The interest rate on federal Stafford Loans is a phony political issue. The 6.8 percent interest rate was slashed - at taxpayer expense - to 3.4 percent last year. Now Obama and Democrats in Congress are acting as if the rate returning to its usual level is an economic catastrophe for students. It isn't. We're talking about a difference of $6 per month on new loans. Existing loans are unaffected. The student debt problem is real, but the Stafford Loan interest rate issue is not.
Yet the legislation proposed in Congress to address this non-issue is still hugely consequential, because the Republican version would end a particularly destructive big government spending program and the Democratic alternative would raise taxes on small businesses. It's a fight that epitomizes the choice voters will face when they head to the polls this fall.
The House has already passed legislation, H R 4628, that extends the current Stafford Loan interest rate for another year, averting that $6 per month disaster that Obama has been focusing on out on the stump. The bill also does something much more significant: it repeals the so-called Prevention Fund, a multi-billion-dollar slush fund created by Obama's stimulus bill and then expanded and funded even more lavishly - and automatically, without annual appropriations-by the president's health care law.
The Prevention Fund is the most egregious type of federal spending because it uses our federal tax dollars to raise our taxes and limit our freedoms at the state and local levels. Specifically, it provides taxpayer-funded grants for television advertising, lobbying campaigns, and other activities aimed at raising taxes on soft drinks, imposing zoning restrictions on fast food restaurants, imposing smoking bans, and other such nanny-state favorites.
In Philadelphia, the city spent millions of federal taxpayer dollars on advertising to promote a tax hike on soft drinks. The tax was defeated by a remarkable coalition of tea party and union activists, but Mayor Nutter has vowed to continue to pursue it. And why not, with federal taxpayers picking up the tab?
In California, federal taxpayers paid for an effort that resulted in a ban on fast food restaurants in West Adams-Baldwin Hills-Lemert, South Los Angeles, and Southeast Los Angeles. That's right; a state with 11 percent unemployment is using taxpayer dollars to intentionally prevent restaurants from opening that could employ thousands.
In New York, Mayor Bloomberg - enemy of trans fats, sugar, salt, and pretty much anything else that tastes good - is now tapping into federal Prevention Fund tax dollars for flashy advertising attacking the soft drink industry and urging customers to "drink water, fat-free milk, seltzer, or unsweetened tea instead."
There's also outright waste, like in Nashville, where Prevention Fund dollars are going to spay and neuter pets. That improves public health because, the reasoning goes, people will exercise more if they are no longer cowering in their homes, afraid of stray dogs and cats.
Contrast ending this outrageous use of taxpayer dollars with what's in Harry Reid's version of the Stafford Loan legislation: a tax hike on small businesses.
Harry Reid's bill, S. 2343, contains language identical to the House-passed bill extending the 3.4 percent rate on Stafford Loans for one more year. But it leaves the Prevention Fund intact, while attaching a $9 billion tax hike on the business income of S-corporations and partnerships by applying a self-employment tax if the owners of those businesses are also employees. This is despite the fact that there are already IRS rules to ensure those individuals are already paying themselves fair market wages, which are subject to payroll taxes. It's bad tax policy and it would set a terrible precedent. Meanwhile Reid, intent on protecting the Prevention Fund and keeping the phony interest rate issue alive, is refusing to vote on the House bill - even though the Senate rejected his own version last week.
This battle is now over whether we should hike taxes on small businesses (in the middle of a recession) or cut irresponsible, wasteful spending. That's a fight worth having, even if the $6 per month that started it is inconsequential.