November 18, 2004
Honorable Edward M. Kennedy
United States Senate
Washington, DC 20510
Dear Senator Kennedy:
Thank you for your August 25, 2004, letter regarding excessive special allowance payments made to certain lenders under the Federal Family Education Loan Program. In February, the President called on the Congress to close the loophole in his fiscal year 2005 Budget and to use the savings to benefit students. The Congress responded, and, on October 30, the President signed into law the Taxpayer-Teacher Protection Act of 2004, which closes the loophole and passes the savings on to math, science, and special education teachers in the form of increased student loan forgiveness. The Act provides important incentives for highly qualified teachers to teach in those areas where they are most needed. The following responds to the specific questions raised in your letter:
Did the Department approve of the methods that Nelnet and other lenders are using? If not, why hasn't the Department sought to recover illegitimately claimed subsidies?
The Department did not approve or disapprove of the methods that Nelnet and other lenders were using. Rather, the Department implemented the requirements of the Higher Education Act of 1965, as amended (HEA), existing Department regulations, and interpretations of those regulations, including an interpretation issued by the prior administration expressly permitting lenders to extend the excessive special allowance payments indefinitely.
If the basis for this is a regulatory ruling that pre-dates the Bush Administration, and the Administration disagrees with that ruling, why hasn't the Department changed it in light of the 1993 statutory change intended to limit the growth in 9.5% loans?
In March 1996, the prior administration issued an authoritative interpretation
of Department regulations that provided "if a loan made or acquired with
the proceeds of a tax-exempt obligation is refinanced with the proceeds of a
taxable obligation, the loan remains subject to the tax-exempt special allowance
provisions." As stated above, the Bush Administration proposed to change
this policy in the President's fiscal year 2005 Budget, and, on October 30,
the President signed into law the Taxpayer-Teacher Protection Act of 2004, which
closes the loophole and passes the savings on to math, science, and special
education teachers in the form of increased student loan forgiveness. Although
we would have preferred an even quicker fix to close the loophole, some actions
taken by the administration legally require notice to the public and an opportunity
to comment pursuant to the Administrative Procedure Act (APA).
The federal courts in the District of Columbia have interpreted the APA to require agencies to conduct rulemaking to change regulatory interpretations. In addition, the HEA requires the Department, for regulatory changes relating to Federal student aid programs, (1) to conduct negotiated rulemaking, which requires protracted negotiations and regional meetings with stakeholders, and (2) to comply with a calendar requirement that delays the effective date of such changes. It would have, thus, taken the Department about two years to reverse the prior administration's policy.
Despite the Government Accountability Office's claim to the contrary, the Department could not invoke the "public interest" exception to rulemaking here. The courts require that exceptions to the regulatory process be used sparingly and "limited to emergency situations." We believed that it was not a viable option to call this issue an "emergency" when it was specifically endorsed by the prior administration and has been on the books for close to a decade. The President was nevertheless adamant that the loophole had to be closed to preserve precious taxpayer dollars, and we are very pleased that the Congress responded to the President's call for reform.
If the Department believes a statutory change is required to stop 9.5% loans, would the Administration support such a change being passed immediately with all secured savings dedicated to improving college access and affordability?
As stated above, the Bush Administration proposed to change this policy in the President's fiscal year 2005 budget, and, on October 30, the President signed into law the Taxpayer-Teacher Protection Act of 2004, which closes the loophole and passes the savings on to math, science, and special education teachers in the form of increased student loan forgiveness. Thank you for your support of the Act. Closing this loophole and investing the savings in our nation's teachers helps to ensure that a highly qualified teacher teaches every child in America. The Department will move expeditiously to implement this legislative remedy.
I hope this information is helpful to you. The Department is compiling materials
that are responsive to your request for documents. If you have further questions
or need additional information, please let me know.