WASHINGTON – The House moved Thursday to cut off the flow of billions of taxpayer dollars to banks by ending the guarantee of a whopping 9.5 percent return to lenders of student loans (search).
The Republican-led House unanimously approved a bill that would halt the high interest rate on new loans and shift the savings to help teachers pay college loans. The plan would last one year, with sponsors promising a more permanent fix when Congress renews the nation's higher education law next year.
For years, the guarantee to banks has been a profit-maker because the government must pay them whatever amount of interest students do not - and students are now paying less than 3.4 percent.
The bank subsidy cost taxpayers $556 million in 2003 and $634 million through June 2004, and is poised to quickly escalate into billions of more dollars, the Government Accountability Office found.
The bill, said House Education and the Workforce Committee Chairman John Boehner (search), R-Ohio, will "protect the taxpayers, support schoolteachers and help poor schools ensure every student has the opportunity to learn from qualified teachers."
Democrats said they reluctantly supported a flawed bill. They favor a permanent ban now, not a one-year fix. And they say the Republican version leaves open a loophole that allows banks to recycle the profits from current loans and then create new ones that still promise the large government payments.
"We don't deal with those provisions of this program that continue these unconscionable profits at the 9.5 (percent) loans due to recycling," said Rep. George Miller, D-Calif., (search) top Democrat on the education committee. "I'm sorry that we can't go the whole way."
Republican leaders in the Senate hope to pass the bill by the end of the week, when Congress is scheduled to recess for the election. The White House backs the measure.
"The choice is simple: pass this legislation and provide more student benefits, or block this legislation and allow lenders to continue taking advantage of this loophole," said Judd Gregg, R-N.H., chairman of the Senate education committee.
Under the Republican bill, 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. The Senate estimates the bill would free up as much as $270 million in one year.
GOP sponsors say the Democratic version of the bill would hurt nonprofit lenders who are using their excess money to help students. Yet Democrats say all the savings in their bill would aid students.
Congress tried in 1993 to stop the loan guarantee. But banks have found ways to transfer, recycle or create new loans based on the original loans, which were financed by the sale of tax-exempt bonds.
The initial promise was set in 1980, when interest rates were considerably higher and the federal government was trying to encourage college lending.
In this election year, both parties are accusing each other of having prevented a solution.
The issue has taken on more urgency in Congress after recent news reports, which brought the banks' sweet deal to greater public attention. The matter has surfaced in the presidential election, too.
President Bush (search) called for the end of high payments to banks in his budget this year. But critics point to a recent GAO finding that his administration could make changes without a new law.
"The president's kicking this to Congress is a sorry excuse for not taking action himself," said Robert Gordon, domestic policy adviser for Sen. John Kerry (search), the Democratic presidential nominee.