About 20 states are participating in a scheme to finance loans to college students that amounts to a raid on the federal Treasury. A good number of the legislatures in these states have passes resolutions demanding that the federal budget be balanced, at the same time that they lend support to this raid. Not much hope exists for federal budget restraint unless these ill-but-licit practices are stopped.

The vehicle for the states to siphon federal dollars is tax-exempt student loan bonds. Typically, a state government creates a special authority -- such as a Higher Education Board -- to issue bonds whose interest is free to federal income taxation under current law. This is the same device that is used to raise funds for mortgages, hospitals and airports and it results in a comparatively low cost-of-funds to the authority. It is on the receipts side of the ledger that these student loan bonds are truly unique.

The states lend the proceeds of the tax-exempt bonds to college students (either directly or through intermediaries such as colleges) under the provisions of the federal guaranteed student loan program. This program provides that any qualified lender will receive (a) 7 percent interest paid by the federal government while the student is enrolled and by the student thereafter, plus (b) a variable special allowance payment made by the federal government throughout the life of the loan.

The special allowance rate was instituted to compensate banks, which are the predominant lenders in the student loan program, for their cost of funds and the cost of collection from a mobile young-adult population. The rate is now set quarterly to be equal to 3.5 percentage points less than the coupon-equivalent rate on 91-day U.S. Treasury bills. This means that lenders receive a gross payment of the Treasury-bill rate plus 3.5 percent. In the third quarter of 1979, this rate amounted to about 13.6 percent; currently, it is close to 16 percent.

While 16 percent may be necessary to compensate ordinary bank lenders to participate in lending to students, it is outrageously excessive for these tax-exempt authorities, whose cost-of-funds is now under 8 percent. While there is no guarantee that the rate spread will continue to be this high, the formula virtually assures some profit to participating states.

Sure enough, states are greatly accelerating the rate at which they reap the profits possible. According to the Congressional Budget Office, student loan bond issues were about $58 million in 1974, $106 million in 1977 and are expected to reach nearly $600 million by 1979. The CBO estimates that by the end of 1980 a cumulative total of almost $2 billion in loan bonds will have been issued. In 1979, State of North Dakota Series A Student Loan Revenue Bonds raised $78.5 million-- enough to lend $2,500 (the maximum federal student loan) to every college student enrolled in that state! With a total of $7.8 billion in new loans projected by the government in 1985, it is only a matter of time before all states wise up and increase the drain on federal funds.

The states not only enjoy the spread between their costs and the interest paid by the federal government, but don't have to bear any risk of default either. The federal government guarantees virtually all of the principal and interest on these loans against default; this backing makes the state tax-exempts that much more attractive and holds down costs.

When it comes time to begin collecting repayments from students, the state authorities are free to sell their loans to a private corporation called the Student Loan Marketing Association, or Sallie Mae. After Sallie Mae purchases the student loans, it begins to reap the interest and special allowance payments previously flowing to the states. Sallie Mae gets its money from -- you guessed it -- the Federal Financing Bank, an off-budget entity that is really the U.S. Treasury in drag. So far, only Minesota and Florida have sold their loans to Sallie Mae, but it has made forward commitments to state exceeding $400 million.

There are two broad strategies for dealing with this middle-mania of federal student loans. An incremental approach would begin with revising the special allowance formula so that tax-exempt authorities receive a lower rate than other lenders. This would curb the most egregious flaw in the system -- the arbitrage profits of tax-exempt issues -- but still leave behind a mixed, and mixed-up, system of federal-state-bank-college intermediation in providing loans to students. A bold approach would recognize that federal funds are ultimately behind the student loans anyway, and simply establish a federal lending authority for student loans, with carefully limited subsidies flowing only to students.

Whether any reform will occur is problematic in the face of the substantial number of interests now benefiting from this program: banks, students and states. All recent legislative changes have "liberalized" the program. But if federal budgetary balance is to be realized in the 1980s, states must recognize that austerity begins at home.