Students, Seniors May Feel Impact Of Debt Deal

But debt deal won't affect short-term, individual tax rates

ByABC News
August 5, 2011, 12:36 PM

Aug. 7, 2011 -- For now, the crisis has been averted. Retirees will receive their Social Security benefits, soldiers in Afghanistan will get paid, and government workers won't be furloughed.

But the debt-ceiling compromise approved by the Senate on Tuesday and signed by President Obama will have both short- and long-term consequences for all Americans. Who could be affected:

•Student borrowers. Interest on federally subsidized student loans for graduate students will accrue while students are in school. Currently, interest on doesn't begin to accrue until they graduate. The change will take effect on July 1, 2012, says Justin Draeger, a spokesman for the National Association of Student Financial Aid Administrators.

In addition, the deal will eliminate on-time repayment incentives for all federal student loans, effective July 1, 2012. Currently, federal Stafford loan borrowers who make 12 consecutive on-time payments are eligible for a rebate of 0.5% of the loan amount, which is applied to the 1% repayment fee.

The changes will generate an estimated $22 billion in savings. Of that amount, $17 billion will be used to preserve the federal Pell grant program, which provides grants of up to $5,550 a year to low-income college students.

Earlier proposals to cut federal spending called for cuts to the Pell grant program. More than 9 million college students rely on Pell grants to cover some of their college costs, according to the Project on Student Debt.

•Seniors. As a result of the deal, Social Security payments will be sent out on schedule, Social Security Commissioner Michael Astrue announced Tuesday. The president had warned that if Congress failed to raise the debt ceiling, the government might not have the borrowing authority to send out checks today.

A proposal to reduce cost-of-living increases for Social Security beneficiaries wasn't included in the final deal. In addition, the first installment of $1 trillion in spending cuts excludes Social Security and Medicare.

Still, cuts in domestic spending could affect services that low-income seniors rely on, such as nutrition, caregiving and senior job placement programs, according to the AARP.

•Families. In the short-term, individual tax rates won't be affected by the debt-ceiling deal. "The Republicans have been highly successful in resisting tax increases as part of this conversation," says Clint Stretch, managing principle of tax policy for Deloitte Tax.

That doesn't mean tax increases are off the table. In comments after the compromise passed the Senate, President Obama said he would continue to push for a debt-reduction plan that would raise more tax revenue from wealthy Americans.

The debt ceiling compromise sets up a 12-member bipartisan commission that's tasked with identifying $1.5 trillion in budget savings by November. Previous fiscal commissions have proposed an overhaul of the tax code that would raise revenue by eliminating popular tax breaks, such as deductions for charitable contributions and mortgage interest.

Unless Congress extends the Bush tax cuts, rates for all Americans will increase Jan. 1, 2013. That puts significant pressure on lawmakers to address the issue, says Mel Schwarz, partner with Grant Thornton's National Tax Office: "There will be a lively and open debate about the role of individual taxes in the overall deficit situation leading up to 2012 election."