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.
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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.
