Disgrace

Two years ago, the Administration said it shoveled out the door to student loan banks almost a billion dollars a year in corporate welfare (i.e. excess taxpayer subsidies for improperly claimed 9.5% loan subsidies), because it didn't have the authority to stop runaway claims without going through a public regulatory, negotiated rulemaking process. A month later, the Government Accountability Office (GAO) said the Administration was wrong and that the Department of Education had the authority to stop the 9.5% loan scandal in its tracks.

This week, the Administration effectively admitted GAO was right all along. On Tuesday, without going through any public regulatory or negotiated rulemaking process, the Administration simply issued a Dear Colleague letter stopping payment on improperly claimed 9.5% loans. The Dear Colleague letter clarifies old Department of Educaiton guidance. It makes no reference to any post-2003 changes in law. Tuesday's letter thus shows the Department of Education could have stopped the 9.5% loan scandal years ago and saved taxpayers well over a billion dollars -- approximately $278 million of which alone went to the Nelnet student loan corporation.

Why didn't the Administration act years ago? A cynic would argue that it was either in bed with the lenders or wanted to "score" savings in the President's budget. Regardless, the 9.5% loan scandal exemplifies the disgraceful design and oversight of the Federal Family Education Loan Program.

Nothing should make clearer than the 9.5% loan scandal that establishing taxpayer subsidy rates to student loan banks by Congressional fiat and counting on Administration officials, many of whom used to work for student loan banks, to interpret those subsidy decisions is rife with possibilities for waste, fraud, and abuse. Only the free market, by means of an auction, can ensure that the government subsidy to student loan banks is as low as possible. The government runs auctions on everything from spectrum sales to timber cutting rights to Treasury security sales. Why not student loans as well?

It's time to revamp the structure of the federal student loan system so that families get more help and banks get less.