Loans loophole favours lenders

October 8, 2004

Opponents of the Bush Administration allege that US Government-backed student loan programmes are enriching private lenders at taxpayers'

expense.

Critics, including an investigative arm of the Government itself, say the Administration is doing almost nothing about the problem, while powerful senators have also repeatedly delayed addressing it.

Meanwhile, the cost to taxpayers could grow to billions of dollars, according to the Government Accountability Office, an investigative division of Congress.

"Without Government action, the taxpayers remain exposed to additional payments that can easily and rapidly escalate into billions of dollars," a GAO report says.

To encourage lenders to make student loans in the 1980s, the Government guaranteed a minimum 9.5 per cent rate of return.

If the interest rate charged to student borrowers declined, the Government promised to make up the difference.

Under a loophole in the law, however, banks have been able to perpetuate the high interest rates by reusing the proceeds of those 1980s loans to make new loans.

Because of rocketing student borrowing - which has increased from $11 billion (£6 billion) a year to more than $17 billion a year in the past decade, thanks to rising university tuition - this has cost the Government some $600 million so far this year to cover this gap - triple the amount it had to cover for the whole of 2001.

But while the House of Representatives and some members of the Senate have proposed closing the loophole, the Bush Administration and the Senate Appropriations Committee have prevented them from doing so, insisting that more study is needed.

The Administration said the required process of public hearings alone could take up to two years - during which lenders would reap another $2 billion, if current trends continued.

The GAO disputes that there was a need for further delay, and says the changes could be made immediately.

The issue has now become tied up in the presidential campaign between Democrat John F. Kerry and Republican George W. Bush, who already faces criticism that well-connected American conglomerates such as Halliburton are profiting from US taxpayer spending for the reconstruction of Iraq.

Republicans, said Mr Kerry, had not gone far enough to eliminate excessive subsidies for banks in the student loan system. "That's wrong," he said. "I believe in free markets, and I believe Congress shouldn't be setting profits for banks."

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