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Quietly, House Gives Sallie Mae a $692 Million Break

By Juliet Eilperin
Washington Post Staff Writer
Thursday, October 28, 1999; Page A16

With no debate, a popular bill aimed at helping disabled people return to the workplace was quietly amended on the House floor last week to include a potential multimillion-dollar break for Sallie Mae, the Washington area company that is the biggest provider of student loans in the country.

The language for Sallie Mae would rewrite the way federally backed student loan rates are calculated, with a new formula the Clinton administration calculates could mean an extra $1.7 billion in profits for lenders over the life of new loans, including $692 million for Sallie Mae alone.

Sallie Mae's congressional allies added the provision to the disabilities bill because it was the best vehicle for quickly winning approval of a measure they say would help lenders cope with fluctuations in market interest rates. The disabilities bill is wildly popular on both sides of the aisle and was easily approved by both the House and Senate.

The final shape of the bill will be worked out in a House-Senate conference committee in the coming days, and Clinton administration officials vowed they would work hard to delete the provision. They said lenders are already doing well under the student loan program, and said it was unfair to give them potentially higher returns.

"Now they're asking for more," said Marshall Smith, acting deputy secretary of education. "If there is more to be had in terms of profitability, those savings should somehow go to the students."

But officials for Sallie Mae--which has retained three former members of Congress as lobbyists and spent $1.1 million on lobbying during the first six months of this year alone--said the company was simply seeking a "long overdue" correction to a student loan reform package last year that reduced lenders' profits by 30 percent. They questioned the Education Department's contention that the company would reap new profits and noted congressional analysts' calculations that the change would even save the government $20 million over the next five years.

"This allows us to stabilize our financing for the future," said Sallie Mae executive vice president Larry O'Toole, who noted the administration based its calculations on the worst-case scenario of current market conditions. "I've never seen us receiving profits as a result of this."

At issue is the complicated financing arrangement for the hundreds of millions of dollars loaned to students by companies such as Sallie Mae. Under the current system, these lenders are able to make favorable loans to students because of subsidies from the federal government.

Essentially, Sallie Mae wants the government to rewrite the way these subsidies are calculated, reducing the risk the company faces from fluctuating interest rates. Right now, those subsidies are based on Treasury bill rates, while the company must borrow at more volatile commercial lending rates. That means that when the difference between the two rates rates is especially wide, Sallie Mae must bear the cost.

Under the proposed system, the federal subsidy would be based on commercial rates, meaning the government would bear any additional costs from climbing commercial rates while profiting from a decline in rates. While the Office of Management and Budget and the Congressional Budget Office have estimated the government would not lose any money from the switch, officials at the Treasury and Education departments say a spike upward in commercial interest rates would cost taxpayers dearly.

"It's a special-interest giveaway that shifts potential risk to the taxpayers," said Sanjeev Bery, higher education associate for the U.S. Public Interest Research Group. "Sallie Mae has a major presence on Capitol Hill in terms of campaign contributions and lobbying expenses, and now Sallie Mae is trying to cash in."

O'Toole called the administration's $692 million profit estimate "an outrageous number," adding the company is willing to sacrifice some profits in exchange for less volatility and Congress could always readjust the subsidy system when it reevaluates the student loan program in 2002.

O'Toole played down his company's lobbying campaign, saying nearly $350,000 of this year's $1.1 million expenditure went to fund student seminars and a program aimed at reducing loan default rates for students at historically black colleges.

Without question Sallie Mae has directed considerable resources toward Congress over the past year: its lobbying expenses for the second half of last year outranked those of RJR Nabisco, Procter & Gamble, and the AFL-CIO, according to U.S. PIRG, and it hired former representatives Tom Downey (D-N.Y.), Vin Weber (R-Minn.) and Pat Williams (D-Mont.) as lobbyists.

Rep. Howard P. "Buck" McKeon (R-Calif.), who chairs the student loan panel and backs the change, said the switch could help students by attracting more lenders to the student loan program. He noted that Congress reduced lenders' profits a few years ago and "this is giving a little bit back."

© Copyright 1999 The Washington Post Company

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