Murray Effort to Close Federal Student Loan Loophole Fails on Party-Line Vote, Senator Vows to Continue Fight for Students, Fiscal Responsibility

Update: 9/22/04 – Murray Fights on Senate Floor to Protect College Students and Taxpayers from Runaway Lender Subsidy | 9/29/04 – Senator Murray Introduces Bill to Finally Close Multi-Billion Dollar Student Loan Subsidy Loophole

Summary of Amendment

(WASHINGTON, DC) – Flying in the face of public policy recommendations and a bi-partisan vote in the House of Representatives, Senate Appropriations Committee Republicans today rejected an amendment from Senator Murray that would have closed a loophole in federal student loan policy that has cost the federal government billions of dollars in recent years. The Murray amendment Republicans rejected would have redirected the estimated $290 million in savings back into programs to make college more affordable and accessible.

The amendment, offered in today’s committee hearing on the Labor-HHS-Education Appropriations bill, would have put an end to a huge overpayment some lenders receive from the federal government despite plans to phase out these higher interest loans ten years ago. It is estimated that a delay of even six months for this change could cost the government $2.8 billion in interest payments despite widespread agreement among lenders and Members of Congress from both parties that these loans should not exist today.

“It’s disappointing that today some Republicans refused to take a strong stand on the side of students and fiscal responsibility. My amendment was a simple effort to close an egregious loophole that could cost us billions of dollars in the next few months alone. Somehow politics won over sound policy today, and our budget and our students will pay the price,” Senator Murray said.

Following the defeat of her amendment, Murray secured an agreement from the Chairman and ranking members of each committee involved to re-address the issue when the Labor-HHS-Education Appropriations bill comes before the full Senate.

In the 1980s when interest rates were high, Congress promised lenders a rate of return at 9.5 percent on their loans. Congress did this in an attempt to keep costs down for students and lenders in the program. Lenders are paid a special allowance payment (SAPs) on student loans when the guaranteed lender rate of return is higher than the interest rate paid by students. In 1993, when interest rates were coming down, these 9.5 percent loans were supposed to be phased out. However, they were not phased out and the government has been paying for them ever since. In fact, recently the number of these loans has increased at a rapid rate.

On an average student loan today, with an interest rate of 3.37 percent, the government pays an SAP of .2 percent. On the 9.5 percent loans the government is paying 6.13 percent. According to GAO, it is estimated that the cost of this overpayment to the lenders was $400 million two years ago, and skyrocketed to $1 billion in overpayments in fiscal year 2004

The Murray amendment would have stopped this runaway subsidy and used the savings to add $290 million back into critical higher education programs. Some committee members suggested today that the loophole would be better addressed during the forthcoming reauthorization of the Higher Education Act.

“I support efforts to correct this problem in the authorization process, but that will not move forward soon enough. We should not flush hundreds of millions of dollars down the drain while we wait for that bill to move forward. The American people won’t stand for it, and neither will I,” Murray said.

Problem:

In the 1980s, lenders were promised a rate of return at 9.5 percent on their loans when interest rates were high, and Congress was trying to keep costs down for students and lenders in the program. Lenders are paid a special allowance payment (SAPs) on student loans when the guaranteed lender rate of return is higher than the interest rate paid by students. In 1993, when interest rates were coming down, these 9.5 percent loans were supposed to be phased out. However, they were not phased out and the government has been paying for them ever since. In fact, recently the number of these loans has increased at a rapid rate.

On an average student loan today, with an interest rate of 3.37 percent, the government pays an SAP of .2 percent. On the 9.5 percent loans the government is paying 6.13 percent. According to GAO, it is estimated that the cost of this overpayment to the lenders was $400 million two years ago, and skyrocketed to $1 billion in overpayments in fiscal year 2004. It is also estimated that a delay of even six months for this change could cost the government $2.8 billion in interest payments.

Solution:

Pass the Murray amendment to end this subsidy and put the savings back in the hands of students.

Student Aid Funding Increases:

The Murray amendment would stop this runaway subsidy and uses the savings to add $290 million back into critical higher education programs.

The amendment:

• Doubles state grants through the Leveraging Education Assistance Partnership program to $3,000 for an estimated 700,000 students;
• Doubles the funding for Campus Child Care programs to $36 million so that 25,000 additional low-income student parents can go to college;
• Adds an additional $84 million to Supplemental Educational Opportunity Grants adding roughly 200,000 new recipients who will get $800 in grants from their schools;
• Adds $72 million to the TRIO program so that more that 80,000 additional low-income and first-generation students can pursue higher education;
• Increases funding for GEAR UP by $25 million so that 100,000 more middle and high school students have the promise of college;
• Increases funding for the High School Equivalency Program by $5 million and the College Access Migrant Program by $5 million to help low-income migrant and seasonal farm workers finish high school and successfully enter college; and
• Increases funding for graduate education by $7 million.