House Holds Firm on Tight Budget

In passing spending measure for student aid and NIH, lawmakers approve permanent end to lender loophole.
June 27, 2005

It's on to the Senate for those college officials and higher education lobbyists unhappy with the House of Representatives' proposed 2006 spending plan for education, health research, and job training programs.

And as of Friday, add the student loan industry to the list of the aggrieved, as the House voted to permanently close a controversial loophole that has generated billions of dollars for some lenders.

Two full days of debate in the full House, on Thursday and Friday, produced few meaningful changes to a bill that would deliver decidedly mixed results for colleges and universities. But the amendment adopted during the discussion that is most significant to higher education would prohibit the U.S. Education Department from paying lenders a 9.5 percent return on student loans that have been financed with certain tax-exempt bonds. 

A growing chorus of watchdog groups, like The Institute for College Access and Success, and government agencies, including the Government Accountability Office, have urged the government to permanently end a practice that Congress has tried on several occasions to stem. Congress first guaranteed lenders that finance their loans using tax-exempt bonds a return of 9.5 percent during a downturn in the economy in the 1980s, out of fear that they would otherwise abandon the student loan program. In 1993, Congress ended the program but left a loophole that allowed the lenders to earn the guaranteed rate on new loans financed through pre-1993 bonds that were refinanced. 

Students now pay interest of 3.4 percent, forcing the government to make up the difference on those loans. The GAO and others have estimated that the lenders have generated as much as $1 billion a year in such payments, money that opponents argue could be better used to increase financial aid spending.

Last year Congress temporarily shut down the loophole, and Republican leaders of the House Education and the Workforce Committee have vowed to phase out the exemption in the legislation they are preparing to extend the Higher Education Act.

But Democrats do not want to wait for the passage of that law, which is unlikely to occur this year. So Friday, Rep. Christopher Van Hollen (D-Md.) proposed an amendment to the spending bill for the Departments of Labor, Health and Human Services, and Education that would permanently end the 9.5 percent exemption.

"Closing this loophole would make available billions of dollars, giving more students an opportunity to attend college," said Van Hollen. "If Congress does not shut down this abuse completely and permanently, a few big lenders will continue to be enriched at the expense of taxpayers and students."

Although Rep. John A. Boehner (R-Ohio), who heads the House education panel, warned that taking such abrupt action could force some of the nonprofit lenders out of business, 42 Republicans joined 181 Democrats in approving the amendment, which passed by a margin of 224 to 178.

Groups that represent lenders could not be reached for comment after Friday's vote. But Robert M. Shireman, director of the Institute for College Access and Success, applauded lawmakers for showing that "a bipartisan majority in Congress wants real reform," adding: "This particular amendment may not survive, but Congress clearly wants to clamp down further on this corporate welfare. These are funds that should be made available to help deserving students to go to college."

The Rest of the Bill

The overall appropriations measure passed later Friday by a margin of 250 to 151. Democrats had railed loudly against the bill, saying that it contained too few funds, and shortchanged too many programs, because Congress has committed too much of the money available for the government's 2006 budget for tax cuts. 

Although few programs important to higher education get much of anything in the way of new funds under the House-passed bill, college leaders and lobbyists have in general been more relieved than distraught over the measure, given that the legislation would protect a number of important programs that the Bush administration's own budget blueprint had proposed eliminating or slashing.

The House-passed measure would:

  • Increase the maximum Pell Grant by $50 to $4,100 -- half of the $100 rise called for by President Bush’s budget and by the 2006 budget resolution approved by Congress. The House measure also would eliminate the program’s $4.3 billion shortfall.
  • Protect several programs that President Bush’s budget had recommended eliminating, including the Carl D. Perkins Vocational and Technical Education program, the Upward Bound, Talent Search, and Gear Up programs that help disadvantaged students attend college, and the Leveraging Educational Assistance Partnership Program.
  • Wipe out new funds for the Perkins Loan Program, which gives colleges money to lend at a fixed low rate to students from low-income families.
  • Finance a new community college job training initiative that President Bush has touted, but at $125 million -- half of the $250 million the president requested.
  • Provide $28.5 billion for the National Institutes of Health, an increase of $145 million, or 0.5 percent, over the 2005 budget.
  • Eliminate about $250 million of the $300 million that Congress provided last year for programs in the Department of Health and Human Services that support the education and training of health professionals.

One other change made to the measure on the House floor that affects higher education was the adoption of an amendment that would shift $100 million to the Corporation for Public Broadcasting (which the original measure had proposed slashing by $200 million) from several other programs financed by the bill, including $27 million from the Fund for the Improvement of Postsecondary Education.

The studies, at the University of Iowa and the State University of New York at Buffalo, study pigeons' perceptions of stimuli andcouples' perceptions of their marriages, respectively. NIH officials called the vote an example of "damaging and inappropriate political interference" in peer review. Similar votes in recent years have not stood, having been dropped in negotiations with the Senate over a compromise spending bill for the education, labor, and health agencies.

The Senate has not yet begun work on its version of the appropriations measure for the departments, though Congressional leaders have vowed to finish work on all spending bills by July. A panel of lawmakers from the two chambers would then be responsible for crafting a compromise to resolve differences between the bills.


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