WASHINGTON—Acting in response
to recent criticism over a student lender loophole that costs taxpayers nearly
one billion dollars a year, the House voted yesterday on measures to address
the loophole that higher education advocates said fell far short of stopping
the taxpayer rip-off. The Senate is expected to pass the bill later today.
“Congress missed an opportunity to fully close the 9.5 percent loophole,” said
State PIRGs’ Higher Education Associate Luke Swarthout. “What they passed was
incomplete and temporary. It will push the issue past November instead of safeguarding
taxpayers and helping students now.”
While the bill, HR 5186, stops private student lenders from using pre-1993 tax-exempt
bonds to increase their returns on government-subsidized loans to 9.5 percent
, Congress allowed lenders to continue to create new 9.5 percent loans using
a process known as “recycling.” The term refers to the process whereby lenders
use the interest on old 9.5 percent loans to create new 9.5 percent loans. The
GAO estimates that recycling is responsible for between 25 percent and 40 percent
of the $17 billion in outstanding 9.5 percent loans. All restrictions on 9.5
percent loans in the bill are set to expire in October of 2005.
“When taxpayers are losing millions of dollars a day due to private lender abuse,
a partial close is not enough,” explained Jasmine Harris, Legislative Director
of the USSA. “Congress has once again missed a chance to cut excess lender profit
and direct the money back into student aid programs.”
“While the bill will save approximately $270 million in the next year and use
that money to increase teacher loan forgiveness for math, science and special
education teachers through 2005, had Congress completely closed the loophole,
they could have fully funded the loan forgiveness program and used more than
$2 billion in additional savings for critical student grant programs,” explained
Swarthout.
By closing the loophole through authorizing legislation, rather than by an amendment
on an Appropriations bill, Congress had the opportunity to make the closure
complete and permanent. Such legislation would have prevented private lenders
from ever creating more 9.5 percent loans.
