Washington, D.C. - U.S. Congressman Chris Van Hollen today offered an amendment to the Labor-HHS-Education Appropriations bill to stop a scam in the college student loan program that has allowed certain lenders to pocket billions of dollars in excess profits at the expense of both taxpayers and students. The Government Accountability Office (GAO) has found that the so-called “9.5% loan scam” has cost taxpayers billions of dollars. Van Hollen’s amendment would close this loophole and ensure that federal education dollars are available to help students and families afford college. This amendment passed on a vote of 224 to 178.
“Closing this loophole would make available billions of dollars, giving more students an opportunity to attend college,” said Van Hollen. “If Congress does not shut down this abuse completely and permanently, a few big lenders will continue to be enriched at the expense of taxpayers and students.”
Van Hollen led the effort to expose this controversy by asking the Government Accountability Office to investigate the 9.5% lender subsidy on October 17, 2003. After receiving the results of that investigation, Van Hollen and Congressman Dale Kildee (D-MI) offered an amendment to the FY05 Labor-HHS Appropriations Bill to stop funding for the subsidy. The House passed the Van Hollen-Kildee amendment (413-3) on September 9, 2004. Under pressure from Democrats, Republicans reluctantly passed legislation that partially closes the loophole for only a year, rather than permanently ending this abusive practice. The President signed this legislation into law in November 2004.
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 9.5% guarantee was established in the high interest rate year of 1980. Congress intended for it to be phased out of existence beginning in 1993, but through a regulatory loophole, the guarantee has continued.
Last fiscal year (2004), it is estimated that lenders earned nearly $1 billion in an unintended federal subsidy, 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.