OPINION & EDITORIAL
Student Loan system corrupt
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by Ryan Greenfield
Monday, April 21, 2008
If you get student loans from a private financial institution, you might want to hold on to your pocketbook. Rates have gone up almost a full percentage point in the last few months and companies are tightening their standards to weed out credit risks.
Most students have yet to be greatly impacted in terms of higher rates or fewer choices of loan packages, but there are worries that the problems could worsen in the fall.
Fifty-seven banks are completely leaving the student loan business due to the global credit crunch and low profit margins. Sallie Mae, the largest student loan lender in the nation, will no longer offer federally guaranteed student loans, according to the San Francisco Chronicle. The House recently passed a bill allowing the U.S. Department of Education to buy up student loans, which would provide more money for lenders to make new loans.
But as steps are taken by the state and college administration to ensure students are relatively insulated from this unfortunate result of the sinking economy, it is important to avoid conflicts of interest that may prevent the best solutions possible from being implemented.
When college administrators do favors for banks in exchange for “gifts,” or banks do favors for colleges, it is under the implicit understanding that the college will recommend a particular student loan lender or group of lenders over others. This has the effect of distorting the market if students would have been able to get lower interest rate loans elsewhere.
This isn’t merely a theoretical concern; corruption is pervasive in the student loan business. A 2007 Senate report found e-mails from the financial aid officers at the University of Texas and Johns Hopkins (among others) requesting gifts and favors from the lenders, including “wine and tequila.” These officials were fired or resigned.
This issue also hits close to home. In 2005, UW-Milwaukee’s director of financial aid was sitting on the board of Student Loan Xpress when she designated the company as UWM’s sole preferred lender. The company paid for her to take all-expenses-paid trips to Ohio and New York City for conferences. The Milwaukee Journal Sentinel reported that the company managed 55.5 percent of student loans taken out by students in 2006, even though it’s exceedingly rare for a school’s dominate private lender to manage more than 30 percent of these loans.
The official in question, Jane Hojan-Clark, claimed there was no impropriety and that Student Loan Xpress was selected solely based on its merits. But the perception of a conflict of interest that could damage the finances of thousands of students is nothing to scoff at. Fortunately, UW-Madison’s director of financial aid, Susan Fischer, has refused offers to sit on any private lender boards to avoid the perception of quid-pro-quo.
Yet evidence has surfaced that even UW-Madison has contracted with some crooked lenders. According to a lawsuit by New York Attorney General Andrew Cuomo, the lender Student Financial Services had been paying the athletics departments of 63 schools — including three in Wisconsin — in order to use their “names, colors, mascots and logos” to market SFS’s loans. This was intended to give those loans the semblance of school approval, even though this was not necessarily the case.
Fortunately, UW-Madison has ended its relationship with SFS. But the fact remains that students’ choices are often swayed by advertising and school recommendations rather than an unbiased appraisal of each of the loan packages. This is understandable, as scrutinizing the terms of all the loans from all 14 private lenders listed on the UW-Madison financial services website can be a daunting task.
One way to deal with this is to cut private lenders out of the student loan market entirely. The federal government can increase the amount students can borrow from federally subsidized, fixed-rate student loans to cover all or almost all of their education. There would no longer be a reason to apply for private loans requiring higher interest rates.
The federal government also needs to pass tough legislation to restrict lender gifts to colleges and universities and regulate how colleges refer students to private lenders. This would help ensure that financial aid offices are helping students get the best private loan for their situation, rather than for the benefit of specific school offices or officials.
Until this happens, students who are shopping around for loans need to be aware of the direct marketing practices of the student loan companies. It’s important to exhaust all federal loan options before turning to private loans. Don’t be fooled by introductory “teaser” rates that go up after some time period. Be wary of high fees and late payments that may be in the loan’s fine print. And if they’re using school logos or mascots or offering to enter you into a prize drawing in their advertising, they’re probably trying to distract you from a lousy deal.
Ryan Greenfield (rgreenfield@badgerherald.com) is a junior majoring in political science and economics.
Correction: Due to an editing error, the article should have said Sallie Mae has stopped offering consolidation student loans, not federally guaranteed student loans. We regret the error.
Anonymous (April 21, 2008 @ 1:08am):
Nice article! There's a few more ways these banks have been taking advantage of students. Unfortunately if you're not savvy you're likely to find yourself with some problems. Dept of Ed. can be of little help in many cases.
Chris Carroll (April 21, 2008 @ 5:35am):
First of all, you said that according to the San Francisco Chronicle, Sallie Mae would quit making federally guaranteed student loans. That is not true. Sallie Mae has quit making "consolidation" loans, as have many other lenders. Here is a link to the article:
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/04/18/MN6U107EB7.DTL.
