WASHINGTON – Senate Democrats are ready with an election-year bill preventing interest rates from rising for millions of college students with federal loans. Republicans are already balking at the way Democrats would cover its $5.9 billion price tag: boosting payroll taxes on the owners of some privately held firms.
Democrats unveiled their bill late Tuesday, a measure that would prevent today's 3.4 percent interest rates on subsidized Stafford loans for low- and middle-income students from doubling automatically on July 1. The interest rate freeze, which would help 7.4 million people, would last for a year.
The congressional maneuvering highlighted the competition between the two parties to appeal to college voters, who leaned heavily toward Barack Obama during his 2008 run for the White House, and to address the broader financial pressures facing Americans in an economy still struggling to regain strength.
Not willing to cede any ground, Obama's likely GOP rival this time, Mitt Romney, has also asked Congress to temporarily extend the lower rates. Congressional Republicans say they too support keeping students' interest rates low.
That apparent agreement on the overall goal is not stopping either side from seeking political advantage.
"Republicans in Congress have voted against new ways to make college more affordable for middle-class families, even while they're voting for huge tax cuts for millionaires and billionaires," Obama told college reporters Tuesday by telephone as he flew aboard Air Force One from North Carolina to Colorado, where he addressed university audiences on the subject.
"This is a question of values," he added.
Obama was scheduled to speak to students Wednesday at the University of Iowa.
At the Capitol, Rep. Chris Van Hollen of Maryland, top Democrat on the House Budget Committee, told reporters that Romney's call for freezing student loan rates was "a huge contradiction" because Romney supports the House-passed GOP budget. That fiscal plan proposed no changes in the student loan law, which would double the loans' interest rates without congressional action.
Republicans trained their fire on Democrats' plan to finance the bill by making it harder for owners of smaller, privately owned companies called S corporations to avoid paying Social Security and Medicare payroll taxes on some of their income.
The proposal would apply to such companies with incomes exceeding $250,000 and whose revenues come mostly from the work of three or fewer owners. The higher payroll taxes would also be required for some law firms, doctors' practices and other professional services partnerships.
"Not only are they calling for higher taxes on small-business owners, they also plan to raid the Medicare and Social Security trust funds at the same time," said Senate Minority Leader Mitch McConnell, R-Ky.
Democrats released their plan a day after the government announced that Social Security's trust fund would be depleted by 2033, three years earlier than projected last year. It said Medicare's trust fund would run dry in 2024, the same as last year's estimate, but cautioned that the program's spending is continuing to grow quickly.
Senate Democratic aides said their bill would pay for itself with around $6 billion in extra Medicare taxes that would be collected over the next decade from the private companies.
That money would normally go to a Medicare trust fund for financing the hospital care the program provides its elderly recipients. Democrats said their payroll tax language would also raise $3 billion in new Social Security revenue, but that money would go to Social Security's trust fund and not be used to pay for the student loan legislation.
Top House Republicans said little about the issue Tuesday. Michael Steel, spokesman for House Speaker John Boehner, R-Ohio, blamed Democrats for the potential doubling of student loan interest rates — a reference to the 2007 law that lowered rates to 3.4 percent but said they would automatically double in 2012.
"That's why Republicans and Democrats on both sides of Capitol Hill will be working on this issue in coming months," Steel said.
Rank-and-file House Republicans said they were open to keeping students' interest rates low but opposed the Democrats' payroll tax increase on company owners.
"The proposal they're talking about is a dream world," said Rep. Rob Bishop, R-Utah.
Sen. Pat Toomey, R-Pa., a tea party-supported freshman, would not commit to supporting the overall bill, saying he wanted to study it.
Asked if Romney's endorsement of keeping interest rates low would sway him, Toomey said: "I'm aware of that. We all make our own decisions."
House Democrats said they are writing legislation similar to the Senate Democratic bill.
The Obama administration says a doubling of interest rates would cost the average student more than $1,000 over the life of the loan.
College students finish school owing an average $25,000 in loans. The Federal Reserve Bank of New York estimated that 37 million Americans — about 1 in 7 — owe $870 billion in student loan debt, with two-thirds held by people under age 30.
There are about 4 million S corporations. They pay no corporate income tax, but their owners must pay individual income taxes on the company's earnings.
S corporation owners owe payroll taxes on the part of their income that they consider their salaries. They don't owe payroll taxes on the earnings they classify as their firm's profits, and they have great leeway in deciding how to classify the money they make.
Ninety-four percent of S corporations are owned by three or fewer stockholders.