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It's Only Your Tax Money

September 27, 2004

Nearly everybody in Washington agrees: Let's close a loophole in the student loan program that has taxpayers shelling out billions of dollars in subsidies for lenders. There's more than one way to do it, and do it fast. Yet it's maddening that neither Congress nor the Department of Education will simply get it done, as more and more money bleeds away.

Back when interest rates hit double digits in the 1980s, it made sense for the government to guarantee lenders a 9.5% return on loans for college students, backed by tax- exempt bonds. That became a serious burden more than a decade ago, but a 1993 congressional attempt to get rid of the subsidy left too much room for maneuvering: It allowed loans financed with pre-1993 bonds to keep getting the 9.5% rate. By recycling new loans into the old pools, even if only for a day, lenders can claim the subsidy. That has become more enticing with interest rates at near-record lows and college loans going for 3.5% or less. The 6 percentage-point difference makes for a hefty taxpayer-subsidized profit to lenders.

With even some lenders -- those that already have made a killing on the loophole -- agreeing that the subsidy is unnecessary and horrendously wasteful, it's bound to be closed. Sometime. That's not good enough. A delay of six months from now could cost taxpayers an additional $2.8 billion, in addition to the $6 billion already committed.

The Department of Education could change the rule but says it would rather leave it to Congress. An administrative rule change would take two years, officials say; the proposal must be published and public comment taken. But a report from the Government Accountability Office last week chided the department for its passive stance, citing regulations that allow swift action when it's in the public's best interest.

An end to the subsidy is written into the Higher Education Act now before Congress, but that isn't expected to pass until 2005. So why not split this urgent issue into a separate bill for quick action? Can't do that, said a spokeswoman for the House Education and Workforce Committee. All the provisions in the act are important and they can't be separated, she said. Actually, they could. In fact, a temporary end to the subsidy was written into an appropriations bill that passed the House this month, but it was killed in the Senate. Lawmakers are reluctant to split individual items from sweeping legislation because it opens the way to political games in Washington, prompting other lawmakers to demand separate bills on their own pet projects.

This is the kind of inaction and bureaucratic gobbledygook that turns citizens into teeth-grinding government-haters. The right way to stop needlessly draining billions of dollars from public coffers is to stop doing it.

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