Congress weighs options to prevent budget sequester and student loan interest rate hike

June 11, 2012

The potential impacts of a year-end budget sequester on U.S. defense spending are prompting some Republicans and Democrats to urge their respective leaders to reach some type of compromise on deficit reduction before the November elections. The sequester passed in the Budget Control Act of 2011 will require across-the-board cuts in discretionary spending if lawmakers do not reach an agreement before next January. Lawmakers in defense-heavy districts and states are feeling strong pressure from their communities—and threats to their own political futures—over the scheduled $600 billion, ten-year cut to defense programs that would be part of the automatic $1.2 trillion cut in spending approved as part of last year’s budget deal.

The impact of sequestration on higher education is expected to have a large negative impact on domestic discretionary spending including student aid pro¬grams and research funding. While some believe it is unlikely that Congress in the end would allow such cuts to be implemented, the threat could have the effect intended by last year’s budget agreement: to create pressure for compromise sooner rather than later. If so, Congress could resolve the sequester issue sometime after the November elections during the lame duck session. There remains a great deal of skepticism, however, that this will occur.

Congressional leaders also continued to debate options to prevent the doubling of the Stafford student loan interest rates set to occur on July 1. The House and Senate have offered conflicting proposals to cover the $6 billion cost of maintaining the current 3.4 percent interest rate for one year. The Senate’s plan (S. 2343) would pay for the one-year extension by eliminating a tax break for certain corporations; the House plan, which has already passed the House (H.R. 4628), would do so by eliminating funding for a preventive health fund created by the Pa-tient Protection and Affordable Care Act.

Oregon Democrat Peter DeFazio, MA ’77, also offered a plan to prevent the doubling of Stafford loan interest rates and keep them permanently low. DeFazio would offset the costs of his proposed plan by increasing the tax rate by 1 percent on income more than $380,000. This debate over Stafford loans comes as more Americans rely on loans to finance their education. A recent Oregonian article recounted that the Federal Reserve Bank of New York estimates that at least 37 million Americans owe $870 billion for outstanding student loans, a figure that is growing and that exceeds the money owed for credit cards or auto loans.