Washington, D.C. - The Government Accountability Office (GAO) today released a final report, commissioned by Congressmen Chris Van Hollen (D-MD) and Dale Kildee (D-MI), which shows that a small number of banks providing student loans are projected to receive almost $1 billion this year in an unintended federal subsidy. Recently, the House of Representatives passed an amendment to the Labor-HHS Appropriations bill offered by Representatives Van Hollen and Kildee to close this loophole in the federal student loan program in FY 2005 and free up billions of dollars to help students and families afford college. Today, Van Hollen and Kildee introduced legislation to provide a permanent solution.
“While needy students are striving to pay their college tuition, the federal government is fattening the pockets of certain lenders by subsidizing extraordinarily high interest rates on student loans,” said Van Hollen. “Instead of giving unjustified and excessive handouts to banks, we should be helping our students by increasing federal aid like Pell Grants so that more students can afford to go to college.”
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 and Bush Education Department acquiescence, the guarantee has continued.