Federal aid fails needy students

May 16, 2007|By Kate Sabatini and Pedro de la Torre III

Kickbacks, conflicts of interest, multimillion-dollar out-of-court settlements, high-profile resignations and suspensions under a veil of shame - if only we could throw in an illicit affair. It's hard to believe we are talking about something as unsexy as student loans.

Ninety percent of students who receive loans choose their lender based on their school's recommendation. In an age where students leave college with an average of more than $19,000 in loan debt, students should be able to count on their schools for impartial and helpful advice as they navigate a complicated and stressful process.

But beneath the unsavory revelations of the past several months, there is a deeper scandal lurking: Even more appalling than the misbehavior of a handful of loan officers is how careless and wasteful our government is in its efforts to provide greater opportunity and financial relief.

In Baltimore, the scandal hit close to home when the Johns Hopkins University learned that Student Financial Services Director Ellen Frishberg received $65,000 in consulting fees from a lender that her office recommended to students. Nearly every week we learn of another scandal - lenders sponsor dinner cruises and lavish trips, schools accept payments from lenders based on loan volume, lenders pay university officials as if they are on the payroll, a lender settles for $2.5 million for its kickback arrangements.

Last week, Rep. George Miller, a California Democrat and chairman of the House Education Committee, grilled Education Secretary Margaret Spellings about the failure of her department to adequately monitor the student loan program. Recent revelations suggest that some officials tasked with overseeing the program may have been more focused on their stock portfolios.

The House last week passed the Student Loan Sunshine Act by an overwhelming 414-3, and the Senate is poised to add similar provisions in the Higher Education Act next month. The House bill would, among other things, regulate the ways that schools recommend lenders to students; require more disclosure of the relationships between schools and lenders; ban gifts, participation on advisory boards, and other inducements to school financial aid officials; and require that schools and lenders inform students of their borrowing options.

This bill represents a huge step forward. But let us not lose sight of what is at stake - and how hard it is for the average student or family to afford a college education.

Every year, the government pays billions to private student lenders, primarily in the form of interest rate subsidies as part of the government-guaranteed loan program. Yet, the loans that students can access in the direct loan program, where the government lends directly to the student, are virtually identical. The difference is that the direct loan program costs the government significantly less money. The scandal? Direct loans account for about 20 percent of federal student loans, while the more costly and wasteful guaranteed loans claim the lion's share of around 80 percent.

Using figures from the president's 2008 budget, we estimate that between 1992 and 2007, the government could have saved more than $38 billion had all of the loans made during that period been direct. In 2006 alone, the government could have saved more than $7 billion - about half of what the Pell Grant program, which provides need-based grants for lower-income students, will disburse this year and enough to provide about 1.8 million additional students with grants at the current maximum of $4,050. Need-based grants that students never have to repay will do far more to expand access and affordability than moderate reductions in interest rates on loans.

We need to get back to basics. How do we make college more affordable for all of our students? And how can we best leverage precious taxpayer dollars to do so? Perhaps some officials at our schools and some of our lawmakers in Congress have lost sight of these fundamental goals.

In response to calls for direct loans, the lending industry and some conservative lawmakers often talk about how they prefer the "market-driven" approach of the guaranteed loan program, because the "market" will be more efficient. Markets are good - when they work. For the loan market to work, lenders would need to compete both for the government subsidies and for the students' business by offering real comparative value instead of offering financial aid officers "consulting fees" over filet mignon.

If we're ready to really let the markets work, then let the most affordable and efficient lender win. As it stands now, direct loans offer the best bang for our buck.

Kate Sabatini is a research associate for economic policy at the Center for American Progress. Her e-mail is ksabatini@americanprogress.org. Pedro de la Torre III is an associate manager of organizing and outreach for Campus Progress. His e-mail is pdelatorre@americanprogress.org.

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