Taxpayer-Teacher Protection Act of 2004

TAXPAYER-TEACHER PROTECTION ACT OF 2004

Mr. REED. Mr. President, I support the limited effort before us today to close a loophole in Federal student loan policy that has cost taxpayers billions of dollars over the past decade.

In the 1980s, when there were fears that student loans would become scarce due to high interest rates, Congress provided lenders participating in the Federal Family Education Loan, FFEL, program a guaranteed minimum 9.5-percent return on student loans generated from tax-exempt bond funds. Congress did so to ensure that there would be lenders willing to make affordable loans for students.

In 1993, Congress sought to end the 9.5-percent guaranteed return on what had become a small subset of student loans due to a much lower national interest rate environment, the growth in availability of other private bank and government-subsidized student loans, and the creation of Federal direct loans.

In doing so, a grandfather clause was enacted for outstanding 9.5-percent return, tax-exempt bond generated student loan funds. Rather than end the 9.5-percent loans, this grandfather clause has worked as a loophole. Owners of 9.5-percent guaranteed loans continually recycle proceeds from tax-exempt bonds originally issued before 1993-creating in effect a revolving loan fund-and the Federal Government continues to guarantee a 9.5-percent rate of return on what is today approximately 1 out of every 20 student loans. Lenders of the remaining 19 out of 20 student loans receive a much lower guaranteed interest rate-less than 4 percent.

This overpayment has grown dramatically over the past few years, as this administration and Department of Education have failed to intervene and stop it. According to the Government Accountability Office, GAO, the overpayment cost taxpayers well over $600 million by the end of June 2004, up from $209 million in Fiscal Year 2001.

To finally close this loophole once and for all, I joined Senator Kennedy in introducing S. 1793, the College Quality, Affordability, and Diversity Improvement Act last October, which among many provisions to expand access to higher education, would eliminate the 9.5-percent giveaway. More recently, I cosponsored legislation introduced last week by Senator Murray-S. 2861, the Student Loan Abuse Prevention Act-which would also permanently fix the abuse of the 9.5-percent rate and redirect the estimated savings of $5 billion over 10 years to increase the maximum Pell grant for low-income students.

Regrettably, the bill before us today does not contain such a comprehensive and permanent fix. This more limited effort provides only a temporary 1-year solution and it continues to allow "recycling" of loans, as opposed to the bonds, by which the lender uses the income from current 9.5-percent guarantee. And, instead of using the more modest savings from this bill to boost grants for low-income students struggling to afford college, the savings will be used for a different but important cause-providing help to certain teachers through loan forgiveness.

Considering how long it has taken the majority to act on this situation, I am pleased we are taking this first, although, limited step. I will be working with my colleagues to fully close this costly loophole in the upcoming Higher Education Act reauthorization process and capture these savings for students. I thank Senators Kennedy and Murray and their staffs for their leadership and work on this matter.