Student Loan Issues and the Reauthorization of the Higher Education Act
Released: 2004-11-22T00:00:00

Summary:
The federal government operates two major student loan programs: the Federal FamilyEducation Loan (FFEL) program, authorized by Part B of Title IV of the Higher Education Act(HEA), and the William D. Ford Direct Loan (DL) program, authorized by Part D of Title IV of theHEA. These programs provide loans to undergraduate and graduate students and the parents ofundergraduate students to help them meet the costs of postsecondary education. Together, theseprograms provide more direct aid to support students' postsecondary educational pursuits than anyother source. In FY2003, they provided $45.8 billion in new loans to students and their parents.
The HEA is being considered for reauthorization. This report discusses issues concerningthe FFEL and DL student loan programs that are likely to be considered during reauthorization.
Issues that are expected to receive attention include borrower interest rates, loan fees,refinance opportunities, and annual and aggregate loan limits. Additionally, it is likely thatconsiderable attention will be devoted to promoting greater comparability between the loan termsand conditions made available to borrowers in the FFEL and DL programs.
In general, helping students by enhancing their benefits is a goal upon which many can agree,but finding offsetting revenues is often a challenge. It is therefore likely that some effort will bemade to identify savings in the loan programs' mandatory spending that could be used to offset costsassociated with enhancements in borrower benefits, or that could be used to finance other studentaid expenditures. This report will be updated as events warrant.

subsections: section_title: Introduction
paragraphs: The Higher Education Act of 1965 (HEA) is being considered for reauthorization. The HEAwas last reauthorized by the Higher Education Amendments of 1998 ( P.L. 105-244 ). Title IV of theact authorizes the major federal student aid programs, including the federal student loan programs,which provide more direct aid to support students' postsecondary educational pursuits than any othersource. In FY2003, the federal student loan programs provided $45.8 billion in new loans tostudents and their parents. This report discusses issues concerning the student loan programs thatare likely to be considered during reauthorization.
The report is organized in the following manner. First it provides background informationon the student loan programs and their loans. Then it provides an overview of many of the issueslikely to receive attention in the reauthorization. (1) 
subsections: section_title: Introduction to the Federal Student Loan Programs
paragraphs: The federal government operates two major student loan programs: the Federal FamilyEducation Loan (FFEL) program, authorized by Part B of Title IV of the HEA, and the WilliamD. Ford Direct Loan (DL) program, authorized by Part D of Title IV of the HEA. (2) These programs provide loansto undergraduate and graduate students and the parents of undergraduate students to help them meetthe costs of postsecondary education.
Under the FFEL program, loan capital is provided by private lenders, and the federalgovernment guarantees lenders against loss through borrower default, death, permanent disability,or, in limited instances, bankruptcy. Under the DL program, operated through the U.S. Departmentof Education (ED), the federal government provides the loans to students and their families, usingfederal capital (i.e., funds from the U.S. Treasury). The two programs rely on different sources ofcapital and different administrative structures, but essentially disburse the same set of loans. (3) 
The DL program, established in 1993, was intended to streamline the student loan deliverysystem and achieve cost savings. While the DL program was originally introduced to graduallyexpand and replace the long-standing FFEL program, the 1998 HEA amendments removed theprovisions of the law that referred to a "phase in" of the DL program. Currently both programs areauthorized and the two programs compete for student loan business. In FY2003, these programsprovided $45.8 billion in new loans to students and their parents. In that year the FFEL programprovided 8,429,000 new loans averaging approximately $4,009 each and the DL program provided2,937,000 new loans averaging approximately $4,075 each.
The FFEL and DL programs provide the following types of loans to students and theirparents:
Stafford loans (subsidized and unsubsidized): Lowinterest, variable rate loans available to undergraduate and graduate students. The interest rates onsubsidized and unsubsidized Stafford loans adjust annually, based on a statutorily established,market-indexed, rate setting formula, and may not exceed 8.25%.
