Lawmakers Again Target Maligned Student Loan Subsidy

Twelve years ago, Congress passed a law meant to phase out an obscure interest rate subsidy for providers of student loans. But the lenders exploited legal loopholes and falling rates to enlarge their take from the federal government -- aided recently, critics charge, by an acquiescent Bush administration.

Now, lawmakers are on the verge of passing legislation they say will eventually kill the subsidy that refused to die.

Behind the measure, tucked into a budget bill that could win final congressional approval in early 2006, is a saga of government action -- or inaction -- that helped some enterprising financial institutions in recent years reap hundreds of millions of dollars.

Nelnet Inc., a for-profit lender based in Lincoln, Neb., is a leader in the field. The company holds roughly $3.5 billion in student loans that qualify for a government-guaranteed 9.5 percent interest rate.

Interest rates on government-backed loans paid by the student borrowers are lower -- often far lower. Some have recently financed their college education at less than 4 percent. The government pays the interest rate difference to Nelnet and other lenders that qualify for what is known as the 9.5 subsidy. The lower the market rates, the higher the subsidy -- and the greater the potential profit for the lender. That has proven costly for the federal treasury in what has been a decade of low rates.

The total federal payout in the first nine months of 2005 was more than $600 million, Education Department data show. Nelnet reported $77 million in profit during that time as a result of the subsidy. Yet Nelnet agrees with lawmakers and Bush administration officials who say the subsidy should end in coming years.

"This is an opportunity for this Congress to say, today, this policy doesn't make sense any longer," Nelnet spokeswoman Cheryl Watson said in a telephone interview.

Watson said the company endorsed the pending legislation, which would end financing practices that extended the subsidy's life. "We believe it makes good sense and will provide for better utilization of the funds. It's a position that we support."

Democrats say the subsidy's demise is long overdue.

"This has been a run on the taxpayer," said Rep. Chris Van Hollen (D-Md.), a member of the Education and the Workforce Committee who has tracked the issue. "Certain lenders have lined their pockets at the expense of students."

Republicans also lament the subsidy. But they say their hands have been tied by statute and legal interpretations dating to the Clinton presidency.

"The law is the law is the law," said Sally L. Stroup, assistant secretary of education for postsecondary education. "What the law says is what you pay people. We didn't make this stuff up. We may not like it and nobody else may like it, but we can't just unilaterally ignore Congress."