Washington, D.C. - A small number of banks providing student loans are projected to receive almost $1 billion this year in an unintended federal subsidy that is growing rapidly with the acquiescence of the Bush Administration, according to preliminary findings of the Government Accountability Office (GAO) and a report by The Institute for College Access and Success (TICAS), a non-profit higher education policy think tank.
The subsidy results from a federal guarantee to the banks of a 9.5% rate of return on a group of otherwise non-descript student loans. Students who hold newly-issued "9.5% loans" pay an interest rate of less than 3.37%, while the government provides lenders an additional 6.13% payment. For other new student loans, banks are guaranteed only a 3.57% rate of return, which means the government payment in most cases is only two tenths of one percent.
The special 9.5% guarantee is attached to loans financed by tax-exempt bonds, a financial vehicle which already receives a federal subsidy worth $2 billion over the next five years, according to the Joint Committee on Taxation. The 9.5% guarantee was established in the high interest rate year of 1980. Congress intended for it to phase out of existence beginning in 1993. But through a regulatory loophole, the guarantee has continued.
In the past year, as Members of Congress have questioned the continued existence of the subsidy and introduced legislation that forces the Education Department to end it, banks have pursued a novel bond-swapping technique solely designed to take greater advantage of the subsidy before it goes away. Bush Administration officials have refused to issue emergency regulations to stop the practice, according to Education Department documents obtained through the Freedom of Information Act by TICAS and Congressional staff briefings by GAO.
In FY 2001, the 9.5% guarantee cost taxpayers approximately $200 million, but the cost in this current fiscal year is likely to be nearly five times greater, according to the new analyses. The TICAS report estimates that on top of this year’s near billion dollar cost, growth in the special subsidy will cost an additional $2.8 billion in future years, if not halted immediately.
"Every penny of this unnecessary subsidy should be helping needy students struggling to pay for college, instead of providing a needless windfall to wealthy banks and other lenders," said Senator Edward M. Kennedy (D-MA), who first proposed legislation to close the loophole in October 2003. "It's an outrage that the Bush Administration refuses to crack down on this manipulation of the student loan program.”
“The banks are obviously making an all-out effort to milk the loophole for as big a subsidy as possible before Congress can act,” said Kennedy. “In this situation, the Administration clearly has the power to issue emergency regulations to crack down on the abuse. Instead of blowing the whistle, the Department of Education is egging the banks on.”
"Instead of giving unjustified and excessive subsidies to lenders, we should be subsidizing our students directly by increasing student loan programs and Pell Grants so that more students can afford to go to college, said Representative Dale E. Kildee (D-MI), one of the original requesters of the GAO study. “As tuition continues to skyrocket, the Administration and Congress have done virtually nothing to alleviate the financial burdens of college students. It is a shame that the Administration would rather pay nearly a billion dollars in outrageously high subsidies to our nation's biggest lenders instead of using that money to help make college more affordable and accessible for millions of students."
"Rather than expanding opportunity for college-ready students, or maximizing value for American taxpayers, the Bush Education Department is sitting idly while profit-hungry lenders raid the U.S. Treasury to the tune of nearly $1 billion this year," said Congressman Chris Van Hollen (D-MD), who joined Kildee in requesting the GAO study. "That's money that could be going to families struggling to provide their children with the promise of a higher education. I call on Secretary Paige to use his regulatory authority to stop this abuse immediately. Scarce federal resources should be spent where they are needed most - not to provide windfall subsidies to already profitable institutions."
Money for Nothing, the report by The Institute for College Access and Success, can be read at:
www.ticas.org