Our friends over at Higher Ed Watch got the scoop today on what could turn out to be yet another student loan scandal in the Federal Family Education Loan Program (FFELP). While a full investigation is still in order to determine whether wrong doing took place, this news is yet another example of why adopting the president’s proposal to phase out the FFELP, which includes wasteful subsidies to student loan companies, and use the estimated $94 billion in savings over ten years to expand student aid.

Higher Ed Watch found evidence to believe that the South Carolina Student Loan Corporation, the state’s loan agency, and the South Carolina State Education Assistance Authority, the state’s Guarantee agency, worked together to deny some students federal loans in order to take advantage of the Lender of Last Resort program. Under the program, loan companies are not liable for a single cent if a loan that they make goes into default, unlike regular loans made under the FFELP where the lender is on the hook for 3% of the loan, and the government covers the other 97%.

The program is rarely used because very few students are ever denied loans under the FFELP (the government assumes nearly all of the risk anyway, after all). The Department of Education is aware of the situation, and conducting a review of the program.