House looks to fix loan process

The proposed legislation would cut student-loan excess subsidies to lenders.

Lacey Crisp

A loophole in student-loan guidelines that costs the federal government billions of dollars might be closing.

Sen. Judd Gregg, R-N.H., and Rep. John Boehner, R-Ohio, on Thursday proposed legislation that would cut off excess subsidies to lenders and use the money to offer loan forgiveness to teachers who work in poor schools.

Alexa Marrero, press secretary for the House Education and Workforce Committee, said President George W. Bush called on Congress to close the loophole in February, but was unable to get legislation passed.

“Judd Gregg announced new legislation that would put an immediate end to the subsidies and to use the savings for loan forgiveness for teachers who teach in high-poverty schools,” Marrero said.

She said the proposed legislation would increase loan forgiveness from $5,000 to $17,500 for math, science and special-education teachers who teach in poor schools.

“We want to put this money to good use,” Marrero said.

She said the goal is to improve education.

“Recent graduates who find themselves swamped with student loans may try to work at these schools that desperately need good teachers,” Marrero said.

She said that in the 1980s, interest rates were high and lenders were scarce. Congress set up a tax-exempt bond for nonprofit loan agencies to guarantee loans to students. The lenders were ensured a return of 9.5 percent on each student loan, but lending companies are now offering rates of approximately 3.4 percent. The federal government is now paying lenders the difference in loan rates.

Marrero said the student-loan bonds were necessary at the time to help lenders, but they are unnecessary now.

The nonprofit loan agencies have been bought out by larger for-profit companies and have continued to receive government funding, Marrero said.

The guarantee of 9.5 percent student-loan return rates was put in place when interest rates were higher, which ensured student access to loans, Marrero said.

“This is a provision that Congress attempted to phase out in the ’90s,” Marrero said. “Unfortunately, the practice was opened up so that lenders could profit off of these loans.”

Congress has scrutinized the National Education Loan Network, one of the largest lending companies in the nation, for receiving money from the government.

In an e-mail to higher-education institutions, Nelnet wrote, “In support of the May 5, 2004, introduction of legislation proposing the redirection of the funds, Nelnet discontinued adding new loans that qualify for the provision.”

Nelnet did admit to taking advantage of the guidelines.

“In the past, however, as a prudent business decision made in a highly competitive market, Nelnet applied for and received payments pursuant to this provision available to it under current law,” the e-mail continued.

The proposed legislation would put an end to the payments.

Marrero said the Bush administration has been trying to pass similar legislation as part of the Higher Education Act, which expired Thursday. Congress passed a continuing resolution so all unfinished legislation can continue past the end of the fiscal year to the end of the lame-duck session on Nov. 20.

Robert Gordon, director of domestic policy for Democratic presidential candidate Sen. John Kerry, said Bush should have taken care of the loophole a long time ago.

“It is a loophole that costs taxpayers about $1 billion a year,” Gordon said.

He said the money could be going to students instead of lenders.

“The Bush administration could shut it down by the stroke of a pen, but they continue to let it happen,” Gordon said. “Sen. Kerry thinks that President Bush could take care of this by himself because it is an accounting decision.”

Brian Jones, general counsel for the U.S. Department of Education, wrote in an e-mail that the Bush administration has been wrongly criticized for not taking action. He wrote that the General Accountability Office, which recently reported that the administration should close the loophole, is “simply wrong as a matter of law. Legislative action by Congress is the most expeditious means of addressing this issue.”

Jane Glickman, of the Department of Education, said the department cannot change the loophole right away because the law would have to change.

“We feel it is very important to close this loophole,” Glickman said. “That is why we are taking action so that it gets done very quickly.”

Josh Straka, spokesman for Rep. Betty McCollum, D-Minn., said House Democrats have signed a petition to force an immediate vote.

“The concern is if we delay, this is going to cost a heck of a lot more,” Straka said. “It could be as much as $3 billion more just in the next six months.”

Straka said students and taxpayers deserve action.

Kris Wright, director of the student finance office at the University, said students probably will not see many changes.

“As taxpayers, we pay a lot to help with student aid, and it’s a shame that the money is going to increase profit for lenders,” Wright said.

She said changes in the loophole would be for the better.

“I think it’s important that Congress ensure that the money they spend on higher education is used the best way possible,” Wright said.