Student Loan Abuse Prevention Act

CONGRESSIONAL RECORD
SENATE
Sept. 30, 2004

STUDENT LOAN ABUSE PREVENTION ACT

Mr. DURBIN. Mr. President, I rise to speak on behalf of the Student Loan Abuse Prevention Act. I am pleased to join Senator Murray as a cosponsor of the measure. This bill would amend the Higher Education Act of 1965 to end the siphoning of taxpayer dollars to pay exorbitant interest rates on student loans.

A special class of student loans, financed by tax-exempt bonds issued before October 1993, has become a goldmine for the companies that hold them. In the 1980s, Congress created the Guaranteed Student Loan Program, now known as the Federal Family Education Loan Program, or FFELP, to keep college loans accessible and affordable for students. Facing high interest rates, the program guaranteed lenders an interest rate of 9.5 percent to entice them to join the program.

Congress intended to end the special treatment of tax-exempt bonds with the Omnibus Budget Reconciliation Act of 1993. But the way in which the grandfather clause for pre-existing bonds was drafted has had the opposite effect. Two loopholes have allowed student loan companies to profit widely as they recycle old tax exempt bonds to produce new subsidies. The first loophole has extended the life of these bonds. If the lender refinances an old bond, it is still treated as an old bond but with a longer life. The second loophole allows for the volume of loans receiving this excessive subsidy to grow. Even if a tax-exempt bond finances a loan only temporarily, that loan is permanently treated as if it was financed by a tax-exempt bond.

The serial refinancing of loans is an accounting trick that ratchets up the subsidies the Government must pay. In fiscal year 2001, the 9.5 percent guarantee cost American taxpayers approximately $200 million. Now GAO and others have estimated that the cost is nearly five times greater this year. That is a billion dollars in unnecessary subsidies. This windfall has a secondary effect. U.S. News & World Report credits this "obscure loophole in federal law" with giving private lenders the financial latitude to lure colleges and universities away from the direct loan process.

Old loans are very much alive and multiplying in plain sight of Federal regulators. Lenders use the 9.5 percent bond funds to finance a set of loans for as little as one day and that new loan earns a 9.5-percent guaranteed return for life. Nelnet, the Nebraska based National Education Loan Network, is the lender that has exploited 9.5 percent loans more aggressively than any other, increasing its 9.5 percent holdings nearly tenfold in the last 18 months.

These subsidies have already consumed a disproportionate share of the Nation's financial dollars. Although loans carrying the 9.5 percent subsidy rate account for no more than 8 percent of the FFEL Program, they have soaked up 78 percent of all subsidies paid to lenders under the program in the current fiscal year. We need to halt and reverse the explosive growth of 9.5-percent loans. Each day of delay allows more loans to be converted to 9.5-percent loans, enriching lenders and undermining the direct loan program.

I urge my colleagues to support the bill to end this outdated subsidy.