[Congressional Record Volume 150, Number 128 (Saturday, October 9, 2004)]
[Senate]
[Pages S10918-S10921]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
TAXPAYER-TEACHER PROTECTION ACT OF 2004
Mr. GREGG. Mr. President, I ask unanimous consent that the Senate now
proceed to consideration of H.R. 5186, which is at the desk.
The PRESIDING OFFICER. The clerk will report the title of the bill.
The legislative clerk read as follows:
An act (H.R. 5186) to reduce certain special allowance
payments and provide additional teacher loan forgiveness on
Federal student loans.
There being no objection, the Senate proceeded to consider the bill.
Mr. KENNEDY. Mr. President, this bill deserves to pass, but it's only
a down-payment on the real reform needed to close a flagrant loophole
in the student loan program. The bill takes $285 million in excessive
subsidies to banks and gives it to college students and new teachers in
the form of increased forgiveness for student loans.
It is only a downpayment, however, because it does not close all of
the notorious 9.5 percent student loan loophole, and because even this
reform will expire after one year. The bill is silent on the full
interest rate gouging that has taken place over the last 18 months--
funds that the Secretary of Education should have reclaimed on his own,
and still should after this bill passes.
Obviously, our Republican colleagues hope that this modest action
will cool the public outcry that has erupted in the past month as the
full extent of this shameful loophole has come to light.
For almost 25 years, the taxpayer has been guaranteeing banks a 9.5
percent rate of return on a specific type of student loans. In 1993,
Congress acted to end the guarantee, but a loophole emerged that even
the Government Accountability Office says the Bush administration has
refused to shut down.
Today's bill still leaves 40 percent of the loophole wide open. In
other words, our Republican colleagues can no longer stand the heat
from the loophole, and so they're now sacrificing 60 percent of it, in
the hope that their special interest friends in the student loan
industry can still retain the other 40 percent.
Sadly, under this Republican bill, the abuse will continue. New loans
will be
[[Page S10919]]
made to new students that taxpayers will subsidize at a 9.5 percent
interest rate. It's madness. We should be allowing older borrowers to
refinance their student loans at today's market rates, instead of
subsidizing big banks at the high interest rates of the 1980s. We
should be helping students who are eligible for Pell Grants, instead of
subsidizing big banks needlessly.
Republicans claim that some of this subsidy will go to student
benefits. I say, it all should go to student benefits in whatever loan
program a student participates. No one should be fooled. Half of the
student loan loophole that this bill leaves wide open goes to for-
profit corporations like Nelnet and Sallie Mae.
The 9.5 percent guarantee is still highway robbery for special
interests. Our Republican colleagues reply that at least they're
narrowing the highway from five lanes to two lanes. Banks like Nelnet
and Sallie Mae can still drive right through, collecting outrageous
profits at the expense of students and taxpayers.
I had hoped to offer an amendment to this bill that would close the
9.5 percent loan loophole completely and permanently. But the
Republican Majority objects to that effort here and now. We will be
back though on the first available vehicle to shut down this wasteful
corporate subsidy once and for all.
It's long past time for President Bush and Republicans find the
courage to stand up to their special interest friends, and do what's
right for the Nation's students and taxpayers.
In most cases, lenders today receive a 3.6 percent rate of return on
new student loans. But for the last 11 years, the Government--
taxpayers--have been guaranteeing lenders a 9.5 percent rate of return
on a certain group of otherwise non-descript student loans. A 9.5
percent rate of interest might have made sense years ago, but it
doesn't today.
In 1993, Congress passed legislation intended to phase-out of
existence the 9.5 percent bank guarantee. But two key loopholes have
kept that subsidy alive and well. The legislation before the Senate
closes one.
The first loophole--the one that isn't closed by this legislation--
allows for what is called 9.5 percent loan ``recycling.'' A lender
makes a loan to a student--``Student A.'' Over the course of the next
10 to 25 years, the lender is repaid by Student A and the lender gets a
subsidy payment guaranteeing a 9.5 percent rate of return.