To qualify for a subsidized Stafford loan, astudent must establish financial need. The federal government pays the interest on the borrower'sbehalf on the subsidized Stafford loans while the borrower is in school (on at least a half-time basis)and during grace periods and deferment periods.
PLUS loans: Variable rate loans available to parentsof dependent undergraduate students. The interest rates on these loans adjust annually, based on astatutorily established, market-indexed, rate-setting formula, and may not exceed9%.
Consolidation loans: Loans that provide borrowersrefinancing options. A consolidation loan may be comprised of one underlying loan or multipleunderlying loans. Consolidation provides borrowers with multiple loans the opportunity to simplifythe repayment of loans by combining multiple loans into one. Consolidation loans also enableborrowers to lower monthly payments by extending the repayment period. Additionally,consolidation loans afford borrowers the opportunity to pursue a more favorable long term interestrate through locking in a fixed interest rate on their student loans, based on the weighted average ofthe interest rates in effect on the loans being consolidated rounded up to the nearest one-eighth of1%, capped at 8.25%. (4)
section_title: Underlying Tensions
paragraphs: Prior to discussing individual reauthorization issues, it may be helpful to note that there arecertain underlying tensions inherent in the current design of the loan programs that affect many ofthe reauthorization issues considered in this report. One pertains to program cost. It is generally thecase that enhancements to borrower benefits increase federal subsidy costs. For instance, in theFFEL program, where the government insures and subsidizes loans made by private lenders, federalsubsidy costs increase when less revenue is derived from borrower fees and when interest subsidypayments to lenders are increased (lenders receive a subsidy payment that ensures they receive thedifference between the statutorily set borrower rate and a fair market rate). In the DL program,where the government acts as lender, federal subsidy costs are increased when borrower fees orrepayment revenues paid to the government are reduced.
Another tension stems from dissimilarities in FFEL and DL program loan terms andconditions. The two programs disburse the same set of loans, but loan terms and conditions are notperfectly parallel across the two programs. Each program has its supporters. Some favor promotingmore parallel terms and conditions, others do not if parallel terms and conditions are achieved byreducing a benefit currently available in only one of the two programs. (5) 
section_title: Reauthorization Issues
subsections: section_title: Loan Terms and Conditions
paragraphs: Interest Rates on Stafford and PLUS Loans. TheStafford and PLUS loans currently being disbursed are variable rate loans. As of July 2006, undercurrent law, new Stafford and PLUS loans will carry fixed interest rates. The desirability of thisplanned switch has been the subject of considerable debate.
Student loan interest rates were a focal issue in the 1998 reauthorization. The statutory ratesetting formulas, which are used to establish rates for loans disbursed from July 1, 1998 through June30, 2006, were initially enacted in June 1998 and extended in the HEA amendments of 1998.
The formula for calculating interest rates on Stafford loans is based on the 91-day Treasurybill rate plus 1.7% while the borrower is in school, and plus 2.3% when the borrower is inrepayment. Stafford rates are capped at 8.25%. The formula in effect for calculating interest rateson PLUS loans is based on the 91-day Treasury bill rate plus 3.1%, and the PLUS rates are cappedat 9%. (6) 
The current rate setting formulas were adopted as a result of deliberations that centered onhow to replace so called "comparable maturity rates" that were set to take effect July 1, 1998. Thecomparable maturity rate-setting formula was initially enacted in the Student Loan Reform Act(SLRA) of 1993, the legislation that created the DL program. The formula afforded the Secretaryof Education a great deal of latitude in establishing borrower rates. (7) 
The decision to move toward a comparable maturity rate was made in 1993 within thecontext of the assumption that the DL program would be phased in over a series of years andultimately replace the guaranteed loan system. In years following the enactment of the SLRA,Congressional support emerged for sustaining both loan programs and, within this context,considerable attention was devoted to replacing the comparable maturity rate structure before it tookeffect. This led to the adoption of the rate setting formulas currently in effect. However, due to costconsiderations under prevailing budget scoring rules, the HEA amendments of 1998 were only ableto install the current formula until June 30, 2003, after which the comparable maturity rates wereonce again set to take effect.
