for one year. Stafford loans benefit low- and middle- income students.The 52-45 vote fell short of the 60 votes needed to proceed, with all Democrats voting in favor except Senator Reid (D- NV), who voted “no” to allow for the procedural ability to request a future vote, and all Republicans voting in opposition except Senator Olympia Snowe (R-ME), who voted “present.”

If Congress fails to act, interest rates on Stafford loans will rise from 3.4 percent to 6.8 percent on July 1. According to the Education Department, the passage of S. 2343 would affect 7.4 million undergraduate students borrowing money this year.

The legislation presented by Senate Democrats would cover the $6 billion cost of keeping interest rates low by closing tax loopholes for owners of S-corporations, often attorneys or other professionals.  Compensation paid from the S-corporation is subject to both employee and employer payroll taxes; corporate profits are not.  Some use this tax status to under-report compensation, thereby evading payroll tax payments. Republicans strongly oppose this means of paying for the extension of the low-interest loans.

The House has already passed legislation (H.R. 4628, the Interest Rate Reduction Act) that would prevent student loan rates from increasing. This Republican pay-for strategy uses funds from the Prevention and Public Health Fund in the Affordable Care Act to pay for the extension. H.R. 4628 passed the House 215-195 with thirteen Democrats voting in support and 30 Republicans voting against it. The White House has issued a veto threat for this bill based on the offset, labeling it an effort to undermine health care reform. The Administration called the measure “a politically motivated proposal and not a serious response.”

This measure is not the first threat to low-income students’ educations in recent months. In order to avert a government shutdown, Congress passed a $1 trillion deal (H.R. 3671, the Consolidated Appropriations Act) in December 2011 that made large cuts to Pell Grants for 100,000 students (for more, see this ThinkProgress article). This bill reduced the maximum number of years that students can receive the Pell Grant from nine to six, and reduced the income level under which a student will automatically qualify for the maximum Pell grants from $30,000 to $23,000. Considering this substantial cut, advocates fear that doubled interest rates on Stafford loans would add extra strain on the backs of low-income families.

With the July 1 deadline looming, and bipartisan support for not letting the interest rates double, it is likely that more Congressional action is forthcoming.

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