Thursday, July 13, 2006

Colleges that Profit when Student Loans Grow

Interesting press release from the National Direct Student Loan Coalition. Maybe right-wingers who think that government spending is the real problem in the student loan equation should look into reforming the loophole that allows colleges to profit directly by lending loans to their students.

The National Direct Student Loan Coalition Calls on Congress to Fix the Eligible Lender Trustee Loophole

In defiance of the intent of Congress when it recently passed restrictions on the School as Lender (SAL) program, some colleges and universities have found a loophole that allows them to garner profits from their student borrowers far in excess of what they could ever make through SAL.

Using an eligible lender trustee to manage their lending function for them, schools can bypass SAL restrictions imposed by Congress and lend not only Stafford to their graduate students, but PLUS loans, Graduate PLUS loans, and undergraduate Stafford loans as well. The U.S. Department of Education has confirmed to the Coalition that they consider this activity legal under current law.

When it created the School as Lender option in the Federal Family Education Loan Program (FFELP), Congress did not intend to create a major profit center for institutions of higher education, but simply to ensure that institutions could potentially serve as lenders of last resort to their students when banks refused to do so. Fortunately, the need for serving as a lender of last resort no longer exists.

School as Lender is in and of itself bad public policy – it is harmful to students who often have higher loan fees than through traditional federal programs, harmful to taxpayers when the less expensive Direct Loan Program volume decreases, and harmful to institutions of higher education who jeopardize their credibility through a profit-scheme that is rife with conflict of interest and inherent incentives to increase the cost of education.

In addition, this eligible lender trustee loophole has the potential to not only decrease loan volume in both DL and traditional FFELP, but could inevitably lead to the weakening and ultimate demise of the FFEL program itself.

Congress must quickly move to close this eligible lender trustee loophole to protect the integrity of the federal student loan programs.

1 comment:

Holly Godarkly said...

Upon what are they basing the statement that the need for schools to serve as lenders of last resort no longer exists? Do lending institutions no longer turn students down due to bad credit? A few years back, in law school, I knew several students who had been turned down by private lenders, and would not have been able to go had the school not had its own loan program.