Senators propose freezing student loan rate for 2 years

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(MoneyWatch) New legislation, introduced today by Senate Majority Leader Harry Reid and 11 other Democratic senators, would freeze the interest rate on a popular student loan for two years.

If Congress doesn't act, the interest rate on the subsidized Stafford Loan will double to 6.8 percent beginning July 1 and would impact roughly 7 million undergraduates. This new legislation would give Congress a two-year window to develop a more comprehensive solution to the growing accumulation of student loan debt that now exceeds $1 trillion.

Sen. Jack Reed (D, R.I.), one of the co-sponsors of the legislation, framed the legislation as an issue of fairness. "Instead of raising interest rates on families struggling to pay for college, Congress should close costly, special interest tax loopholes. This legislation will protect taxpayers and keep student loan interest rates affordable while ending wasteful subsidies for oil companies and reducing the amount of taxes lost to tax havens."

The Senate has expedited its legislative process for The Student Loan Affordability Act, which calls for the closing of tax loopholes to cover the two-year cost of the rate freeze. Here are two of the cuts that the senators have proposed:

Retirement account loop

Under current law, investors with Individual Retirement Accounts and 401(k) plans are required to draw down on their accounts and pay taxes on this money once they reach the age of 70-1/2. A loophole, however, allows taxpayers to stretch those distributions over many years if they leave their account to a much younger beneficiary.

When an account holder dies, the taxation on an inherited retirement account can be spread over the life of the beneficiary. The student loan act, however, would require a retirement savings account to be distributed within five years of the death of the account holder unless the beneficiary is within 10 years of the account holder's age. The legislation would also include exceptions for beneficiaries with special needs, a minor or a spouse. This provision would save taxpayers $4.6 billion over 10 years.

Oil industry tax loophole

The act would include oil from tar sands among the petroleum products that are subject to taxes that support the oil spill liability trust fund. The legislation sponsors argue that there is no good reason for the current special exemption for oil from tar sands. This provision would save taxpayers approximately $1.3 billion over 10 years.

The bottom line: Congress averted the scheduled interest rate hike for the subsidized Stafford Loan last summer, and it's highly likely that Congress will also stop the rate hike this year too. 

Whether Congress adopts this legislation or another bill remains to be seen. What's clear, however, is that Congress needs to take a comprehensive look at the financial aid system in this country rather than addressing it piecemeal.

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