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Washington, D.C. - After months of pressure from House Democrats to permanently close the student loan loophole, Congress passed a bill today offered by Congressional Republicans to partially close the loophole over the next year. Although the bill does not completely and permanently close the loophole, Congressman Dale E. Kildee (D-MI) supported the legislation because it marks the first step towards dismantling this outrageous government subsidy he has worked hard to end. The rate of return on these special student loans is 6% higher than the return which lenders receive on traditional student loans.
“While I am pleased that Congress passed a bill that finally addresses this issue, I am disappointed that my Republican colleagues have decided to leave the door open so that lenders can continue to exploit this loophole,” said Kildee. “Instead of using this opportunity to completely and permanently close the loophole, the House Republican Leadership decided to offer a temporary and incomplete fix to this problem. As a result, Congress will be forced to revisit this issue again next year after millions of additional taxpayer money will have been wasted on this unnecessary and excessive subsidy.”
As the ranking member of the Higher Education Subcommittee, Congressman Kildee led the effort to expose this controversy by requesting a study of this practice from the Government Accountability Office back on October 17, 2003. After receiving the results, Kildee passed an appropriations amendment to cut off funding for this subsidy and introduced a separate bill to close the loophole completely and permanently. Kildee’s bill would have redirected the funds that were saved by closing this loophole directly to the Pell Grant Program.
Unfortunately, Chairman Boehner and the House Republican Leadership refused to consider Kildee’s bill and decided to offer their own version of his bill, which fails to address the issue of “recycling”. By leaving the “recycling” provision open, lenders will be able to take loan proceeds (interest payments from students and subsidies paid by the Federal government to lenders) and use them to issue or invest in loans that receive the 9.5% rate. According to GAO estimates, the “recycling” provision in the 9.5% student loan program accounts for up to 40% of existing of loan volume, which represents up to $7 billion of total loan volume ($17 billion). According to Congressional Budget Office estimates, closing the loophole partially under Chairman Boehner’s bill will only save the American taxpayer $280 million in FY05. A complete closure of the loophole would have saved taxpayers $100 million more in FY 05. |
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