Student loans eyed by budgeteers

Sen. Mitch McConnell, R-Ky., recently dismissed negotiations among the Senate's 'Gang of Six.'

The White House and key lawmakers are considering reductions in student loan subsidies, farm payments, and support for federal workers’ pensions as they search for cuts that can clear the way for an increase in the national debt limit, according to officials in both parties.

The proposals being floated by both sides of the political spectrum differ over key details, but both would involve having interest on their college loans begin to accrue for at least some college students while they are still in school.

The negotiations are still in the early stages, with no final decisions made, these officials said May 18.

While the amounts involved so far are relatively modest, the talks led by Vice President Joe Biden appear likely to assume greater public prominence with the evident collapse of a freelance attempt by the “Gang of Six” senators to produce a sweeping bipartisan plan to reduce red ink.

“We’re talking [about cuts totaling] $200 billion, $150 billion and we have to get up into the trillion range or more,” said Sen. Jon Kyl, R-Ariz., one of six other lawmakers taking part in the talks at Blair House across the street from the White House.

“We have a long way to go if we’re struggling at this level with this amount,” he said, adding that so far, the talks have generally focused on areas of agreement.

The group has yet to discuss military spending or deeper reductions in programs that already were trimmed in legislation that narrowly averted a partial government shutdown in April.

Any discussion about savings from Social Security, Medicare, and possibly Medicaid is likely to be set aside for President Barack Obama and Speaker John Boehner, R-Ohio, to handle.

Treasury Secretary Tim Geithner has said Congress must raise the $14.3 trillion debt limit by Aug. 2 or risk a first-ever government default.

Republican leaders, acknowledging the need for new borrowing authority, want cuts of at least the same magnitude as any increases as a way to gain control over future spending.

Some of the cuts under review were first advanced by the administration, and others were included in a budget that Republicans passed in the House last month.

Negotiators are also looking to recommendations made by the National Commission on Fiscal Responsibility and Reform, appointed by Obama and headed by Erskine Bowles and former Sen. Alan Simpson.

A separate plan produced by the highly regarded Bipartisan Policy Center also figures in the talks.

Obama’s own budget proposes letting interest begin to accumulate on government loans to graduate students while they are still in school, rather than begin accruing when they finish.

The savings for the government are estimated at $18.1 billion over a decade, money the White House wants to use to expand Pell Grants for education.

Going one step further, Republicans want to allow interest to accrue on loans to undergraduates still in school, at a savings estimated at an additional $46.5 billion over 10 years. Unlike the White House, the GOP would apply all of the savings to deficit reduction.

Obama’s deficit commission called for eliminating the current in-school interest subsidy, citing a recent report by the College Board that said, “There is no evidence that eliminating in-school interest is critical” to the decision a student makes about enrolling in school.

Republicans have called for $27.7 billion in farm program savings through the end of the decade, as compared with about $5 billion in Obama’s budget last February.

Mark Kantrowitz, a student loan expert who runs popular financial aid websites and, said the savings targeted by Obama and Congressional Republicans would be better used to increase Pell Grant funding.

“Unfortunately, efficiency improvements in student aid funding have repeatedly been used for deficit reduction,” Kantrowitz said. “In the current proposal, the government will be cutting student aid funding without using the savings to improve other more effective aid programs like need-based grants.”

“Need-based grants,” including Pell Grants, aren’t adequately funded, he added.

“The plan will likely gain traction in [Washington] because it saves money and there’s a big push to save money wherever possible,” Kantrowitz said.

Both sides have called for savings from the crop insurance program and direct payment to farmers. Details are sketchy, because the House Republicans omitted many from their budget and the White House has not released several of the specific recommendations that comprise a 12-year deficit-cutting plan Obama unveiled last month.

As did Obama, the presidential deficit reduction commission and Bipartisan Policy Center recommended cutting payments to the largest farms.

The House budget written by Republicans recommends raising pension contributions by workers and cutting them for the government.

Obama made no such recommendation in his budget last February. Despite opposition from unions representing federal employees, several congressional officials say the White House has made clear it will back some savings in the area.

Currently, most federal civilian workers contribute 0.8 percent of their wages to the fund that pays pension benefits, and the government contributes 11.2 percent of payroll.

The disparity dates to the last major change in federal employee pensions, passed a quarter century ago, that required workers to pay Social Security taxes for the first time.

Requiring workers and the government to contribute 6 percent apiece would save about $121.7 billion if implemented immediately, according to the House Budget Committee.

The House budget suggests Republicans want to gradually phase the pension out in favor of a system that lets employees decide how to invest their retirement savings, as is happening in private industry.

That would replace a system “that is creating future unfunded liabilities for taxpayers,” it adds, although the Congressional Research Service says the pension fund for most current employees is on a pay-as-you-go basis.

Phasing in the change over several years, as the president’s deficit commission suggested, would end up saving about $70 billion, and the savings would be even less if it applied only to future retirees.

In contrast to the talks led by Biden, the so-called Gang of Six negotiations that ran aground in the Senate had scoured programs in every corner of the budget and envisioned possible tax increases as well.

Sen. Tom Coburn, R-Okla., quit the effort on May 16, saying that he wanted deeper cuts to Medicare and that the overall package was not balanced.

At the same time, Coburn reaffirmed support for higher government revenue, saying that was “the only way we get out of this problem” of soaring deficits.

GOP leaders have expressed adamant opposition to higher taxes, at least for now. Sen. Mitch McConnell, R-Ky., indicated recently he viewed the efforts by the six senators as something of a sideshow.

“With all due respect to the Gang of Six … the discussions that can lead to a result between now and August are the — are the talks being led by Vice President Biden,” he said.

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