Under the 1993 law, after one loan, there should be an end to that
9.5 percent guarantee. But lenders have been recycling Student A
payments and the attached Government subsidy into a new loans issued to
new students--``Student B''--and claiming a 9.5 percent guarantee on
those loans as well. So, 9.5 loans haven't been phased out at all.
They've being maintained. And the Department of Education has done
nothing about it.
Worse, 18 months ago, lenders started growing the number of 9.5
percent loans through a process called ``transferring.'' A lender
shifts a loan out of its tax-exempt bond estate into its taxable bond
estate. When the loan shifts, the 9.5 percent guarantee shifts with it
and the tax-exempt bond estate then has money available to it to issue
new 9.5 percent loans.
As a result of ``transferring,'' 9.5 percent loan bank subsidy
payments have more than doubled in the last 18 months. The Bush
administration has refused to stop the process, despite Democrats' and
GAO's urging.
A year ago, Senate Democrats proposed legislation to shut both
loopholes down once and for all. The Senate Republicans did not act on
that proposal, did not introduce their own legislation, and did not
hold a single hearing. They asked no oversight questions of the Bush
administration. In short, they did nothing.
Democrats requested a GAO investigation. We alerted non-partisan
higher education policy experts. We requested an SEC investigation. Two
months ago, we blew the whistle in the media on the new, explosive
growth in the 9.5 loan subsidy. Finally, our Republican friends
responded to the criticism with the legislation before us today.
But again, this bill doesn't get the job done. It leaves the
``recycling'' loophole open, and it lasts only one year. Now, this
remains a live issue in the Appropriations Committee. I would hope we
would follow the House's 413-13 vote lead in shutting down this
loophole in its entirety. It's a change past due.
Mr. DODD. Mr. President, I would like to commend Senator Gregg for
taking what I hope is one of many steps in closing what most, if not
all of us agree, is an egregious loophole in current law relating to
student loans.
In the 1980's, the Higher Education Act sought to attract more
lenders to the student loan program by offering nonprofits a 9.5
percent rate on return on student loans in exchange for their
participation in the program. At a time of high interest rates, it
provided an assurance to nonprofits that they could make student loans
and stay afloat economically. The 9.5 percent subsidy was an incentive
to bring the nonprofit sector into the lending business, to offer
students more options in choosing a lender. The subsidy made sense at
the time.
In 1993, a time when interest rates were coming down, 9.5 percent
amounted to a windfall for lenders. Congress rescinded the policy but
grandfathered loans already made, assuming that the volume of these
loans would decline as borrowers paid them off. That assumption turned
out to be wrong.
Exploiting a loophole in current law, some lenders, including for-
profits that have acquired nonprofits, have been rolling new loans into
old accounts, sometimes for as little as a day, to qualify for the
subsidy. That means that in today's market, some guaranteed a 9.5
percent profit on 3.4 percent student loans. The Federal Government is
making up the 6.1 percent difference.
How egregious is this practice? From January 2004 to June 2004, one
bank alone amassed over $3.2 billion in 9.5 percent loans by exploiting
this loophole. The General Accounting Office GAO, has found that the
overall volume of loans receiving a 9.5 percent return has increased to
more than $17 billion this year from $11 billion in 1995. This is money
that should be going to the student loan program and the Pell grant
program, not bank profits.
In response to this discovery, the Department of Education has been
asked to issue new rules clarifying that the practice in question is,
in fact, not within the intent of current law. They have refused to do
so. They claim that their hands are tied, that only Congress can close
the current loophole. The GAO disagrees.
In a report issued September 21, the GAO states that the Department
could use less formal guidance to clarify or alter its position on the
practice, or publish an interim rule that would close the loophole
until a formal rulemaking process is complete. The GAO also suggests
that the Department publish an emergency rule. This type of rule allows
Federal agencies to skip the formal process if they believe it would be
``impracticable, unnecessary or contrary to public interest.'' The
Department does not believe the current situation rises to that level.
Clearly, it is against the public interest, and against the interest of
the U.S. Treasury, to allow this practice to continue.
According to some, the payments in question could cost the U.S.
Treasury nearly $1 billion by the end of this calendar year and at
least $5 billion over the next 10 years. This is money that could be
used to send kids to college.