The interest rate issue was revisited in 2002 with the passage of P.L. 107-139 . This measureextended the existing variable rate setting formulas through June 30, 2006. Additionally, it installedfixed interest rates of 6.8% for Stafford loans and 7.9% for PLUS loans disbursed thereafter.
In the upcoming reauthorization of the HEA it is likely that borrower interest rates will onceagain receive consideration. Some feel that the 6.8% fixed rate set to take effect for new loans madeon or after July 1, 2006 is a good rate in comparison to historical borrower rates in the program, andthat a fixed rate provides the borrower with a set of predictable monthly payments which manyborrowers desire. Others feel that a borrower is better served under a variable rate formula wherethe borrower is able to take advantage of low market rates when available (such as the 3.37%repayment rate being charged this year) but still receive protection against high rates thanks to the8.25% interest cap.
It is likely that student loan interest rates will be hotly debated. Part of the debate is likelyto focus on enhancing or preserving borrower benefits. There will also likely be concerns about thefederal subsidy cost. This is because, in the FFEL program, lenders are provided a federal interestsubsidy payment (discussed later) when the statutorily set borrower rate fails to provide lenders amarket rate of return. In the DL program, where the federal government acts as lender, federalsubsidy costs increase when repayment revenues are reduced. Across both programs, more generousborrower benefits generally increase federal costs.
Borrower Fees. Several proposals have beenforwarded recently that call for reductions in borrower fees. Currently, Stafford borrowers in the DLprogram pay a 3% origination fee that goes to the federal government to help offset program costs. Statutory provisions call for DL borrowers to pay a 4% origination fee, but ED reduced the fee forStafford DL borrowers effective August 15, 1999. DL PLUS borrowers pay a 4% origination fee.
In the FFEL program, the origination fee for PLUS and Stafford borrowers is 3% which goesto the federal government. Lenders may opt to pay the fee or a portion of the fee on the borrower'sbehalf in order to secure loan business. Additionally, FFEL borrowers may be required to pay a 1%insurance premium. This fee goes to guaranty agencies to help offset loan insurance costs. Guarantors may wave the fee, and if the fee is assessed lenders may opt to pay the fee or a portionof the fee on the borrower's behalf.
It is likely that a reduction in borrower origination fees (particularly for student borrowers)will be considered in reauthorization. Helping students by reducing charges is a goal upon whichmany can agree, but finding offsetting revenues from other sources is often a challenge. In FY2003,borrower origination fees generated approximately $1.3 billion in revenue across the two programs.Additionally, attention may be devoted to examining the comparability of borrower fees chargedacross and within the two loan programs.
Loan Limits. To limit the federal government'ssubsidy costs, and to limit the amount of debt incurred by borrowers, annual and aggregate Staffordborrowing caps have been established. Considerable interest has surfaced in the adequacy of theexisting loan limits. The current caps for undergraduate students, which were enacted in the HigherEducation Amendments of 1992 ( P.L. 102-325 ), are as follows.
 Table 1. Annual and Aggregate Stafford LoanLimits
Source: HEA, Section 428 (20 U.S.C. Â§ 1078).
As Table 1 shows, dependency status is a key determinant of a student's personal borrowinglimits. (8) It is assumed thatdependent students and the parents of dependent students will co-finance the postsecondaryeducation of the dependent students. Dependent students are therefore afforded lower personalborrowing limits than independent students. At the same time, parents of dependent students areafforded the opportunity to take out federal PLUS loans to support dependent students. (9) Some have questioned,however, whether dependent students in particular are being provided adequate borrowingopportunities if they have to self finance their studies.
In general, those in favor of expanding loan limits suggest loan limits have not kept pace withtuition increases and thus constrain students' ability to finance their education, adversely affectingstudent access, choice, and persistence. Those opposed suggest it is undesirable for students to incurmore debt, and question whether the expansion of borrowing opportunities will have any positiveeffect on access, choice or persistence -- particularly for lower income students. Also at issue arefederal subsidy costs, because as borrowing opportunities are expanded so are federal subsidy costs.
