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.
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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.
