Big Money On Campus
In the multibillion-dollar world of student loans, big lenders are finding new ways to drain Uncle Sam's coffers
In a four-month inquiry, U.S. News canvassed more than 100 colleges and universities to determine which had abandoned the Education Department's direct-loan program--and at what cost to taxpayers. The review included interviews with lobbyists, federal lawmakers, private bankers, and officials at state lending agencies, Sallie Mae, and the Education Department.
Among the findings:
Some of the tactics banks and other private interests have used to win student loan business, critics say, are highly questionable. Lenders use proceeds from federal loans to entertain financial aid officers, providing them with free meals and drinks, golf outings, and sailboat cruises. Sallie Mae goes even further: It offers schools special pools of money that can be lent to students. In exchange, schools agree to promote other Sallie Mae loans on campus. In one case, an internal Sallie Mae E-mail shows, the company offered $4 million in special loans to a major university in exchange for its business. Sallie Mae says its program is legal, but Education Department officials say the offer merits further investigation.
Lenders offer the prospect of millions of dollars in profits to universities--if they drop out of the Education Department's direct-loan plan. In effect, the lenders set up the universities as temporary banks, and the schools are guaranteed profits on federally backed loans they make to graduate students. In return, the lenders often win the exclusive right to make loans to the university's undergraduates, a lucrative business.
Several lenders, including the powerful Nebraska-based National Education Loan Network, discovered a loophole in federal law that forces the government to pay them a premium on top of the interest they already earn from students. According to Department of Education records, the subsidy cost taxpayers about $432 million last year. The tab this year could top $500 million.
The Bush administration has appointed longtime opponents of the direct-loan program to oversee the Education Department's student loan operation. Some of these insiders have moved to weaken the direct-loan program.
Sallie Mae and other lenders have forged close ties with key members of the House and Senate education committees and have spent millions of dollars on lobbying and campaign contributions. They have reaped their share of legislative rewards. Since 1997, Sallie Mae has spent more than $13 million to finance its high-powered Washington lobbying operation; an independent ranking placed the company third within the credit industry on lobbying expenditures.
Sallie Mae, easily the biggest player in the student loan business, says that its tactics are fair and that the rivalry with the direct-loan program has improved services for financial aid offices. "Schools and borrowers have been the direct beneficiaries of these enhancements," says Tom Joyce, a company spokesman. "In short, competition works." The company and others in the industry also argue that the deals they cut with schools reduce student debt.
The Inside Game
When students borrow directly from the Education Department, the government lends the money, and students pay the government back. If a student defaults, the government is left holding the bag. Under the FFEL version, students obtain loans from private lenders, such as Sallie Mae and Citibank's Student Loan Corp. Students pay the lenders back. If a student doesn't make payments, the Education Department still covers 98 percent of any default. In certain instances, the government also pays lenders a subsidy for making the loans. FFEL is the larger of the two programs, with $31 billion in new loans issued since October 2002; direct loans totaled $13 billion. All told, the federal government guarantees repayment of some $293 billion in outstanding loans, many dating back 10 years or more.