Repayment Plans. Issues concerning repaymentplans that surface with some regularity relate to differences between options made available toborrowers in the DL program and those made available to borrowers in the FFEL program. A briefsummary of the repayment options available in each program is offered below.
All FFEL borrowers are allowed to choose among standard, graduated, and income sensitiverepayment plans. For new borrowers on or after October 7, 1998, who accumulate (after such date)outstanding loans totaling more than $30,000, a fourth repayment option is available -- an extendedrepayment plan.
Like FFEL borrowers, all DL borrowers are allowed to choose among standard and graduatedrepayment plans. In addition, all DL borrowers are allowed to choose extended repayment (thereare no restrictions similar to those in FFEL). Income contingent repayment (as opposed to incomesensitive repayment) is available to all DL unsubsidized and subsidized Stafford borrowers. (10) 
One of the things likely to garner some attention is the difference in the repayment termsavailable in each program. In FFEL, all repayment plans offer a 10-year repayment term with theexception of extended repayment under which repayment must occur within a time period not toexceed 25 years. In DL, standard repayment offers a 10-year term. Under the income contingentrepayment plan, repayment must occur over a period not to exceed 25 years. Repayment periods forDL extended and graduated repayment plans vary with the size of the loan.
It is likely that some attention may be devoted to adopting more comparable repaymentoptions across the two programs. Additionally, some interest exists in adding a new "interest only"repayment option. Under such an option, a borrower would have low "interest-only" payments intheir initial years after graduation, but would also delay the point at which they begin paying downloan principal.
section_title: Loan Consolidation
paragraphs: Consolidation Loan Interest Rates. In recentyears, several congressional hearings have focused on the fixed rate benefit on consolidation loans. In general, the debate pertaining to the fixed rate benefit centers on its cost.
Consolidation loans were originally introduced in the HEA Amendments of 1986 ( P.L.99-498 ). They were initially intended to simplify repayment for borrowers, simplify loan repaymentservicing for lenders, and offer relief in the form of extended repayment to those borrowers seekinglower monthly payments. As the consolidation loan interest rate formula has been modified byCongress, consolidation loans have evolved into a refinance benefit as well (i.e., a benefit thatenables a borrower to pursue a better interest rate).
The current consolidation loan interest rate formula affords borrowers the opportunity tosecure a fixed rate equal to the weighted average of the rates in effect on underlying (variable rate)loans being consolidated rounded up to the nearest one eighth of 1%. In the recent low interest rateenvironment consolidation volume has grown dramatically as borrowers have sought to lock in aspermanent the favorable rates currently in effect on their variable rate loans. This has enabled a largenumber of borrowers to secure a valuable refinance benefit. Currently, a borrower who consolidateswhile in the grace period can secure a 2.88% interest rate. Over the last two years, in which very lowrates have been available, an estimated $63 billion in loan volume has been consolidated. Whenborrowers exercise their option to lock in low rates permanently the federal government is potentiallyexposed to high subsidy costs. In the FFEL program, this is so because the government hasguaranteed the lenders a market rate of return, and must make up the difference between the rate theborrower is paying and the rate the lender is guaranteed. In the DL program, subsidy costs increasewhen repayment revenue is reduced.
Those in favor of the existing fixed rate setting formula assert that in the current low interestrate environment the fixed rate amounts to a valuable benefit to borrowers. At a time of escalatingstudent loan debt it provides important repayment relief and sends a signal to students and potentialstudents that repayment will be manageable. Further, proponents of the existing rate setting formulasuggest that eliminating the opportunity to lock in a fixed rate would be tantamount to taking awaya benefit that was available when borrowers received their Stafford loans and that they are countingon utilizing once they enter repayment. The removal of this benefit in a low interest environmentwould amount to dropping a large share of the interest subsidy currently available to borrowers.
