Let's Not Change the Subject

[This column, which is adapted from an op-ed appearing in the St. Louis Post-Dispatch, was written as a solicited response to a piece by Leslie Carbone of the Lexington Institute]

Student loan banks and their allies are trying to spin away the public's outrage over the discovery that private lenders have been bribing college aid officials to steer student business their way. The banks want to change the subject by criticizing the government's separate Direct Loan program instead of looking at where all that bribe money comes from: You.

As regular Higher Ed Watch readers know, the federal government spends billions each year on unnecessary subsidies to banks that make student loans. It's these excess taxpayer subsidies to private student loan banks that are the root cause of the college loan scandal. They ought to be eliminated.

There are two main federal student loan programs. Under the Federal Family Education Loan program, the government provides a cash subsidy to banks and non-profit lenders who issue college loans to students and families and then guarantees those loans against default. The competing Direct Loan program cuts out the middleman banks, and the government issues the loans directly to students.

Both programs have their pros and cons in terms of administration and benefits. But every independent study, as well as those undertaken by the Clinton and Bush administrations, has found that the Direct Loan program is cheaper for taxpayers.

Most colleges, however, participate in the bank program. The banks say it's because they offer better benefits. Recent revelations suggest it also might be because they offer better graft.

There never has been any evidence of the government offering kickbacks to college aid officials to get them to participate in the Direct Loan program. Indeed, the Direct Loan program already is prohibited by law from offering any incentives or extra benefits to colleges or their financial aid officials. All the recent revelations about secret deals and perks have involved private banks.

Higher Ed Watch was the first to discover that financial aid officials had been offered and acquired cut-rate stock in a student loan company they were recommending to their students. Subsequent investigations uncovered other lenders giving college aid officials personal tuition reimbursement and cash payments.

In some instances, lenders paid bills for happy hours, spa treatments and consulting trips to resorts in Pebble Beach and the Bahamas for some financial aid officials. One financial aid administrator at a major public university was known for bragging that he always got his tequila and wine for free.

Where was the money for these treats coming from? Your pocket.

Taxpayers have been over-subsidizing private student loan companies for years. Giant student loan banks such as Sallie Mae have been reaping excessive federal subsidies and then improperly using some of those profits to bribe financial aid offices and get even more student loan business.
President Bush has proposed slashing student loan subsidies to private lenders by more than $12 billion over the next five years. Key education committees in both houses of Congress have proposed cutting those subsidies by $18 to $20 billion and shifting the savings toward larger grants and lower interest rates for students.

The banks and their allies say students will lose all the great benefits the banks provide. Don't be fooled. The borrower benefits they tout often turn out to be a mirage. Most benefits come with so many conditions attached such as 36 continuous months of on-time payments that few students ever qualify for them. Student aid experts estimate that fewer than 10 percent of student borrowers ever benefit from the rebates advertised by commercial lenders.

Washington should ban every gift, kickback and trick banks have used to bribe college officials. But it should go further. Instead of relying on banks to pass on a portion of excess taxpayer subsidies to students and families, end them all. Congress should follow through on the education committees plans and drive taxpayer aid straight to families. Financial aid is for students, and taxpayers should be guaranteed that its reaching them, not big private banks like Sallie Mae or their shareholders.