Federal loan refinancing student

When U.S. Secretary of Education Roderick Paige in 2001 promised to cut down on government waste at the Education Department, it probably didn't occur to most people that some of that "waste" would continue to trickle down to banks that offer student loans.

With the reauthorization of the Higher Education Act stalled in Congress, it turns out that access to college may be further hampered by the department's payments of unintended interest money to student loan companies, according to a report called "Money for Nothing," by The Institute for College Access and Success (TICAS), and preliminary findings by the U.S. Government Accountability Office (GAO). This year, nearly $1 billion was doled out, the TICAS report said--money that the department agrees could be going to needy students through loans and grants. GAD expects to issue its report on the special allowance payments--which are financed by tax-exempt bonds--at the end of this month, said Jeff Appel, assistant director of education workforce and income security at GAO.

When Congress began phasing out a 9.5 percent guaranteed interest rate for the student loan industry in 1993, the Education Department implemented rules that contained a loophole allowing some loan companies to continue charging the federal government that interest rate level on amounts already raised for loans. Meanwhile, in recent years, the 9.5 percent loans have been provided to students at market rates--currently, at less than 3.37 percent, according to Sen. Edward M. Kennedy, D-Mass.

Now that the loophole will likely be closed with the renewal of HEA, banks have been hatching innovative legal tactics to transfer the high interest rate onto new loans.

TICAS's report recommends that the department address the problem immediately by publishing a clarification prohibiting the serial refinancing of loans and limiting the dollar volume of 9.5 percent loans to the amount of the original tax-exempt bonds. "The loophole [itself] was created through a clarification, a 'Dear Colleague' letter in 1996 in the context of a different interest rate environment," said Robert Shireman, director of TICAS and a congressional appointee to the federal Advisory Committee on Student Financial Assistance. Such agency clarifications aren't burdensome, he said.

In response, Sally L. Stroup, assistant secretary for education for postsecondary education, said, "We can't do that. We can't change policy any time we want to. There are administrative procedures we have to follow in negotiated rulemaking, which are required by statute, and [that's] a lengthy process. This [remedy] can't happen before July 2005."

Groups such as the United States Student Association and the U.S. Public Interest Research Groups recently echoed calls by members of Congress for the department to take immediate action. In response to Sen. Kennedy's call that the department issue emergency regulations to fix the problem, Stroup said such a process is used only for health and safety issues.

The report also suggests that the Education Department convert all remaining 9.5 percent loans to regular loans, even though such an action "may require requesting new, emergency authority from Congress before the end of this legislative session."

Stroup said Congress would have to consider the measure through the HEA reauthorization bill. "The [fix] could have been done in July 2003, when we became aware of the problem--we were looking at what we were paying in increased special allowance payments [as] a result of interest rates--but we had no idea that HEA reauthorization would take so long; we thought it would be done this year," she said.

Stephanie Babyek, a spokeswoman for the Education Department, explained that in July 2003, "we looked at negotiated rulemaking [as a solution, but] we were looking for the quickest process, and the rulemaking process wouldn't have been finalized until 20065

The Education Department's 2005 budget contains a proposal to end future abuse of the loophole, and the department decided to include the budget in the currently plodding HEA.

The budget is "best [addressed] through the HEA reauthorization, where it will be considered in one package--including savings projected and new spending [proposals]--not piece by piece," Stroup said. "It's our intention that the savings will be spent on students."

While a small number of students at two-year colleges finance their education through federal student loans--6.9 percent, according to the American Council on Education's 2003 Status Report on Federal Education Loan Programs--and while these students account for only 4.5 percent of total federal loan volume, 35 percent of all federal Pell Grants go to two-year students, Shireman said. "If the Department of Education or Congress closed the loophole this year, Congress could use the savings in the annual appropriations bill," he said, ostensibly to help students who receive all forms of federal student aid.

If the loophole remains open for another year, an estimated $2.8 billion may be spent unnecessarily, the TICAS report said. Rep. Chris Van Hollen, D-Md., who along with Rep. Dale E. Kildee, D-Mich., originally requested the GAO study, called on Secretary Paige to "use his regulatory authority to stop this abuse immediately," and commented that "scarce federal resources should be spent where they are needed most--not to provide windfall subsidies to already profitable institutions."