(Washington, D.C.) -- Senator Patty Murray today introduced legislation to finally and fully close a loophole in federal student loan policy that has cost taxpayers billions of dollars over the past decade.
Murray's bill, the Student Loan Abuse Prevention Act (S.2861), would end a runaway subsidy that some lenders are abusing today to create new loans subsidized far above prevailing interest rates. These overpriced loans were supposed to have ended more than ten years ago, but they continue today and are growing in volume.
While the Bush Administration and Senate Republicans are avoiding closing the loophole, Senator Murray today offered the Senate yet another opportunity to take strong action to save taxpayers money and provide more help for students in need.
"Today, I call on the Administration and Senate Republicans to finally stand up for students and taxpayers. Time is running out, and everyday of inaction costs taxpayers more money," Murray said. "If the Administration continues to fail the American people, I will continue to press my colleagues to act and act now."
This is Senator Murray's third attempt to close the subsidy loophole. On September 15th, she offered an amendment in the Appropriations Committee to the Labor-HHS-Education Appropriations bill. Her amendment failed on a party line vote. Then on September 22nd, Senator Murray spoke about the special interest giveaway on the Senate floor and urged her colleagues to act. Today, she introduced legislation to close the loophole.
"I tried to close this loophole in the Appropriations Committee. I tried to get the Administration to act. Now, I'm offering the Senate one more opportunity to close this egregious loophole and finally put an end to this boondoggle. I can't understand why anyone supports continuing to ship billions of dollars out the door, but I'll continue this fight for as long as it takes," Senator Murray said.
Murray noted that the Department of Education could end the runaway subsidy with the stoke of a pen. If the loophole stays open another six months, it could cost taxpayers $2.8 billion in interest payments.
In the 1980s, when interest rates were high, Congress promised lenders a rate of return at 9.5 percent on their loans. Congress did so to keep costs down for students and lenders. Lenders are paid a special allowance payment (SAPs) on student loans when the guaranteed lender rate of return is higher than the interest rate paid by students. In 1993, when interest rates were coming down, these 9.5 percent loans were supposed to be phased out. However, they were not phased out, and the government has been paying for them ever since. Recently, the number of these overpriced loans has increased at a disturbing rate.
On an average student loan today, with an interest rate of 3.37 percent, the government pays an SAP of .2 percent. On the 9.5 percent loans the government is paying 6.13 percent. According to GAO, two years ago this overpayment cost taxpayers $400 million. Today, it has skyrocketed to $1 billion in overpayments in fiscal year 2004.
The Murray legislation is a permanent, comprehensive fix to the abuse of the 9.5 percent rate. It will produce estimated savings of $5 billion over 10 years that would be redirected to fund the maximum Pell grant for students.
Joining Murray as original co-sponsors are Senators Kennedy, Mikulski, Durbin, Dodd, and Reed.