Mr. President, in response to this crisis, Senator Gregg has proposed
a bill to close the 9.5 percent loophole. There is just one problem
with his bill. It does not close the loophole completely and it does
not close the loophole permanently. The loophole should be completely
and permanently closed.
I applaud Senator Gregg for taking this first step. Between enactment
of the change and the time that it expires next year, his bill will
achieve a $285 million savings for the student loan program. If we were
to shut down the loophole completely, we would achieve a $400 million
savings within the same time frame. That would amount to an additional
$115 million for student financial aid.
In response to Senator Gregg's bill, Senator Kennedy offered an
amendment to close the loophole completely and permanently. This is
something that my Democratic colleagues and I have been fighting to do
since last October. Unfortunately, the amendment was not accepted.
[[Page S10920]]
Mr. President, the Pell grant maximum has remained flat for 3 years.
Tuition is up. And all the while, the Federal government is giving away
a $1 billion annual subsidy through 9.5 percent loans. The Federal
Government is paying hundreds of million of dollars in unnecessary
subsidies to student loan companies. The bill before us allows this
practice to continue, even if it is to a lesser extent. I hope we will
have an opportunity in the near future to take definitive action to
correct this egregious short-coming in the law.
Mr. REED. Mr. President, I support the limited effort before us today
to close a loophole in Federal student loan policy that has cost
taxpayers billions of dollars over the past decade.
In the 1980s, when there were fears that student loans would become
scarce due to high interest rates, Congress provided lenders
participating in the Federal Family Education Loan, FFEL, program a
guaranteed minimum 9.5-percent return on student loans generated from
tax-exempt bond funds. Congress did so to ensure that there would be
lenders willing to make affordable loans for students.
In 1993, Congress sought to end the 9.5-percent guaranteed return on
what had become a small subset of student loans due to a much lower
national interest rate environment, the growth in availability of other
private bank and government-subsidized student loans, and the creation
of Federal direct loans.
In doing so, a grandfather clause was enacted for outstanding 9.5-
percent return, tax-exempt bond generated student loan funds. Rather
than end the 9.5-percent loans, this grandfather clause has worked as a
loophole. Owners of 9.5-percent guaranteed loans continually recycle
proceeds from tax-exempt bonds originally issued before 1993--creating
in effect a revolving loan fund--and the Federal Government continues
to guarantee a 9.5-percent rate of return on what is today
approximately 1 out of every 20 student loans. Lenders of the remaining
19 out of 20 student loans receive a much lower guaranteed interest
rate--less than 4 percent.
This overpayment has grown dramatically over the past few years, as
this administration and Department of Education have failed to
intervene and stop it. According to the Government Accountability
Office, GAO, the overpayment cost taxpayers well over $600 million by
the end of June 2004, up from $209 million in Fiscal Year 2001.
To finally close this loophole once and for all, I joined Senator
Kennedy in introducing S. 1793, the College Quality, Affordability, and
Diversity Improvement Act last October, which among many provisions to
expand access to higher education, would eliminate the 9.5-percent
giveaway. More recently, I cosponsored legislation introduced last week
by Senator Murray--S. 2861, the Student Loan Abuse Prevention Act--
which would also permanently fix the abuse of the 9.5-percent rate and
redirect the estimated savings of $5 billion over 10 years to increase
the maximum Pell grant for low-income students.
Regrettably, the bill before us today does not contain such a
comprehensive and permanent fix. This more limited effort provides only
a temporary 1-year solution and it continues to allow ``recycling'' of
loans, as opposed to the bonds, by which the lender uses the income
from current 9.5-percent guarantee. And, instead of using the more
modest savings from this bill to boost grants for low-income students
struggling to afford college, the savings will be used for a different
but important cause--providing help to certain teachers through loan
forgiveness.
Considering how long it has taken the majority to act on this
situation, I am pleased we are taking this first, although, limited
step. I will be working with my colleagues to fully close this costly
loophole in the upcoming Higher Education Act reauthorization process
and capture these savings for students. I thank Senators Kennedy and
Murray and their staffs for their leadership and work on this matter.
Mrs. MURRAY. Mr. President, I rise today to discuss my ongoing work
to protect taxpayers and help students by finally ending a special
interest subsidy.
