Big Money On Campus
In the multibillion-dollar world of student loans, big lenders are finding new ways to drain Uncle Sam's coffers
Sallie Mae insists that it doesn't require schools to make it an exclusive lender. But in an internal document, Sallie Mae writes that one factor used to determine whether a school gets an opportunity loan is the amount of other business the school gives the company. Investigators in the Education Department are critical of Sallie Mae's tactics. In August, the inspector general's office found that the company had "negotiated preferred lender status [with schools] in exchange for a specified dollar amount of private loans" and urged strengthening the anti-inducement law.
Other arrangements also lure schools away from the direct-loan program. In "school as lender" deals, Sallie Mae and others in the industry in effect turn schools into temporary banks as a way to get their business. The schools pocket a nice fee, sometimes topping $1 million, for acting as a lender. "It is a new way to . . . pay a school to force business to a specific lender," complains Dan Davenport, financial aid director at the University of Idaho and former chairman of the Direct Loan Coalition.
Despite the complaints, a federal court decision permits this arrangement, which is used only for loans involving graduate students. Case Western Reserve University in Ohio illustrates how the tactic works. In 2001, Key Bank lent the university $22 million. The school, in turn, lent the money to graduate students. Soon after, it sold the loans to Sallie Mae at a premium of several hundred thousand dollars. As part of the deal, Case Western dropped out of the direct-loan program and gave its undergraduate loan business to Sallie Mae. A Case Western official says students are getting cheaper loans.
Don Bouc, the president of the National Education Loan Network, or Nelnet, defends the practice as "a necessary evil." He explains, "The expectation is if the graduate school goes school-as-lender, you have a leg up in getting the undergraduate loans. It's something we have to do to be competitive."
The aggressive marketing of the program by companies such as Nelnet and Key Bank is having an impact. Since last year, 26 universities have become temporary lenders, including six that dropped the direct-loan program. "We figure we'll bring in $1.3 million a year," says Bryan Terry, financial aid director at Detroit's Wayne State University, which dropped out of the direct-loan program and signed with Nelnet. "We will use it for scholarship money."
Many universities are under financial pressure to join the school-as-lender scheme and drop their direct-loan programs. The University of Michigan-Ann Arbor says it is now studying whether to let Nelnet handle undergraduate loans and set up the school as a graduate lender, a development that could bring in several million dollars in special premiums.
When schools become lenders, every new loan brings in extra profits to the school. That poses a conflict of interest for financial aid officers, who are supposed to serve as objective counselors, steering students to the best aid packages. Critics fear the temptation will be to push more loans. "People will see we make more money by making more loans," says Karen Fooks, financial aid director at the University of Florida. "The linkage is so obvious it ruins our credibility." Rep. Dale Kildee, a Michigan Democrat, has launched an inquiry.