Those opposed to sustaining the existing rate setting formula suggest it offers an overlygenerous borrower benefit that is costly to the point of placing future aid in jeopardy. They alsoquestion whether it is necessary to offer a refinance benefit when the rate is already subsidized onStafford loans. Further they question whether a benefit received in the years after postsecondaryschooling contributes in any way to students' postsecondary access, persistence, or choice. They notethe repayment period subsidy is provided without regard to need, over a lengthy period potentiallyextending up to 30 years beyond schooling, and disproportionately benefits students who attendedfour-year private institutions and/or graduate programs.
Reconsolidation. In many ways the debate on"reconsolidation" is an extension of the debate on the fixed rate benefit. Borrowers who have lockedin fixed rates through consolidation in high interest periods sometimes miss out on moreadvantageous variable rates that they would have had on underlying loans. This introduces a facetof the fixed rate benefit some find troubling -- some borrowers fare worse under the high fixed ratesthey lock in. This raises concern, particularly with regard to those using consolidation for repaymentrelief (i.e., extended repayment), because these borrowers may have to consolidate in years in whichthe fixed rate is disadvantageous.
One way to address this situation is through offering borrowers multiple refinanceopportunities (i.e., offering borrowers with relatively high fixed rates the prospect of securing abetter rate). Any added interest benefit for a borrower, however, would likely expand federal subsidycosts. Another way to address this is to eliminate consolidation loans' fixed rate benefit. Thiswould prevent borrowers from locking in disadvantageous rates in the future, but would not offerassistance to those having already done so.
Borrowers' Ability to Choose AmongConsolidators. A complex set of provisions has been enacted to regulatecompetition for consolidation loan refinance business among loan holders within the FFEL programand across the DL and FFEL programs and to protect borrowers -- ensuring they are affordedequitable refinancing options. In effect, some of these provisions constrain borrowers' ability tochoose among consolidators.
FFEL borrowers whose loans are held by one holder must first attempt to consolidate theirloans with that holder. (11) If a consolidation loan is unavailable from that lender or thelender does not provide the borrower with an income sensitive repayment plan acceptable to theborrower, then the borrower may pursue other FFEL consolidation loans. Other FFEL borrowers,with loans from more than one FFEL lender, may seek a consolidation loan through any FFELlender. If FFEL borrowers certify that they are unable to secure a consolidation loan through FFELlenders, or that they are unable to secure a FFEL consolidation loan with income sensitive repaymentterms (deemed to be acceptable by the borrower), (12) the borrower may pursue a DL consolidation loan. (13) 
DL borrowers may pursue consolidation loans within the DL program. DL borrowers arealso able to consolidate their loans through FFEL lenders.
It is likely that proposals calling for the elimination of provisions that constrain borrowers'choice among consolidators will receive consideration during reauthorization. Those in favor ofsuch changes suggest it is important to afford all borrowers, not just some, the opportunity to shopamong consolidators. Some FFEL lenders object to making a change in this area, asserting they offersome up front discounts on Stafford and PLUS loans based on the assumption they will be able tohold the loan over its life, and their anticipated level of income from the loan will be jeopardized ifthe borrower can consolidate elsewhere.
Comparable Consolidation Loan Benefits Across the FFEL andDL Programs. Interest is often expressed in promoting greater comparability amongFFEL and DL consolidation benefits. There are several ways in which consolidation loan benefitsdiffer across the FFEL and DL programs. One of the primary ways (discussed above) pertains toconstraints placed on a borrower's ability to choose among consolidators. Some of the otherprincipal differences are as follows.
In School consolidation: Borrowers seeking a FFEL consolidation loan are eligible to pursueconsolidation when the borrowers have entered the repayment or grace period on each loan they areseeking to consolidate. In contrast, borrowers seeking a DL consolidation loan may consolidate anyeligible loans that have been fully disbursed even if the borrowers have not yet entered a repaymentor grace period (i.e., the borrower may still be in their in-school period when consolidating). Inpractical terms this affords DL consolidation borrowers a broader time period in which they can lockin as permanent an in-school rate which is lower than the repayment rate (T-bill + 1.7% as opposedto T-bill +2.3%). This affords borrowers greater opportunity to lock in as permanent favorablevariable rates in effect in years when the borrowers are still in school.
