Stopping a Lender Subsidy, Permanently

House GOP leaders and Bush administration agree to end 9.5% rate for some loans -- belatedly, Democrats say.
July 11, 2005

Bit by bit, compromise by compromise, Republican leaders of the House education committee seem to be crafting a consensus bill to renew the Higher Education Act.

One day after announcing the outlines of a deal on loan consolidation that was backed by a leading maverick Republican, the chairman of the House Education and the Workforce Committee and the U.S. Education Department said late Friday that they had agreed to permanently end to a legal loophole that has allowed nonprofit lenders to reap billions of dollars, at the government's expense.

That issue had been pushed hard by Democrats and advocates for students, who were quick to take credit for what they called a "shift" in the Republicans' stance.

Rep. John A. Boehner (R-Ohio), the education committee's chairman, and Secretary Margaret Spellings jointly announced that the legislation ( H.R. 609 ) the Education Subcommittee on 21st Century Competitiveness will consider on Wednesday to renew most sections of the Higher Education Act will be amended to permanently end an exemption that has allowed lenders that finance their loans using tax-exempt bonds to earn a government subsidized interest rate of 9.5 percent.

Congress first guaranteed the nonprofit lenders a return of 9.5 percent during a downturn in the economy more than 20 years ago, 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 continue to earn the guaranteed rate on new loans that were paid for using pre-1993 bonds that were refinanced.

Students in recent years have paid interest of about 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 hundreds of million dollars a year in such payments, money that opponents argue could be better used to increase financial aid spending.

Last fall, at the urging of Democratic lawmakers like Rep. Dale E. Kildee of Michigan and Rep. Chris Van Hollen of Maryland, the House amended a spending bill in a way that would have temporarily shut down the loopholes for a year, but a similar measure was defeated in the Senate. Boehner then introduced, and President Bush signed, a measure that was aimed at ending the practice but that continued to allow the lenders to make loans at the 9.5 percent rate by "recycling" existing pools of funds.

Boehner and other leaders of the House education panel vowed to phase out the exemption in the legislation they are preparing to extend the Higher Education Act, but the versions of H.R. 609 that they have offered until now have not done so.

In a statement Friday, Boehner said: "Last year, Congress acted decisively to immediately halt the most egregious practices that have allowed these excess subsidies to grow. We made it clear at that time that a broad, permanent solution would be enacted this year, through reauthorization of the Higher Education Act. I thank Secretary Spellings for working with us to develop a long-term solution; the agreement we've reached reflects our shared goal of making the most effective use of taxpayer dollars to provide benefits to students fairly and equally."

Kildee and Van Hollen issued their own statement welcoming what they called Boehner's "belated" announcement.

“I am pleased to see the Republican majority finally heeding the advice of myself and a majority of Congress who have repeatedly urged that this loophole be shut for good,” Kildee said. “The leadership in Congress has had plenty of time and numerous opportunities to close this loophole, yet they have allowed nearly a billion dollars in outrageously high subsidies to be paid out to lenders instead of using that money to make college more affordable and accessible for millions of students.”

Added Van Hollen: “The administration and Chairman Boehner have now finally joined us in calling for an end to this scam that is costing taxpayers and students billions of dollars."

In its own news release about the agreement, the Education Department buried one other important development. It announced that it had concluded that the New Mexico Educational Assistance Foundation did not violate federal laws or rules by taking advantage of the 9.5 percent loophole and receiving tens of millions of dollars in subsidies. A report by the inspector general in May concluded that the nonprofit lender had overcharged the government and should be required to return $36 million in funds.

But Secretary Spellings said that the department's leaders had "determined that the foundation complied with applicable laws, regulations and department guidance on this issue." She added: "I commend the inspector general for his attention to this issue, and the department will develop guidance on documentation and further strengthen its monitoring efforts."

As it renews the Higher Education Act, the House committee is under intensifying pressure from Republican leaders in Congress to slash money from education programs to help balance the federal budget, and going after lender subsidies like the 9.5 percent tax-exempt loans are one way they can achieve such savings without being accused of hurting students. But other changes are expected this week that are likely to take some money out of the pockets of students, including the probable imposition of higher interest rates on consolidated loans.


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