It should come as little surprise that financial institutions resort to heavy-handed and ethically shady tactics to increase their share of the student-loan business. After all, the industry is a nest of crony capitalism, occupied by well-connected lobbyists, the pols they feed, and obscenely compensated CEOs. It should shock and appall us, however, to learn that some colleges and universities have played along. And that is what we have been learning, thanks to aggressive inquiries by New York attorney general Andrew Cuomo and the office of Senator Ted Kennedy.
The revelations should also shock and appall higher-education administrators. Their deafening silence — particularly noticeable here in the Boston area, home to more than 50 colleges and universities and close to 400,000 students — confirms that self-policing is not the answer. Massachusetts attorney general Martha Coakley should pick up on the work of Cuomo, as attorneys general already have in Minnesota, Illinois, and Ohio. Coakley should demand to know which of our state’s schools have been taking kickbacks to steer their students to predatory loan companies.
In doing so, such colleges are serving as de facto sales generators for private lenders, such as Sallie Mae, Nelnet, and Citibank, by placing those companies on a short list of “preferred lenders” for students. Students and their families almost always rely on those recommendations, trusting their schools to steer them away from predators.
By law, private lenders are not allowed to offer inducements to schools, but that has not stopped them from doing so. Cuomo has charged one lender with offering kickbacks to as many as 60 schools, including Boston University and five others in Massachusetts. One loan company paid a school’s financial-aid director $13,000 as a consultant, the New York Times recently reported, and other lending institutions have placed high-ranking university officials on their boards of directors. School administrators have been found to hold stock in lending companies. Other incentives and payoffs have been alleged.
Lenders have also “induced” schools to stop participating in the federal direct-loan program, established by Bill Clinton to compete with the avaricious companies and keep interest rates to a fair level. Sallie Mae, the largest private student lender, has offered millions in special loan funds to schools that leave the federal program, the Times reported.
The bank-friendly Bush administration’s Department of Education has refused to investigate these improprieties, and has not even issued guidelines of what inducements it considers legal and illegal. Bush’s professed “reforms” of the industry turned out to include $1 billion of proposed cuts in federal student aid. Attempts in the US Senate to pass a “Student Borrower Bill of Rights”, among other legislation to regulate the industry, are still in limbo.
Some schools justify their selection of “preferred lenders,” and their rebuffing of the federal direct-loan program, by arguing that they are bargaining for preferable interest rates for their students.
But as we’ve learned in spades from the home-mortgage industry, predatory lending isn’t just about the interest rate. The Phoenix reported more than three years ago that Sallie Mae charges excessive and undisclosed late fees, applies aggressive collection tactics, and is unresponsive to complaints (see “Sallie Mae Not”). Congressional committees that oversee banking regulation — notably, that chaired by Massachusetts representative Barney Frank since the midterm elections — have yet to show serious interest in reining in the excesses of the personal-finance industry as a whole. To give student borrowers relief, banking reform also should be undertaken with all due speed, in tandem with the work of Cuomo and company.
The fact is, once they’ve attracted a high volume of borrowers with lowered interest rates made possible by federal support, institutional lenders care little about helping borrowers succeed after graduation. In fact, thanks to the federal government’s subsidies and guarantees, and the fees and trumped-up balances they ring out of borrowers, lenders end up making enormous profits on the backs of the student and the taxpayer.
How enormous? In 2006, the most highly compensated executive in the country was the CEO of Sallie Mae, continuing a multi-year trend, according to the Washington Post. Recently retired company chair Albert Lord is reportedly building his own personal 18-hole golf course just outside of Washington, DC. And this week, Sallie Mae announced that it is being bought for a cool $25 billion.
You can be sure that the new owners — a joint effort of JPMorgan Chase, Bank of America, and two private investment funds — won’t be any less bottom-line oriented. In fact, Forbes.com speculates that Sallie Mae’s new owners are well-positioned to “squeeze” more income out of the loans; the article says that the buyout “seems like a good deal for all concerned,” but that doesn’t seem to include the squeezed borrowers currently holding 10 million Sallie Mae loans worth an estimated $130 billion.
If anyone listened to those borrowers, whether indebted to Sallie Mae or to another private lender, perhaps things would change. That’s why we want to hear from you.