Repayment term : Borrowers with less than $7,500 in outstanding loans seeking toconsolidate in FFEL may receive a maximum repayment term of 10 years. A 12-year repaymentterm is available to borrowers with that level of debt in DL.
Joint Consolidation. Married persons, each ofwhom has eligible loans, are eligible for a joint consolidation loan. Only one of the borrowers mustmeet the full set of individual eligibility requirements for a new consolidation loan. However, eachagrees to become jointly and severally liable for repayment of the note regardless of any changes inmarital status. It is likely that proposals to eliminate joint consolidations will receive considerationin the reauthorization.
While joint consolidation can simplify repayment for a married couple, concerns have beenraised in recent years about disadvantages that may be associated with joint consolidation for someborrowers. For instance, borrowers with a joint consolidation loan must both meet the requirementsfor a deferment or forbearance in order to receive those benefits. Had the loans not been joined, eachborrower could qualify for these benefits based upon their own status. Additionally, concerns havebeen raised about complications that may ensue for unsuccessful marriages given that both partiesagree to be liable for the total repayment of the joint consolidation loan. Also, in instances involvinga spouse who becomes permanently disabled, a disability discharge is provided for that spouse(covering the proportion of the loan attributable to their underlying debt), but each spouse remainsliable for repayment of the remaining loan amount.
section_title: FFEL Financing and Structure
paragraphs: Guaranty Agencies. Guaranty agenciesadminister the federal government's loan guarantee. The role guarantors play within the FFELprogram has evolved a good deal since the program's inception. Initially, the federal governmentintended to encourage the growth of state loan insurance programs. Over time the federalgovernment assumed the role of providing the insurance and now guaranty agencies service thefederal guarantee and perform various program administrative tasks. In the 1998 reauthorization ofthe HEA considerable attention was devoted to more clearly defining the role guaranty agencies playwithin the FFEL program and insuring clear linkages exist between financing streams and tasksperformed. Changes adopted during the 1998 reauthorization focused on strengthening therelationship between revenues and activities, and improving efficiency.
The 1998 amendments adopted a "risk sharing" approach. Under this approach, uses ofreserves are restricted, and guarantors are afforded flexibility in the use of their operating funds. There is a clearer distinction between reserves and operating funds, and clearer direction about wherevarious revenue streams are to be deposited -- and ultimately about how these sources of revenueare to be used. Under this arrangement reserves are held in a guarantor's Federal Fund which is theproperty of the federal government, and other funds are held in a guaranty agency's Operating Fundwhich is the property of the guarantor.
It is likely that some attention will be devoted to the solvency of Federal Funds (i.e., locallyheld federal reserve funds) and the size of Operating Funds -- which can be used to support agencyoperations and also for discretionary student financial aid expenditures. An overarching issue herepertains to the adequacy of revenues flowing into each fund. Some concerns have been raised aboutshrinking reserves and robust Operating Funds. Some proposals have already called for mandatinginsurance premiums to strengthen reserves. Some observers have suggested guarantor fees for loancollections and defaulted loan rehabilitation work may be too high thus inflating Operating Funds.
Excess Interest Provisions. As has been noted,the federal government provides lenders with a loan subsidy known as a special allowance payment(SAP). The SAP amount is determined on a quarterly basis by a statutory formula which is tied toa financial index and ensures lenders receive, at a minimum, a specified level of interest income onloans. The SAP is designed to compensate lenders for the difference between the below-market,statutorily set interest rate charged to borrowers and a market set interest rate that is intended as fairmarket compensation on the loan asset. (14) 
In some instances lenders receive interest income from borrowers exceeding the amountcalled for by the SAP calculation. The amount of income lenders receive above the government SAPrate is often called "floor income."