As my colleagues know, I have been working to close a loophole that
allows some banks to issue new students loans at outrageously inflated
rates. These subsides were supposed to have ended more than ten years
ago, but they continue today, and taxpayers are footing the bill.
Just last year, this wasteful subsidy cost taxpayers $1 billion.
Imagine how many students we could have helped if that money went to
Pell Grants instead of the special interests. I believe we should close
this loophole--immediately and permanently--and use the savings to help
more students afford a college education.
It is outrageous that taxpayers are paying 30 times what they should
for these student loans. Interest rates haven't been at 9.5 percent in
years, but new loans--at that inflated rate--are being written every
day because of this loophole.
On September 15, in the Appropriations Committee, I offered an
amendment to close the loophole. My amendment would have used those
savings--about $370 million--to increase grants to college students. My
amendment had the support of every Democrat on the Appropriations
Committee, but unfortunately the chairman and every Republican opposed
it. They said they wanted to deal with it later.
So Senator Kennedy and I came here to the Senate floor and called on
the Department of Education to take action, since our colleagues were
not ready to act. Unfortunately, the Department of Education refused.
As the Government Accountability Office noted, the Department could
have closed this loophole with the stoke of a pen. Last week--seeing
that neither the Republican Congress nor the administration--were
willing to act, I introduced my own bill to permanently and fully close
this loophole and help our students.
My bill is called the Student Loan Abuse Prevention Act S. 2861, and
I thank Senators Kennedy, Mikulski, Durbin, Reed, Dodd, and Clinton for
cosponsoring it.
My bill would use all of the savings to increase Pell Grants for
students. The day after I introduced my bill, Senator Gregg offered his
own bill, which we are considering today. I am pleased that the
Republican leaders have finally offered a proposal. I am disappointed,
however, that their plan does not fully close the loophole, expires
after 1 year, and will not help today's student afford college.
Let me say a word about each of those shortcomings. First, the Gregg
bill does not fully close the loophole. This subsidy would still live
on. My bill says that lenders cannot create new loans at 9.5 percent.
No new subsidies--period. And that is important because in the past 2
years lenders have used tricks to extend these outrageous subsidiaries,
and we need to put an end to it. But the Republican bill is not a real
fix. It does not stop these gimmicks entirely. In many cases, lenders
could keep writing new loans at 9.5 percent for decades. Under the
Republican bill, the outrageous subsidy will live on. So the first
problem with the Republican bill is that it does not fully close the
loophole and will still overcharge taxpayers for this lender subsidy.
The second problem with the Gregg bill is that it expires after 1
year. My bill will stop the subsidy forever. The Republican bill would
expire in a year. I want my colleagues to know that when we work on the
Higher Education Act, I will again work for a permanent fix that
protects taxpayers--not just for 1 year--but forever.
The third problem with the Gregg bill is that it does nothing to help
students who are trying to pay for college today. While there are a lot
of good uses for this money, I would also like to see those dollars go
straight into the pockets of our students so they can pay for college.
So the Gregg bill before us has three big problems--it doesn't fully
close the loophole, it expires after a year, and it doesn't help
today's college student. But--after all the work it has taken to get
the Republicans to finally address this--the Gregg bill is a step
forward and one we should take while we can.
I believe that our students and taxpayers deserve better. They
deserve a real fix that is permanent and that helps today's students.
But, given the reluctance we have seen so far, given the votes against
my amendment last month, and the Bush administration's refusal to act,
we should pass this first step and stay on the job until it is done and
done right.
[[Page S10921]]
And I remind my colleagues that we will revisit the Higher Education
Act next year, and I will fight to close this loophole fully and
permanently. From coast to coast, the price of college education is
soaring and parents and students are struggling. I will continue to
fight for policies that put students above special interests and that
protect taxpayers from these wasteful subsidies.
Mr. GREGG. Mr. President, I ask unanimous consent that the bill be
read a third time and passed, the motion to reconsider be laid upon the
table, and any statements relating to the bill be printed in the
Record.
The PRESIDING OFFICER. Without objection, it is so ordered.
The bill (H.R. 5186) was read the third time and passed.
____________________