Student Loan Subsidies Tied to Commercial Rates

Congress approved legislation Friday that would change the way the federal government calculates subsidies for student loans.

Led by Sallie Mae, the banking industry successfully lobbied lawmakers to tie these federal payments to interest rates on commercial paper instead of Treasury bill rates. The Education and Treasury departments opposed the provision, arguing it would yield lenders a windfall of as much as $1.7 billion in increased government payments and lower hedging costs over roughly a decade.

"The proposal would significantly increase lender and secondary market profits by transferring economic risk -- and potential cost -- to the federal government while providing no additional benefits to students," according to a Clinton administration statement last month.

Industry officials disagreed, claiming the change could save the government money; they said lenders are willing to accept the resulting lower profits on student loans for less volatile returns.

Despite the administration's complaints, President Clinton is expected to sign the legislation because its broader goal is letting disabled Americans keep their government-funded health benefits when they become employed. After lawmakers blended differing bills into a compromise version, the House passed it Thursday and the Senate adopted it Friday. -- Dean Anason