The SAP affords lenders necessary protection in high interest environments during which thestatutorily established borrower rate may provide lenders insufficient below-market rate returns. However, in low interest environments, the statutorily established borrower rate has the potential ofproviding lenders with above-market rate returns (i.e., returns above the market-indexed SAP rate). Some argue that since the SAP is designed to approximate fair market compensation it isunnecessary to compensate lenders at levels that exceed the SAP rate. It is often noted that in anearlier period, "excess interest provisions" were adopted that essentially installed the SAP rate as thesole lender reimbursement rate for loans. Several recent proposals have called for reducing federalsubsidy costs by establishing the SAP rate as the sole lender reimbursement rate and having lenders'floor income refunded to the federal government.
9.5% Floor Loans. Some FFEL program loanswhich are made or purchased with tax exempt funds provide lenders a guaranteed interest rate of atleast 9.5% (hereafter, these loans are referred to as 9.5% floor loans). This guarantee is provided inthe SAP formula applied to these loans, which requires the federal government to supplementborrower interest payments so as to insure a minimum 9.5% rate for lenders. There seems to bebroad Congressional support for curbing this rate guarantee for future loans. The legislativedevelopments that led to the enactment of the guarantee are briefly described below.
As part of an effort to ensure the FFEL program would be fully capitalized in the program'searly years, provisions that served to encourage the issuance of tax-exempt student loan bonds wereincluded in the Tax Reform Act of 1976. Such bonds are exempt from federal taxation, and are usedby states to finance below market interest rate loans for students. (15) In essence, through theissuance of bonds with low tax-exempt interest rates, state authorities are able to raise "low cost"funds, and then re-lend the funds at higher rates.
Soon after these provisions were passed, student bond volume began to grow rapidly, andconcerns about the profitability of tax exempt student loans surfaced. The 1980 HEA amendmentstook steps to curb the profitability of tax-exempt loans by reducing by half the SAP rate on loansoriginating from the proceeds of tax-exempt bonds. However, to ensure that student loan authoritieswere always able to cover their operating costs, the amendments also established minimum SAPs,for loans disbursed on or after October 1, 1980, which ensure a minimum return of 9.5% on theseloans. (16) 
The discourse on the profitability of tax-exempt student loans continued through the 1980son into the early 1990s. The Omnibus Budget Reconciliation Act of 1993 ( P.L. 103-66 ) containeda provision eliminating the floor on tax-exempt loans supported through tax-exempt financing forissuances on or after October 1, 1993. These loans were afforded the same SAP rates as wereavailable for taxable loans.
However, different provisions were retained with regard to loans made or purchased with tax-exemptfunds obtained by holders from obligations originally issued on or after October 1, 1980 and priorto October 1, 1993. These loans retained the 9.5% floor reimbursement structure.
The statutory provisions adopted in P.L. 103-66 and ensuing regulatory guidance from EDhave served to establish funds (derived from debt originally issued in the aforementioned period) thatcan be used by holders to finance 9.5% floor loans on an ongoing basis. In recent years lenders havebeen using a variety of refinancing techniques, and also invested earnings from existing 9.5% floorloans to make or purchase new ones.
While 9.5% floor loans comprise a relatively small percentage of all outstanding loans, inrecent years they have accounted for a very large proportion of federal SAP subsidies. There appearsto be a general consensus that no federal policy objective is served now by continually guaranteeinglenders a minimum return of 9.5%. However, there is some debate about how best to phase out theguarantee for nonprofit lenders. The Taxpayer-Teacher Protection Act of 2004 ( P.L. 108-409 );signed October 30, 2004, curbs growth in 9.5% loans, for one year, by eliminating the 9.5%guarantee on new loans stemming from any new refinancing of obligations originally issued on orafter October 1, 1980 and prior to October 1, 1993. However, it does not curtail the 9.5% guaranteeon new loans stemming from "recycling"of proceeds from outstanding 9.5% loans. These proceedscan be used to finance new 9.5% loans.
A phase out of the 9.5% guarantee would produce savings in mandatory spending. Thesesavings could be used to offset new expenditures.