The Government Accountability Office (GAO) released a report Sept. 21 that criticizes the Bush administration's lack of effort to close a costly loophole in federal student-aid law. The GAO, the investigative arm of Congress, says that the U.S. Department of Education should be working harder to prevent commercial lenders from drawing enormous profits from the government.

At issue are payments the Education Department makes to lenders for student loans financed before 1993. In the 1980s, to encourage lenders to issue student loans under the Federal Family Education Loan Program, the federal government guaranteed lenders a return of 9.5 percent on loans, regardless of the interest rates paid by borrowers. In 1993, Congress rescinded that policy, but current loans made before 1993 still fall under the 9.5 percent guaranteed return rate. Thus, for pre-1993 loans, when the interest rate is less than 9.5 percent, the government pays the lenders the difference—termed a special allowance payment.

The policy was intended to encourage student loans during poor economic times; lenders are now using it as a source of tremendous profit, however. Lenders find ways to extend or refinance pre-1993 student loans so that they can keep receiving the guaranteed 9.5 percent return. The GAO estimates that as of June 2004 these special allowance payments have cost taxpayers more than $600 million and could cost nearly $1 billion by the end of the year.

Some members of Congress have proposed changes to the 9.5 percent loans, but  the Education Department appears to be dragging its feet, says the GAO. The department claims its hands are tied in handling this type of situation quickly and that the loophole does not constitute a genuine emergency.

But the GAO charges that the Education Department still could be and should be exploring other options instead of hiding behind a faulty interpretation of procedure. [Lindsay Albert]