(WASHINGTON, D.C.) – Senators Edward M. Kennedy (D-Mass) and Patty Murray (D-Wash.) today introduced legislation to finally and fully close a loophole in the federal student loan program that according to Education Department data has cost taxpayers billions over the past decade. Introduction of the Kennedy-Murray bill comes at a time when Senate Democrats are trying to contrast their willingness to work on domestic issues like college affordability with Republican efforts to end the possibility of Senate filibusters over President Bush’s judicial nominees.
Kennedy and Murray want to end a controversial bank subsidy that guarantees lenders a government subsidized 9.5% rate of return on a certain class of student loans. Borrowers currently pay only 3.37% interest on these loans, originally financed with tax-exempt securities, but taxpayers provide loan holders like the Sallie Mae and Nelnet corporations with a subsidy for the remaining 6.13% The very lucrative “9.5% loans” were supposed to have ended more than ten years ago, but continue to be newly issued to this day. In the first three months of this fiscal year, the federal government paid $262 million to holders of 9.5% loans.
Kennedy and Murray’s Student Loan Abuse Prevention (SLAP) Act would end the runaway “9.5% loan” subsidy on new loans and give borrowers a $1,000 or 1% interest rate discount if they pay their loans off early. The lawmakers say their plan will save over $2 billion.
“Congress should stop pandering to the money-lenders and close this outrageous loophole once and for all. This taxpayer rip-off is costing us a billion dollars a year — nearly $3 million a day — and denying more students the chance to go to college,” Kennedy said. “College loans are supposed to help students, not banks.”
“Our bill would permanently and completely stop banks and special interests from 'gaming the system' at taxpayer expense,” Murray said. “Student loan programs were started to help students – not to line the pockets of lenders – and students should come before special interests.”
Both Murray and Kennedy also expressed deep disappointment that the Senate is ignoring the priorities of the nation – like helping our students to succeed – by debating the so-called “Nuclear Option.”
“We should be focused on priorities like helping to support the dream of a college education,” Murray said. “Unfortunately, the majority party has chosen to focus on breaking the rules instead of breaking down barriers for America’s college students.”
”Republicans should join Democrats in working to protect the public treasury, instead of wasting time in Washington trying to pack the courts,” said Kennedy.
The SLAP Act corrects what was originally conceived in the 1980s as a temporary measure to encourage lenders to offer student loans in spite of what were, at the time, high interest rates. The program guaranteed lenders a 9.5% rate of return on student loans. However, as rates fell over the next twenty five years, lenders continued to make loans at the subsidized 9.5% rate. Although Congress attempted to phase out the guaranteed 9.5% rate in 1993, it has continued to this day.