When U.S. Secretary of Education Roderick Paige in 2001 promised to cut down on government waste at the Education Department, it probably didn't occur to most people that some of that "waste" would continue to trickle down to banks that offer student loans.

With the reauthorization of the Higher Education Act stalled in Congress, it turns out that access to college may be further hampered by the department's payments of unintended interest money to student loan companies, according to a report called "Money for Nothing," by The Institute for College Access and Success (TICAS), and preliminary findings by the U.S. Government Accountability Office (GAO). This year, nearly $1 billion was doled out, the TICAS report said--money that the department agrees could be going to needy students through loans and grants. GAD expects to issue its report on the special allowance payments--which are financed by tax-exempt bonds--at the end of this month, said Jeff Appel, assistant director of education workforce and income security at GAO.

When Congress began phasing out a 9.5 percent guaranteed interest rate for the student loan industry in 1993, the Education Department implemented rules that contained a loophole allowing some loan companies to continue charging the federal government that interest rate level on amounts already raised for loans. Meanwhile, in recent years, the 9.5 percent loans have been provided to students at market rates--currently, at less than 3.37 percent, according to Sen. Edward M. Kennedy, D-Mass.

Now that the loophole will likely be closed with the renewal of HEA, banks have been hatching innovative legal tactics to transfer the high interest rate onto new loans.

TICAS's report recommends that the department address the problem immediately by publishing a clarification prohibiting the serial refinancing of loans and limiting the dollar volume of 9.5 percent loans to the amount of the original tax-exempt bonds. "The loophole [itself] was created through a clarification, a 'Dear Colleague' letter in 1996 in the context of a different interest rate environment," said Robert Shireman, director of TICAS and a congressional appointee to the federal Advisory Committee on Student Financial Assistance. Such agency clarifications aren't burdensome, he said.