• About
    • Mission
    • Biographical Information
    • Contact Us
  • Defense
  • Energy
  • Logistics
  • Innovation
  • In the News
  • Follow
  • Like
  • Linkedin
  • Youtube
August 6, 2007November 15, 2013Leslie Carbone

← Back
← Previous Post
Next Post →

Transparency, not big government, the answer for bad student lending

August 6, 2007November 15, 2013Leslie Carbone

Article published in The Springfield (MO) News-Leader

Proponents of big government have seized on recent concerns about corruption in the student loan industry.

There’s no question that something is amiss in the practices of some student lenders. Large loan companies, and perhaps some small ones too, not only offer colleges and universities goodies like new computers and call centers to answer student loan inquiries, but also seek to sway campus financial aid officers with free trips to resort destinations and even substantial cash payments. Under so-called revenue-sharing agreements, lenders pay colleges a percentage of their private loan volume. In exchange, the colleges steer students toward the companies’ loans.

New York State Attorney General Andrew Cuomo is leading the charge against these practices. “We believe these revenue-sharing agreements are really no different than kickbacks,” Mr. Cuomo charged at a news conference in March.

Senate Health, Education, Labor and Pensions Committee Chairman Edward Kennedy (D-Mass.) has demanded information from several large student loan companies, including Sallie Mae, Citibank, Bank One, and Bank of America, about their financial relationships with colleges.

These actions have energized politicians eager to take credit for clipping the wings of private lenders who earn profits from federally guaranteed student loans and increasing direct lending by the government.

As some taxpayers may not be aware, the U.S. Department of Education operates two competing loan programs, and the taxpayers bear the risk burdens of both. Under the original Federal Family Education Loan (FFEL) program, private companies provide the capital and administer the loans, but these loans are largely subsidized and insured by the federal government. Under the William D. Ford Direct Loan Program, which began during the Clinton Administration, the Department makes and administers loans directly to borrowers.

Some proponents of big government seek to scale back, or eliminate, the FFEL program and expand the Ford Direct Loan program. They’ve seized on current questions about private student lenders to further their cause.

But squeezing out private lenders in favor of federal bureaucracy will ultimately hurt students and their families because it will curtail students’ loan options and consumer power.

Imagine if, the next time you wanted to buy a house, there was one dominant mortgage lender, and that lender was the federal government. You wouldn’t be able to shop around for favorable interest rates or other terms; you’d be stuck with what the bureaucracy offered you. If you acted on wrong information or advice from the government, you’d have little recourse. If the government made an error on your statement, you’d have to wade through its bureaucratic procedures to have it corrected.

That’s the same scenario that would face student borrowers were the Direct Loan program to take over student lending. Protected monopolies are unaccountable; government bureaucracy is unaccountable, and government monopolies are doubly unaccountable.

On the other hand, competition among lenders for your business gives you the power to negotiate the terms and demand the service that you deserve.

Competition also provides an answer to the failure of oversight that has allowed corruption to fester between some private student lenders and some universities.

Universities and loan companies have an opportunity to solve the problems that have created the current mess. A few have already started to do so, under agreements with the New York Attorney General’s office.

But schools and lenders don’t have to wait till they’re in Mr. Cuomo’s sights. They can adopt transparent policies to govern their relationships with one another, decreasing conflicts of interest and increasing accountability. For example, they can prohibit college financial aid officers from accepting lucrative deals with lenders. They can ban the lender-paid trips for aid officers, or at least require disclosure. Such transparency would increase students’ consumer knowledge.

Expanding consumers’ power– not government’s –is the way to increase accountability and decrease corruption.

Print | PDF | EMail

Find Archived Articles:

This entry was posted in Education. Bookmark the permalink.
Sign Up For
LexNext Emails
1600 Wilson Boulevard - Suite 203
Arlington, VA 22209 USA
Phone: 703.522.5828
Fax: 703.522.5837
© 2023 Lexington Institute

Sign Up for LexNext Emails

  • This field is for validation purposes and should be left unchanged.

Sign Up for LexNext Emails

  • This field is for validation purposes and should be left unchanged.