Congress Trying to Redirect College Money to Teachers

WASHINGTON – Congress is trying to end a practice that unintentionally has allowed banks to take in billions of dollars meant to help students pay for college.

Lenders are profiting from a promise the government made in 1980 to encourage college loans (search): a guaranteed return of 9.5 percent on those loans financed by tax-exempt bonds.

The government must pay lenders the interest that is not covered by students. With interest rates now below 3.4 percent, making up the difference has become a budget nightmare.

Republicans and Democrats have different ideas about how to end the big payments to lenders. Lawmakers on both sides hope to pass at least a temporary fix before Congress is done for the year.

On Thursday, the Republican chairmen of the House and Senate education committees offered legislation to erase the 9.5 percent guarantee and shift the savings to teachers.

Teachers who spend five years in poor schools and in the fields of math, science and special education would get as much as $17,500 in loan forgiveness, more than triple the current aid.

"This is obviously a much better use of these funds than simply lining the pockets of lenders," said GOP Sen. Judd Gregg (search) of New Hampshire, chairman of the Senate Health, Education, Labor and Pensions Committee.

The Republican plan would last for just one year. Sponsors say they would seek a permanent solution during the renewal of the higher education (search) law next year.

The top Democrat on the House Education and the Workforce Committee (search), Rep. George Miller of California, said Democrats would support the bill if it were the only choice that Republican leaders offered before Congress adjourned.

Sen. Edward Kennedy of Massachusetts, the top Democrat on the Senate committee, said that if Republicans were serious, "Congress will act immediately to end this rip-off once and for all."

Rep. John Boehner of Ohio, the House committee chairman, said he hoped Congress would pass the bill next week.

Congress meant to stop the practice of inflated payments to banks in 1993. But it did not happen, as lenders refinanced, transferred or created new loans based on sales of old bonds.

As a result, the cost to the public is rising, according to the Government Accountability Office, the investigative arm of Congress.

The amount paid by the government to lenders more than tripled from 2001 through June 2004, from $209 million to $634 million. Since 1995, the volume of loans based on the 9.5 percent guarantee has grown from about $11 billion to more than $17 billion.

The GAO this month urged lawmakers to end the promise of 9.5 percent loans and set a rate of return that better reflects current market rates. The agency also said the Education Department should pass rules ending the payments to banks on the many loans that have been transferred to bonds sold after Congress acted in 1993.

Education Department officials say they are hamstrung by a Clinton administration directive and cannot change the rules before July 2006 because of a required review process.

President Bush supports the change. The quickest and most direct way to accomplish that is for Congress to pass a law, said Bush's budget director, Josh Bolten, and Education Secretary Rod Paige in a letter Thursday that praised the GOP plan.

That proposal would apply to new loans but largely leave untouched the billions of dollars in existing loans. That is meant to avoid the risk of costly litigation, bill sponsors said.

But the plan does not go far enough, said Robert Shireman, leader of The Institute for College Access and Success, a nonprofit watchdog group on student loans.

"If the secretary of education were to simply confirm that the growth in 9.5 percent loans was created inappropriately — as GAO and other investigators have said — then taxpayers would not be shelling out these billions of dollars," Shireman said.