Why Didn't I Think of That

Once upon a time, all the way back in the early 1980s, Congress passed a law that guaranteed lenders a minimum return of 9.5% on student loans. The financial world was very different back then--the prime rate was almost 19% in 1981--and the student loan industry wasn't as robust. But as time went on interest rates dropped into the mid-single digits, more and more students borrowed, and the guarantee wasn't needed anymore. By 1993 the prime rate was down to 6% and the 9.5% program had become a big hole in the public treasury that lenders could stand beneath and lap up leaking money at the taxpayer's expense. So Congress passed another law to shut the loophole down.

Lenders responded by making money honestly devising a series of dodges and gambits to keep the pipeline open, such as taking money made from old loans made under the 9.5% program, sprinkling magic fairy dust on it, and then "recycling" it back into the same old accounts, where it was then re-lent as a new loan but claimed as an old loan that received the 9.5% guarantee. This went on for more than a decade, at what was until recently assumed to be a cost to taxpayers ranging in the hundreds of millions of dollars. Finally, under political pressure, the Bush Administration shut the program down, making the lenders pay back all the money they took allowing the lenders to keep all the money they took as long as they promised not to take any more. For more on this, see the always-valuable Stephen Burd at Higher Ed Watch.

Now comes word that the taxpayers weren't actually ripped off to the tune of over $500 million. No, the real price tag will be closer to $1.2 billion, and while such numbers might seem quaint given today's headlines, call me old-fashioned but that still seems like a lot of money. But apparently I just don't understand the right way to think about this. Contacted by Paul Basken, a reporter from the Chronicle of Higher Education, one lender explained($):

Loan agencies "across the nation have moved forward beyond the 9.5 loan issue," said Patricia Beard, chief executive of the South Texas Higher Education Authority. Anyone concerned about the welfare of student borrowers should instead devote "attention to something that matters to the nation," such as the overall downturn in capital markets, she said.

According to the Chronicle, the South Texas Higher Education Authority "was found to have claimed 93 times the amount of loans now considered eligible for the 9.5 percent program." But never mind, because they have "moved forward beyond" all of that messy business. Why be stuck in the past? I'm going to remember this when prosecutors coming knocking on my door after discovering my scheme to defraud taxpayers out of huge sums of money. Come on, fellas--I've moved forward! Or maybe I'll try this out at home with my wife. Yes, it's technically true that I failed to put the garbage out for three consecutive weeks, resulting in a huge colony of rats establishing permanent legal residence in our back yard. But why dwell on past mistakes? I've moved forward, sweetheart--why can't you?

And where, exactly, would the lenders like to move forward to? To finding new ways to grab loads of taxpayer money, naturally--as Basken reports today, lenders are angling for a piece of the $700 billion bailout pie. Perhaps the plan is to make the cost of the 9.5% scam pale in comparison.