Political news over the past few weeks has been dominated by talk about the “fiscal cliff.” But what is the fiscal cliff, and how will it impact you?
First, some background. Last year, this country went through the “debt ceiling crisis.” The nation was about to reach its “ceiling” in borrowed money (the government needed to borrow more money to pay for crucial government services) and the President needed Congressional approval to raise this debt ceiling, something that has historically been a rather routine process. Democrats and Republicans (led by President Barack Obama and Speaker of the House John Boehner) were locked in intense negotiations on how to pay for it, however, due to the increasing size of the federal deficit. Despite calls for a “grand bargain” that would require all sides to compromise, the negotiations failed to produce a comprehensive long-term solution. The result was that the debt ceiling was indeed raised, but there was also an immediate cut in government spending (which unfortunately directly impacted student loan borrowers), as well as additional across-the-board massive spending cuts that are scheduled to take effect starting on January 1, 2013. In addition, the parties agreed to an extension of the Bush-era tax cuts in exchange for preserving entitlement programs like Medicaid and Social Security. The huge spending cuts scheduled to take effect on January 1, 2013, which would hit defense spending and non-defense discretionary spending equally, are what’s known as the “sequester.” It just so happens that also on January 1, 2013, the Bush-era tax cuts are scheduled to expire as well. The combination of the sequester and the expiration of the Bush-era tax cuts is what is being called the “fiscal cliff.”
The idea behind the fiscal cliff is that it would be so unpalatable to everyone (everyone’s taxes go up, and everyone gets hit by spending cuts) that Democrats and Republicans would have no choice but to negotiate a better deal to reduce the deficit. Right now, with only a couple of weeks to go, there is some hope for a major deal– some combination of tax hikes for the wealthy combined with targeted spending reductions and entitlement reform. But it is still entirely possible that there will be no deal, and if there’s no deal, it means we go “over the cliff.”
So. If we go over the cliff, what does it mean for students and student loan borrowers? Well, we’ll see cuts to work study programs and need-based grants, both of which are crucial in helping students pay for their education without taking on additional student loans. Cuts to federal spending might also impact interest subsidies for federal loans, as well as the quality of federal loan servicing (and we know how well that is going already). The cuts shouldn’t impact the availability of Income-Based Repayment or the new Pay As Your Earn program for borrowers, but it certainly will not be helpful to students overall (to say the least). And of course, I’m just talking about the student loan-related impacts. To read more about how the fiscal cliff might impact you, click here.