Secretary of Education Margaret Spellings sounded like a reformer when she testified on Capitol Hill earlier this month over recent revelations of waste, fraud and bribery in the $85 billion-a-year student loan industry.

"Federal student aid is crying out for reform," said Spellings, speaking before the House Committee on Education and Labor. "The system is redundant, it's Byzantine, and it's broken..."

Between 2001 and 2006 a handful of companies that issue federally guaranteed student loans had what one House Republican staffer called "a banner five years," collecting hundreds of millions of education dollars by exploiting the so-called 9.5 percent loophole -- a 1980 provision that guaranteed certain lenders a 9.5 percent return on the loans they issued to students, no matter the actual interest rate of the loan...

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 Philadelphia 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.

The increased payments should have raised a red flag, says Michael Dannenberg, director of the Education Policy Program at the New America Foundation. But the department "dragged its feet until 2007..."

In November, 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, 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.

"She could have written that letter two years ago," says Dannenberg, of the New America Foundation. "And she should have..."

One day prior to Spellings' testimony, Congress had acted. In a show of bipartisanship virtually unprecedented in Bush's second term, the House passed the Miller-sponsored Student Loan Sunshine Act by a vote of 414-3...

Dannenberg -- who at 37 has just finished paying off his own student loans and recently began saving for his children's college tuition -- credits, among other things, a change in Congress for getting the ball rolling on some of these long-awaited reforms.

The administration, he says, "recognized that Democrats were going to be more aggressive in pursuing these excess subsidies," so made the moves it should have made years ago...

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