A Turnkey Program

Supporters of a program that allows colleges to turn a profit from the Federal Family Education Loan (FFEL) program are understandably upset that the Senate is considering legislation that would phase it out.

After all, universities participating in the School-as-Lender (SAL) program -- in which colleges lend money directly to their graduate and professional students and then sell the loans to commercial lenders for a hefty fee -- stand to lose substantial sums of money they now receive from private lenders. Schools are required to spend their earnings on these loans on need-based financial aid.

Who could possibly object to such an altruistic set up? Advocates for SAL think they know the explanation: the authors of the legislation -- Senators Edward M. Kennedy (D-MA) and Mike Enzi (R-WY) -- must be misinformed. "The President's Coalition to Preserve School-as-Lender Program urges Senator Enzi and other members of Congress not to hastily confuse the good players in the student loan industry with the bad players and harm students in the process," the advocacy group wrote in a news release. "The school-as-lender program is not the same issue as conflict of interest allegations made recently against banks and other student loan firms." [Disclosure: the Editor of Higher Ed Watch worked for Senator Kennedy.]

OK, hold on. Supporters and opponents of SAL can debate it's merits, but let's be honest and call the program what it is: an elaborate kickback scheme designed by lenders to gain exclusive control over the most lucrative portion of universities' loan portfolio.

But don't take our word for it. Let's see how one company, which has been among the most aggressive in marketing the program, described it in filings with the Securities and Exchange Commission:

Education Lending Services, Inc. has business relationships with certain loan servicers, trustees, and financial institutions which allow it to offer a "turnkey process" by which a school may become a FFEL lender and originate and sell its student loans to Education Lending Services, Inc.

Yes, the company in question is Education Lending Group, the former parent company of Student Loan Xpress, which has been implicated as one of the worst players in the student loan scandals. But what did the company's top executives -- most of whom have lost their jobs as the result of a Higher Ed Watch investigation, which found that they had provided stock gifts to financial aid administrators and to a high ranking Education Department official -- mean when they refer to SAL as "a turnkey process"?

The school receives an eligible lender number from the Department of Education and then lists itself and its own loan products as a preferred product for its incoming students...The actual origination, disbursement, and servicing of their loans is handled by third party contractors on an outsourced basis which has been pre-established for the school by Education Lending Services, Inc.

Got that? The schools is the lender in name only. The loan company does all of the work or contracts it out and then pays the university a large premium for the loans.

But why would a loan company pay a school, when in reality it is doing all the work?

The high cost of the these targeted schools (i.e. an average of $20,000 or more for each year of attendance) makes participation in the program very attractive for both Education Lending Services, Inc and the school. These professional graduate programs, especially at the targeted schools, have the highest cost of attendance and produce graduates with the greatest ability to repay their student loans.

In other words, this is absolutely the best loan paper that a lender can possibly get its hands on -- the amount of debt is huge and the loan is certain to be repaid. And since colleges are getting a cut of the loans, they are guaranteed to "provide most, if not all of their loans" through the SAL program, the Student-Loan Xpress officials state.

Let's review. Lenders pay large sums of money to universities, which essentially do nothing, and in return become the exclusive holder of the most-lucrative loan portfolio on that campus. Sure sounds like an elaborate kickback scheme to us and one only available to schools that participate in the Federal Family Education Loan Program.

The New America Foundation has suggested a comparable reward process be offered to Direct Loan program schools as well. Advocates for school-as-lender never grabbed on to the proposal, and now, they face being locked out.