Timeline: 9.5% Loans
To ensure that students have access to college financing, the Tax Reform Act of 1976 encourages states to issue tax-exempt bonds to finance student loans. States begin establishing student loan authorities that issue both tax-exempt and taxable bonds, which become highly profitable at taxpayers' expense.
Intending to limit government payments to lenders at a time of high interest rates, Congress passes a new subsidy formula guaranteeing a minimum return of 9.5% on student loans financed with tax-exempt bonds.
A Congressional Budget Office study finds that student loan authorities remain “substantially more profitable” than commercial banks due to the 9.5% guarantee.
Omnibus Budget Reconciliation Act of 1993 eliminates 9.5% guarantee for new student loan bonds, but a “grandfather clause” keeps the guarantee for pre-existing bonds and loans made with collections from earlier loans.
Student loans made from tax-exempt loan funds begin being transferred to for-profit lenders.
U.S. Department of Education proposes repeal of 9.5% loan provisions.
Fall
Investigators for the U.S. Department of Education alert officials in Washington, D.C., to a lender's scheme to expand holdings of 9.5% loans. Investigators request permission to order the lender to stop. Instead, officials order the investigation closed without raising the 9.5% loan scheme as an issue.
June
Department of Education receives letter from for-profit lender, Nelnet, declaring its intention to bill taxpayers for 9.5% loans funded by qualifying tax-exempt bonds for as little as one day. The letter requests clarification as to the legality of the scheme. The Department does not respond.
October
Congressional Research Service, in memorandum requested by Sen. Edward Kennedy, documents rising cost of 9.5% loans.
U.S. News & World Report cites the 9.5% loans as a problem in front-page expose, "Big Money on Campus: How Taxpayers are Getting Scammed by Student Loans."
Reps. Dale Kildee and Chris Van Hollen ask the Government Accountability Office to review the 9.5% loan situation.
Sen. Edward Kennedy and others introduce legislation that includes a full repeal of the 9.5% loan provisions (S.1793).
February
President Bush's 2005 Budget submission to Congress says that the "significantly lower" government costs in the direct loan program "call into question the cost effectiveness of the FFEL program structure." The Budget cites the 9.5% loans as one example of "unnecessary subsidies," and calls on Congress to end them.
May
Reps. John Boehner and Howard ("Buck") McKeon introduce legislation that includes partial closure of 9.5% loopholes (H.R. 4283).
June
Department of Education replies to letter it received from Nelnet more than a year before (see June 2003). The reply does not declare Nelnet’s actions as either legal or illegal, appropriate or inappropriate.
July
Nelnet issues news release announcing that it will
fully recognize income from cloned 9.5 loans due to "clarifying information"
received pursuant to a request for clarification from the U.S. Department
of Education. Nelnet’s stock price rises more than 20%.
The Institute for College Access and Success (TICAS)
files Freedom of Information Act request with the Department for documents
relating to Nelnet's announcement.
August
GAO briefs congressional requesters on its draft findings regarding 9.5% loans.
Reps. Kildee and Van Hollen and Sen. Kennedy call on the Secretary of Education to close the loophole immediately and transfer the subsidy payments to financial aid programs for college students.
TICAS releases "Money for Nothing," a report on 9.5% loans. The report discloses the Nelnet letter to the Education Department warning of the cloning plan in June 2003.
New York Times article discloses GAO and TICAS findings.
Sen. John Edwards (who had proposed student loan reforms a year earlier) calls on the White House and Department of Education to close the 9.5% loophole, asserting that they have the authority to do so.
September
Jamienne S. Studley, president of Public Advocates and former Education Department General Counsel, tells the Secretary of Education that he does have the authority to immediately stop some of the 9.5% abuses.
Reps. Kildee and Van Hollen propose an amendment aimed at closing the 9.5% loopholes for a year (the duration of the appropriations bill that they were amending). The amendment passes 413-3.
Sen. Patty Murray, proposes an amendment in the Senate Appropriations Committee to stem the 9.5% costs. The amendment fails.
The Government Accountability Office releases final report, "Statutory and Regulatory Changes Could Avert Billions in Unnecessary Federal Subsidy Payments." The report confirms that the Department of Education could do more to avert 9.5% costs, even without congressional action.
Rep. John Boehner and others introduce H.R. 5186, the Taxpayer-Teacher Protection Act of 2004. The bill includes a partial, temporary closure of the 9.5% loophole, and uses the taxpayer savings to forgive student loans for teachers serving disadvantaged students.
October
H.R. 5186 is passed by the House and by the Senate, and is signed by President Bush, becoming Public Law 108-409.
January
Congressional Budget Office finds that legislation by Reps. Tom Petri and George Miller would transfer $12 billion from inefficiencies in the student loan program to grants for low-income students, without increasing federal spending.
President Bush endorses the idea making the student loan program more efficient, and using the savings to increase grants for students.
February
President Bush’s budget calls for $4.4 billion in reductions in subsidies to student loan companies over five years.
House committee leadership announces its opposition to the President’s proposed reductions in lender subsidies.
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