Big Money On Campus
In the multibillion-dollar world of student loans, big lenders are finding new ways to drain Uncle Sam's coffers
The loan industry's romancing of school officers continues year-round. Major lenders appoint university officials to ad hoc advisory boards, which hold regular meetings at high-end resorts. The lenders say the get-togethers allow school officials to offer insights into lending. Critics say the meetings are junkets. Lenders also ply university officials with free lunches and golf outings. "It's an endless stream of invitations," says Ellen Frishberg, the financial aid director at Johns Hopkins University, who turned down a Sallie Mae offer of tickets to a concert this month by Huey Lewis and the News. "It's quite comical at times."
To win loan business, some lenders offer sweeteners the government can't match. At Tuskegee University, for instance, Sallie Mae offered to provide loan counseling for students and install free software for the financial aid office, and even promised free extra workers to perform tasks typically done by objective counselors. "I have only praise for Sallie Mae," says Barbara Chisholm, Tuskegee's financial aid director. "They are making sure we have what we need."
Sallie Mae has introduced another, even more controversial, tactic to lure schools away from the direct-loan program. Three years ago, the company created something called "opportunity loans," in which Sallie Mae agrees to lend money to students, at the direction of schools. These loans are not part of the federal program, and the government does not guarantee repayment in the event of default. Sallie Mae is more than willing to shoulder the risk. Here is why: These private loans are available only if a school, in return, promises to leave the direct-loan program and market Sallie Mae's separate federally backed loan program to students. Unable to borrow unlimited amounts under federal programs, many students can use opportunity funds. Colleges like opportunity loans because they keep enrollment up and tuition flowing.
The loans are catching on. Schools including Seton Hall University in New Jersey, Harding University in Arkansas, Austin College in Texas, Tuskegee, and the University of California-Los Angeles all offer Sallie Mae opportunity loans. They all also have exclusive arrangements to market federal loans from Sallie Mae or its partners to their students.
However, some education experts believe opportunity loans amount to improper inducements. Federal law prohibits lenders from offering direct or indirect inducements to educational institutions, including "points, premiums, [and] payments" to obtain federally backed loans. "It is like someone coming to me and bribing me," argues Leo Kornfeld, an education official in the Clinton administration.
Sallie Mae says opportunity loans are legal. The company defends them as a way to help students with bad credit or no history of credit. "We think an individual's credit as they enter school is not indicative of their credit when they get a job," says Barry Goulding, a senior vice president at the company.
Education Department officials seldom pursue inducement cases. Officials say that opportunity loans are legal if offered simply as a benefit to schools. However, Sallie Mae could have a problem. In an April 2002 E-mail obtained by U.S. News, Sallie Mae proposed this deal to Pace University, which is based in New York City: If Pace made Sallie Mae its "exclusive lender," the company would provide $4 million in opportunity loans over a four-year period. The school declined the offer. U.S. News disclosed the contents of the E-mail to two Education Department officials. Both said the offer merits further investigation.