What's the Word On: Student Loans

What's the Word On: Student Loans

July 14th, 2006

Q: Are you pushing to restore the federal deductibility of student loan interest?

A: Most definitely. From my position on the tax-writing Senate Finance Committee, I have led the effort for almost 20 years to allow taxpayers to take an above-the-line tax deduction on their federal taxes for the interest paid on their student loans. The incentive helps make higher education more affordable for parents who pay the bills and for students who struggle to repay loans and integrate into the work world. Iowans place a premium on quality education. Earning a higher education secures better earning power in the workforce. Studies consistently underscore the fact that those with advanced degrees under their belt have significantly greater opportunities to land higher-paying jobs and flourish in a competitive, dynamic and global marketplace driven by productivity and a nimble, trained workforce. In 1997 I helped to partially restore the federal tax break after a 10-year lapse. Again in 2001, I won efforts to expand eligibility and improve the tax incentive by lifting the 60-month limit to allow individuals to deduct interest for the lifetime of the loan. As chairman of the Senate Finance Committee, I have vowed by whatever legislative means necessary to once again go to the mat for this tax break that gives parents and students a break as they repay student loans. The tax deductibility for student loans lapsed on Dec. 31, 2005.

Q: What changes were made to student loans in the Deficit Reduction Act of 2005?

A: The Deficit Reduction Act of 2005 eliminated certain outdated subsidies to banks and lenders, generating $11.9 billion in savings to the taxpayer to help reduce the deficit. At the same time, more than $9 billion in savings were channeled toward new student benefits. This includes federal grants targeting low income students seeking math and science degrees. It raises the earnings cap so students won't jeopardize their financial aid by getting a job to pay for living expenses. It also raised federal student loan limits for first- and second-year students to $3,500 and $4,500 while graduate borrowing caps were raised to $12,000. Borrower fees also are phased out until being fully eliminated in 2010, making loans less expensive for students.

Q: Did Congress recently raise the interest rate on student loans?

A: No. Since 1992, student loans have had a variable interest rate that is adjusted annually July 1 based on market interest rates at the time. In 2001, out of concern about the impact of future interest rate rises on students, Congress worked with student groups and financial aid advocates to enact a bipartisan agreement fixing student loan interest rates effective July 1, 2006. As of July 1, students applying for new college loans will enter a fixed 6.8 percent interest rate. That's lower than the 7.1 percent that will be charged this year to anyone paying off loans under the old variable rate formula. In fact, compared to student loan rates over the last 20 years, the new fixed rate comes in below the 7.14 percent average for variable rate loans.

http://grassley.senate.gov/index.cfm?FuseAction=WordOn.Detail&WordOn_id=291&Year=2006