EMBARRASSED BY revelations of the program's true price, Congress acted last fall to temporarily close loopholes in student loan laws that were costing taxpayers an unnecessary $1 billion every year. With a certain amount of fanfare, both House and Senate education committee chairmen declared their intention to stop "shortchanging students," in the words of Sen. Judd Gregg (R-N.H.), and to stop paying out huge, unnecessary sums to banks and other financial intermediaries that disburse student loans. At the time, we congratulated the lawmakers but nevertheless worried that the loose wording of the bill had ensured that some of the techniques banks had used to siphon money out of government coffers -- using an outdated law that once guaranteed lenders 9.5 percent interest rates -- would remain legal.
We were right to worry. According to a report by StudentLoanWatch.org, the government has so far made $240 million in excess payments to student loan companies in the first quarter of 2005, almost exactly the same amount as the government paid out in the fourth quarter of 2004. This could simply mean that lenders scrambled to take maximum advantage of the loopholes before they shut down. It could also mean that they are using new techniques to keep the high-interest loans in circulation.
House and Senate Republicans have introduced legislation to close the loopholes permanently. Before they do so, they should look again at the language, to make sure they've actually finished the job. Perhaps it is also time for both Congress and the Education Department to take more seriously the calculations of the Congressional Budget Office and the Office of Management and Budget, both of which agree that government-guaranteed loans, disbursed by financial institutions, cost a whopping 10 times more than loans provided by the Education Department. This is money that could be used to increase Pell Grants for needy students or to ease the massive budget deficit: It's scandalous to waste it on subsidies for banks.