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.

Sincerely,

/s/

Rod Paige

|Last Modified: 11/24/2004
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