They are still originating (for now) federally guaranteed loans (i.e. Stafford and PLUS).
Although Attorney General Cuomo's investigation found some evidence of corruption in the student loan marketplace, I'm not sure if I would characterize the entire industry as corrupt based on some isolated incidents. The overwhelming majority of financial aid administrators are working in the best interest of the students. Be careful what you wish for with regard to more government regulation and oversight. The results may not be ideal.
Anonymous (April 21, 2008 @ 7:14am):
Yeah, well.... what's the going price of a kidney these days?
Anonymous (April 21, 2008 @ 7:51am):
You are clueless-If you have been paying attention at all, this was news a year ago and really didn't hold much water then so don't expect it to now. Any of these lenders holding a gun to your head to take out a loan? As an fyi, check with any of your schools and see what these banks have been doing for them? If all of these loans are so bad...why didn't you and/or your parents save enough so you didn't have to take them...THAT is the problem with this economy-the ME attitude. Enough for one rant!
Anonymous (April 21, 2008 @ 7:56am):
Ryan, double check your Sallie Mae stats. I think you meant to say they stopped Federal Consolidation Loans. Also, your title states that the system is corrupt. Could you please write a follow-up article on the number of convictions that have been garnered by the prosecution of lenders or financial aid advisers? I must have missed them.
Anonymous (April 21, 2008 @ 8:48am):
So, am I to believe that gas prices, student loan rates, and inflation are rising because of the sub-prime mortgage "crisis"?
There was no crisis before interest rates started to climb. So, why are rates climbing?
Doubt in the Dollar. Why is the world skeptical of the Dollar? Petroleum was for years traded in dollars, but some countries (Saddam-era Iraq and now Iran) have chose to trade their oil in Euros.
Since the dollar is effectively on a "petroleum standard," these countries have undermined the worth of our currency.
What is the solution?
1) Bomb countries trading oil in euros (hasn't worked too well with Iraq)
2) Talk with Iran and make nice (unlikely, since they're in control-- supply-side economics on steroids)
3) Get off oil. Become a currency based on something other than oil.
Anonymous (April 21, 2008 @ 9:26am):
8:48,
You're stupid. Iraq, as all OPEC countries do, trades gas in dollars. Not for much longer though...
Anonymous (April 21, 2008 @ 9:45am):
"You are clueless-If you have been paying attention at all, this was news a year ago and really didn't hold much water then so don't expect it to now. Any of these lenders holding a gun to your head to take out a loan? As an fyi, check with any of your schools and see what these banks have been doing for them? If all of these loans are so bad...why didn't you and/or your parents save enough so you didn't have to take them...THAT is the problem with this economy-the ME attitude. Enough for one rant!"
I hope you decide to rant more. I was able to chuckle at this incoherent babbling for about ten or fifteen minutes, before going back to my taxpayer financed education.
Loan Boy (April 25, 2008 @ 9:04am):
Woefully misguided article but I appreciate your frustration. Corruption is not pervasive in the student lending community. If we were to make similar extrapolations, I could point to a number of recent allegations against well-known journalists and discredit both you and your newspaper as nothing more than a sensationalist scandal rag twisting facts to make headlines and plaigarizing others' work. But would that be fair or accurate to launch a full-scale campaign against Ryan Greenfield personally based solely on the sins of peers and colleagues? Of course not.
Simply put, the entire system of higher education finance is broken but without student loans, I venture to guess that nearly 3/4 of all college students withdraw and move back with Mom and Dad. The ability to borrow to pay for a college degree allows students from less modest backgrounds to achieve a degree of social mobility possible in 21st century America that would be inconeivable in almost any other period in history! And I am not preaching from the Ivory Tower, I worked through college and went to a small school--not my dream school--that offered a scholarship. I borrowed $30K to finance my Master's degree. No regrets. I wanted it, I earned it. My choice.
That said, there were inappropriate relationships and excessive monies being spent wining and dining FAOs. But most private lenders also paid down the origination fees for their borrowers and that benefit alone saved college students literally hundreds of millions of dollars last year alone!
Students are graduating with too much debt but college is also too expensive and too many students attend schools they can't afford. As a result, I urge you to take a more nuanced view of the situation rather than take the easy way out and criticize the entire industry for the crimes of the few, lest Ryan Greenfield be compared to Jason Blair of The New York Times simply because they are both journalists.
Anonymous (July 15, 2008 @ 1:43pm):
I was seaching for information about student loans and noticed this aticle which I felt was really interesting so I researched myself and found that the young man who wrote this article is correct. who ever you guys are posting these ranting comments are so stupid do the research before commenting if you call sallie mae or any one else he has mention the phone call will only last 1 minute because there going to freakin tell u no consolidations and no comments as to why.
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