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Lawmakers Again Target Maligned Student Loan Subsidy

Critics say the Bush administration could have stopped much of the subsidy growth but looked the other way. "Rather than taking steps to protect taxpayers," said Robert Shireman, a student loan expert with a Democratic rsum, Bush education officials allowed "these companies to engage in an outrageous misreading of what the law really was."

The original rationale for the subsidy, established in 1980 in an era of high interest rates, was to encourage state and state-authorized institutions to raise funds for the student loan market with tax-exempt bonds. In 1993, Congress decided to end the 9.5 percent guarantee for loans financed with new tax-exempt bonds. The law enacted that year created an exception for loans financed with previously issued bonds. It was widely assumed that the subsidy payouts would dwindle and in time disappear.

But a September 2004 Government Accountability Office report found that the opposite had occurred: The total value of loans qualifying for the 9.5 subsidy rose from about $11 billion in 1995 to more than $17 billion in 2004.

The report found that lenders were using elaborate financing techniques -- with bonds new and old, taxable and tax-exempt -- to maintain and in some cases grow their subsidy income. These arcane strategies were labeled recycling, refunding and transferring. The GAO said the Bush administration could crack down immediately through regulation, but the Education Department disagreed. It said Congress should provide the 9.5 percent solution.

An exchange of letters between the department and Nelnet illuminated the issue. In May 2003, the company alerted the department to a financing plan that critics called an aggressive reading of the subsidy rulebook. The department's brief reply in June 2004 did not question the plan's validity. The company then began claiming increased subsidy income.

Later that year, Congress approved a measure to partially shut down financing techniques that had been used to perpetuate the subsidy -- but only through 2005.

Last May, Education Department Inspector General John P. Higgins Jr. issued a report contending that the government had overpaid a New Mexico lender as much as $36 million. The report faulted financing techniques the lender used to qualify for the subsidy, a criticism with potentially damaging implications for other lenders. The lender, the nonprofit New Mexico Educational Assistance Foundation, protested the finding.

In July, Education Secretary Margaret Spellings largely rejected the inspector general's conclusions, announcing that the lender followed applicable laws and rules. Higgins wrote later in a report to Congress that the department had allowed lenders to "retain and continue to receive excessive" 9.5 subsidies. "These payments will not result in any identified benefit to the government," the inspector general wrote.

With Bush administration support, House and Senate negotiators agreed to shut down the controversial financing techniques for good. That would eventually end the subsidy as qualified bonds are retired and loans are repaid. The measure was attached to a larger budget bill that won Senate passage on Dec. 21. Earlier, the House had passed a nearly identical budget bill. The House is expected to give final approval early next year, sending the bill to President Bush for signature.

Senators inserted one caveat in the 9.5 subsidy provision: Nonprofit lenders with qualifying loans worth less than $100 million would be able to extend the subsidy via financial "recycling" methods through 2010. Such lenders represent a small fraction of the market.

One protected lender would be the Wyoming Student Loan Corp. Its interests were guarded by a senior negotiator, Sen. Mike Enzi (R-Wyo.), chairman of the Committee on Health, Education, Labor and Pensions. Enzi's staff could not be reached this week for comment.

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