A report released today
by The Institute for College Access and Success, entitled "Money for Nothing"
details how lenders have more than a billion dollars in profit through a loophole
that Congress intended to close in 1993. More than ten years later some banks
are increasingly using a small provision in the law to siphon hundreds of millions
of dollars a year in excess government subsidies.
Under the law, banks are
allowed to charge the government interest payments on top of the interest paid
by student borrowers. However, the so-called "9.5%" loophole enables
banks to guarantee interest payments of 9.5% on their student loan portfolio
provided they have used pre-1993 tax exempt bonds to temporarily finance the
loans. With interest rates at historically low levels, the government is forced
to pay as much as 6.13% on certain loans. The result is one billion dollars
a year in lender profit at the expense of taxpayers.
The report details the actions
the Nebraska-based Nelnet Education Loan Funding Inc., one of the largest abusers
of the 9.5% loophole. By temporarily financing loans with pre-1993 loans, Nelnet
has increased their 9.5% loan portfolio 818% in the last 18 months. Over the
past six months they have charged the government almost $90 million for 9.5%
loans.
In a letter to the Department
of Education last year, Nelnet described its plan to employ the 9.5% loophole.
Rather than acting quickly to close the loophole, the Department of Education
stood aside as banks took more than a billion dollars from taxpayers. "This
is a scheme that would make Enron blush. It's a shame that the Department of
Education sat by and watched it happen," says Luke Swarthout, the State
PIRGs' Higher Education Associate.
The Secretary of Education
should close the loophole and end excessive lender profit. However, as Swarthout
explains, "If the Department of Education refuses to propose statutory
language to close the 9.5% loophole, Congress must take action to defend taxpayers
and students."
New information about excessive
lender profit comes at a time when federal funding for higher education has
been frozen. "It is absurd that the Pell Grant maximum remains fixed at
$4,050 while banks take in almost a billion dollars a year through this loophole,"
says Jasmine Harris, Legislative Director for USSA. "We should close this
loophole, cut excessive lender profits, and redirect the money to students struggling
to afford a college education."
The full report can be found
at www.ticas.org.
