As children pack up and head to college, parents are getting out their checkbooks or the kids are putting the next four years on plastic. It should be a wonderful moment to see a child start a new part of their journey through life. Unfortunately, because of an out-dated federal student loan program, it is also the best of times for corporate banks, and the worst of times for the taxpayers.

Currently, there are two federally supported loan programs that provide virtually all federally backed student loans. One works pretty well and the other is a fleecing of America.

Many have not have heard of the Federal Family Education Loan Program (FEL Program), but has probably used it in the form of a Stafford, Parent Loan for Undergraduate Students (PLUS), or Consolidated Loan. Created under the Higher Education Act of 1965, this program was designed to make the cost of receiving a higher education more affordable. Private institutions get enormous government subsidies to provide student loans at interest rates below the market rate. Essentially, the government guarantees a specific interest rate to private FEL Program lenders and when the student interest rate is less than this rate, your tax dollars make up the difference. To fan the fiscal flames, the government guarantees 98% of a defaulted loan, virtually eliminating any incentive for the banks to go after deadbeat borrowers.

How do you save money? Well, eliminate the middle man. In 1992, a new program was created to do just that, cutting banks out of the process, loaning money directly from the U.S. treasury. Known as the William D. Ford Federal Direct Loan Program, this program offers the same loans and interest rates as the FEL Program but costs taxpayers billions less.

Comparing the costly FEL Program to the Direct Loan Program is like comparing a Mercedes to a Chevy. They'll both get you around town, but one is a lot cheaper. The Direct Loan Program more than covers its costs with the interest collected on the loans. In 2004, every dollar loaned through the FEL Program cost taxpayers an additional 9 cents. In contrast, the Direct Loan Program reaped a profit of 1.2 cents.

An expected $85 billion worth of FEL Program and Direct Loans will be offered to students in 2005. If we tried something revolutionary and loaned all of the money out of the cheaper programs and cut the rich bankers out of this sweetheart deal, taxpayers would save over $6 billion!

Considering that students pay the same loan rates no matter which program, one might wonder where the FEL Program's $6 billion goes and why this program is more prevalent. Students don't choose their loan program; colleges select the program for them. Since it is rare for colleges to offer a choice of both loan programs, private lenders wine and dine college officials to entice them to go with the bank-friendly FEL Program. These lavish affairs have included a hotel ballroom decorated like a 1970s disco by Sallie Mae and an Elvis impersonator hired to get college officials to go to a Key Bank party at the Hard Rock Cafe. In another case, officials were invited by the Access Group to watch a U.S. ski team show at the 2002 Olympic Games site. Each lender, in attempt to outdo the next, spends wads of cash to get colleges to sign on the dotted line.

Taxpayers don't need a song and dance routine to convince them that the Direct Loan Program is cheaper for the same exact loans. The White House Office of Management and Budget has pointed out that “significantly lower Direct Loan subsidy rates call into question the cost effectiveness of the FEL Program structure, including the appropriate level of lender subsidies.”

Frankly, it is outrageous that the FEL Program still exists. Send your thank you notes to Congress for this one, because although the Direct Loan Program was intended to replace the FEL Program, in 1998 Congress was persuaded to change their mind and continue both programs. Makes you wonder if there was an Elvis impersonator lobbying on the Capitol steps. While some argue that maintaining both programs encourages competition, the only winner is the banks.