U.S. Secretary of Education Margaret Spellings today joined House Education and Workforce Committee Chairman John Boehner in calling on Congress to prospectively end a provision that enables lenders to claim excessive special allowance payments for student loans.

The Secretary and Chairman Boehner called for a prospective end to the practice known as recycling, which allows lenders to use the income from loans that receive the 9.5 percent subsidy to then make new loans that also receive the benefit of the 9.5 percent subsidy. At the time the provision was created, access to loans was an issue for student loan borrowers; however, today the market is highly competitive and the 9.5 percent floor on special allowances is no longer necessary to ensure access for students.

"President Bush has long supported strengthening protections for student loan borrowers and taxpayers," Secretary Spellings said. "Eliminating these excessive payments on new loans will generate savings that can be used to support enhanced benefits for students. The Taxpayer-Teacher Protection Act was an excellent first step, but now it's time for a permanent solution."

Specifically, the Secretary and Chairman Boehner called on Congress to expand the reforms included in the Taxpayer-Teacher Protection Act of 2004, which curbed the growth of loans that receive the 9.5 percent rate by eliminating the subsidy on new loans stemming from new refinancing of pre-1993 obligations. However, the law did not affect recycling of the proceeds from the pre-1993 obligations. Prior to the Act, holders of Federal Family Education Loans (FFEL) funded with the proceeds of tax-exempt securities originally issued before Oct. 1, 1993, received the benefit of a 9.5% floor on special allowance rates. The 9.5 percent floor special allowance rate is substantially more generous than the rate paid on other loans.

"Last year, Congress acted decisively to immediately halt the most egregious practices that have allowed these excess subsidies to grow," Chairman Boehner said. "We made it clear at that time that a broad, permanent solution would be enacted this year, through reauthorization of the Higher Education Act. I thank Secretary Spellings for working with us to develop a long-term solution; the agreement we've reached reflects our shared goal of making the most effective use of taxpayer dollars to provide benefits to students fairly and equally."

Secretary Spellings also announced that the Department has completed its review of the New Mexico Educational Assistance Foundation's receipt of such subsidies, and has determined that the foundation complied with applicable laws, regulations and Department guidance on this issue. The review of the foundation's process was prompted by a report from the Department's Inspector General.

"I commend the Inspector General for his attention to this issue, and the Department will develop guidance on documentation and further strengthen its monitoring efforts," Secretary Spellings said.

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