Salon.com reports in a recent article that the Republican administration has let approved student financial aid lenders milk taxpayers for hundreds of millions of dollars in excessive interest on student loan. The scheme was simple enough – reclassify loans that had been regulated at a lower interest rate so that the government loan program could be billed at a much higher interest rate:

In 1993, when Democrats controlled the White House and Congress, a law was passed halting the 9.5 percent payments for future loans. But eight years later, with interest rates low and the Bush administration in office, half a dozen or so lenders figured out that they could take a new loan and, by shuffling some paper, make it appear to be part of an older loan that would qualify for the subsidy. Suddenly, starting in 2002, these lenders — including Nelnet, the Kentucky Higher Education Student Loan Corp. and the Pennsylvania Higher Education Assistance Agency — were billing the Department of Education for more and more 9.5 percent loans, and the department began paying out hundreds of millions of additional dollars. While payments on 9.5 percent loans had held steady at below $200 million per year since 1990, according to a 2004 report by the Government Accountability Office, the amount of 9.5 percent payments rose from $209 million in 2001 to over $630 million in 2004. By June of that year, Nelnet was receiving 10 times the amount of 9.5 percent subsidy profits it did in December 2002, according to Department of Education data obtained and analyzed by the New America Foundation, a Washington think tank.

Through the entire tenure of former Secretary of Education Rod Paige (great and good friend of George W. Bush and architect of “the Texas miracle,” the supposed leap in performance by schools in Houston – and across Texas – where he was superintendent of schools before his appointment to the US government’s top education post by The Decider), the dash for cash went on:

From a 2001 internal Education Department memo warning the incoming Bush administration that lenders might be trying to improperly influence college financial aid offices, to a department whistle-blower, to numerous reports outlining a virtual hemorrhaging of the department’s money, for nearly six years there have been signs pointing to something rotten in the state of the student loan industry. But time and time again, according to congressional staffers and Washington education experts, the department leadership and key members of Congress looked the other way.

And when lenders themselves got nervous and decided they’d better ask the Dept. of Education for guidance in order to protect themselves from charges of bilking taxpayers, they got no direction as to whether they were acting improperly:

In 2003 Nebraska lender Nelnet actually wrote the department a letter explaining why and how it was charging 9.5 percent, and requesting guidance on whether the practice was acceptable. The department did not answer Nelnet’s letter for more than a year, during which time Nelnet collected approximately $124 million in 9.5 percent subsidy payments from the department, according to Nelnet spokesman Ben Kiser. Unsure whether the earnings were legitimate, while it waited for the department’s response, Kiser says Nelnet “deferred recognition” of the profits, holding them in a separate account. When the department finally answered Nelnet’s letter, it made no explicit recommendations for or against the practice. So Nelnet went on billing the government, and the government went on paying.

But it wasn’t just the Dept. of Education that allowed the ripoff to go on. Congress, heavily influenced by campaign contributions from these lenders, turned into the three Japanese monkeys on this issue:

But lax oversight by the executive branch of the government wasn’t the only problem. The financial services industry has donated heavily to the campaigns of Republican members of the House Committee on Education and Labor for years, according to the Center for Responsive Politics. The list of donors includes JP Morgan Chase, Citibank, Bank of America and Nelnet. The industry’s leading contributor is Sallie Mae, the nation’s largest provider of student loans. In 2004, Sallie Mae donated three-quarters of its campaign contributions to Republicans.

When Dept. of Education researchers discovered the problem and tried to point it out, they were silenced by superiors and forced to pursue help addressing the problem elsewhere:

In 2003, Joe Oberg, a researcher at the department, discovered the exploding 9.5 percent subsidy payments and reported his concerns to his superiors. But Oberg was silenced. Instead of heeding his warnings, he says, the department barred him from further research into the payments. Oberg says he took his concerns to the GAO, which was investigating the issue on behalf of Reps. Chris Van Hollen, D-Md., and Dale Kildee, D-Mich. The GAO report, which called on the department to change its regulations regarding the subsidies, helped force the issue in 2004, after a cover story in U.S. News and World Report titled “Big Money on Campus” provoked public outrage. For the first time in years it looked as if Congress might act to close the loophole for good. But the final bill, the Taxpayer-Teacher Protection Act, closed only part of the loophole allowing 9.5 percent payments, but again only for new loans, and only for one year.

Finally, once Democrats took control of Congress, the Dept. of Education decided to address the issue:

In November [2006], when Democrats won back the House, Miller, an outspoken critic of the subsidy, became the presumptive incoming chairman of the House Committee on Education and Labor. In late January [2007], three weeks after Democrats assumed control of Congress, the Department of Education finally issued a “Dear Colleague” letter, suspending all 9.5 percent subsidies that can’t be proved eligible with an audit.

But the damage is done. And while the Education Dept. has “settled” with lenders, they haven’t really taken back the money. And some doubt the sincerity – and expedition – with which the Dept. of Education has acted:

The administration… “recognized that Democrats were going to be more aggressive in pursuing these excess subsidies,” so made the moves it should have made years ago. (Robert Dannenberg, Director of Education Policy, New America Foundation)

So the gold rush for banks overcharging the Dept. of Education for student loan subsidies is effectively over. But college administrators remember what happened:

“The day Bush was elected was the beginning of the gilded age for the loan industry,” says Barmak Nassirian, of the American Association of Collegiate Registrars and Admissions Officers.

And hundreds of millions that could have spent to educate students have gone instead to enrich the banking industry – at taxpayer expense.