Banks successful in limiting federal lending to students

Companies offer money to schools to leave program

April 15, 2007|By New York Times News Service.

In a fierce contest to control the student loan market, the nation's banks and lenders have for years waged a successful campaign to limit a federal program that was intended to make borrowing less costly by having the government provide loans directly to students.

The companies have offered money to universities to pull out of the federal direct loan program, which was championed by the Clinton administration. They went to court to keep the government program from becoming more competitive. And they benefited from oversight so lax that the Education Department's assistant inspector general in 2003 called for tougher regulation of lender dealings with universities.

At Indiana University in 2004, for example, Sallie Mae, the nation's largest student lender, offered $3 million that the university could use for "opportunity loans" to students if it left the direct loan program. Indiana left the direct loan program but said the $3 million was not the reason.

Bank of America, which won the University of Virginia's student loan business, said in its 2002 proposal that possible incentives had "the potential to violate" federal law. The bank suggested that it discuss the issues with university officials "during the oral presentation phase of the process."

All of this has helped give private lenders clear dominance of the $69 billion federal student loan industry. The lenders, who defend these practices, say they are winning business because they offer lower interest rates and often lower fees.

Advocates of the direct loan program say that it has been held back from offering more competitive rates and benefits and that students cannot always take advantage of the private rivals' advertised incentives. They argue that private lenders cost the government vast amounts of money because they are subsidized by the government and guaranteed against default.

President Bush's budget reports that in 2006 for every $100 lent by private lenders, the cost to the government of subsidies, defaults and other items was $13.81, while the same loan through the direct loan program cost the government $3.85.

The battle for dominance in the loan market has escalated as tuition has soared and student borrowing has increased. This is the context for payments to universities and university financial aid officials that have come to light after recent investigations into student loan practices.

Part of what is generating the competition is that the government runs two loan programs -- and universities usually choose to participate in one or the other.

Until the 1990s, the primary program was the federal guaranteed loan program under which private lenders like Citibank, Sallie Mae or Bank of America made the loans to students. They were given a helping hand from the government, which paid subsidies to the lenders and guaranteed them against default.

Bill Clinton campaigned for president on the notion of expanding the federal government's role as student loan guarantor into a more central position as the direct lender. The idea was that this would prove cheaper and simpler for students and be less costly for taxpayers because borrowers would pay interest to the federal government instead of to the lenders.

The program went into effect in 1994. The Democrats expected it to become dominant. But unwilling to be muscled aside, private lenders began offering schools and students a variety of benefits such as scholarship money and lower interest rates and fees.

For a few years after direct lending went into effect, the government's share of student loans ballooned. But as student loan volume has soared, the government's share as a direct lender has declined since 1997 and now amounts to less than a quarter of the total.

The Education Department fought back. Richard W. Riley, then the secretary of education, tried to make the direct lending program more competitive in 1999 and 2000 by reducing its origination fees and interest rates. The private lenders sued, saying Riley had no authority to do this because these rates were set by Congress under the loan legislation.

With the Bush administration more sympathetic to the private market, the lenders withdrew the lawsuit last year, and the direct loan program has not been allowed to offer some of the incentives used by its private rivals.

Katherine McLane, a spokeswoman for Education Secretary Margaret Spellings, said both federal loan programs were "a vital source of funds for student aid."

The Bush administration took virtually no action as lenders offered special pools of money if universities would leave the direct loan program. Lenders, by law, are barred from offering inducements to gain loan applications. What constitutes an inducement is not entirely clear.

But a review by the Education Department's office of the inspector general in 2003 -- prompted by an accusation that Sallie Mae was offering illegal inducements -- found that the Education Department had brought only one public action, a case involving Sallie Mae and a college of podiatric medicine in 1995, which an administrative law judge later struck down.

The assistant inspector general, Cathy H. Lewis, who conducted the examination also noted that the Education Department had not given updated opinions about what inducements were barred since 1995, even though the competition had escalated sharply. Lewis expressed concern about "bargaining practices between schools and lenders" involving both the guaranteed loan program and private loans, which like any consumer loan lack government backing. Students increasingly rely on private loans because of limits on borrowing through the federal program.

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.