DJ UPDATE: US House Votes To Close Student Loan Loophole
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By John Godfrey Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--The U.S. House voted, 224-178, Friday to shut down a loophole allowing lenders to qualify for a generous federal subsidy.
The vote came during debate of legislation providing the fiscal year 2006 budget for federal education programs.
Specifically, the House voted to amend the bill to prohibit the Education Department from paying a guaranteed minimum 9.5% rate of return on student loans financed by certain tax-exempt bonds.
The House subsequently passed the funding bill, but it must be approved by the Senate before it can go to the president for signing. It is also unclear whether the amendment will work at all, given the way it is drafted, a House Republican aide said.
In 1993, Congress tried to shut down the 9.5% loan programs, which were first introduced in a high interest-rate era, but lenders found a loophole that allowed the number of loans to instead skyrocket.
Last year, Congress voted to limit such loans, but the limit was temporary and, critics charged, still allowed abusive loans to continue.
The Institute for College Access and Success, a not-for-profit organization, estimates that the cost of 9.5% student loan subsidies has actually increased since Congress acted last year.
"Closing this loophole would make available billions of dollars, giving more students an opportunity to attend college," said the amendment's sponsor Rep. Chris Van Hollen, D-Md., Friday.
House Education and Workforce Committee Chairman John Boehner, R-Ohio, objected to Van Hollen's amendment, saying it would hurt the not-for-profit organizations holding these loans.
Most of the top holders of 9.5% loans are state agencies. The exceptions are Nelnet Inc. (NNI) and Sallie Mae (SLM).
"I am as disgusted by this scheme as (Van Hollen)" said Boehner. But Van Hollen's amendment to abruptly eliminate of the program "would put those non-profit lenders, literally, out of business," Boehner said.
Boehner also said that his committee is already working on legislation to more appropriately close the loophole.
Students who hold newly-issued 9.5% loans pay an interest rate of less than 3.37%, Van Hollen said. The government pays the remaining 6.13% to lenders.
In fiscal year 2004, the subsidy cost the government $1 billion, Van Hollen said.
-By John Godfrey, Dow Jones Newswires; 202-862-6601; John.Godfrey@dowjones.com