Congress Ends Favorable Rates on Student Loans

Congress is ending a promise to banks that has allowed them to reap billions of dollars in profits from a federal college aid program.

Legislation halting the federal guarantee of a 9.5 percent rate of return to lenders of certain student loans was passed Saturday by the Senate and sent to President Bush. The bill, endorsed by the White House, won approval Thursday in the House.

The 9.5 percent interest rate on many loans will be replaced with an adjustable rate reflecting the market. The guarantee to banks has long been a profit-maker because the government has had to pay them whatever amount of interest students do not, and students now pay under 3.4 percent.

Sen. Judd Gregg (search), R-N.H., chairman of the Health, Education and Labor Committee (search), said the bill "essentially saves the taxpayers from paying out a $100 million windfall to people who give loans to students."

The money will be diverted to forgiving up to $17,000 in student loans for teachers who spend five years in poor schools and in the fields of math, science and special education.

The change would last one year, with sponsors promising a permanent fix when Congress renews the nation's higher education law next year.

Congress tried to stop the guarantee in 1993, but banks have continued to get the high-yield rate by transferring, recycling or creating new loans based on the old ones.

Democrats favored a permanent fix but reluctantly backed the one-year version to fix what both parties call a loophole. They complained the Republican version still leaves open a way for banks to recycle profits from current loans and then create new ones that promise the large government payments.

"No one should be fooled," said Sen. Edward M. Kennedy (search), D-Mass. "Half of the student loan loophole that this bill leaves wide open goes to for-profit corporations like Nelnet and Sallie Mae. We should be helping students who are eligible for Pell grants, instead of subsidizing big banks needlessly."

The bank subsidy cost taxpayers $556 million in 2003 and $634 million through June 2004. Without government action, the cost would quickly escalate into billions of dollars, the Government Accountability Office (search) found.