In response to what some see as the U.S. Department of Education’s failure to prevent wasteful spending, fraud and abuse in the multi-billion dollar student loan program, the department Inspector General’s office is working to correct the problem. In addition, several lawmakers have either introduced legislation on the matter or are planning to do so in early 2004.

An anonymous letter sent in 2002 to the education department accused Sallie Mae, the largest student loan firm, of offering illegal inducements to Pace University and other colleges to increase its loan volume. In response, the Inspector General’s office examined the loan practices at two colleges at which loans from Sallie Mae had increased significantly.

The Inspector General decided the education department needed to better address guidelines concerning loan lenders. The department responded by saying it wanted to conduct a more extensive analysis so as not to hastily harm lenders with the formation of new policy based on the occurrences at the two colleges.

The National Association of Student Financial Aid Administrators is still deciding what route of action to take in response to these recent allegations.

Larry Zaglanizzny, NASFAA’s director for Congressional relations, said he could not comment on the policies NASFAA was formulating, but said the legal repercussions are already felt.

“It’s entirely possible, if lenders and the department cannot reach some sort of consensus, that Congress will intervene with legislation,” Zaglanizzny said.

Zaglanizzny said the real issue is what is legal versus illegal in terms of financial aid distribution.

Under the current law, if a loan lender is found to be offering illegal inducements to colleges, the lender is banned from participating in student loan programs. While not routine practice, some lenders have been known to provide their staff members to colleges to help during the admission process, or sometimes provide software at no cost.

The investigation and recent news articles addressing the issue have provoked a bipartisan outrage among lawmakers, who have called for a reform of the current system.

Representative George Miller, D-Calif., called for a Congressional hearing in a recent press release.

“The Education Committee should hold hearings on the serious issues raised and the Department of Education, which has failed to properly oversee these programs, should immediately correct these abuses,” Miller said in the press release.

Rep. Tom Petri, R-Wis., is planning to introduce legislation in early 2004 aimed at strengthening the direct loan program, where students take out a loan from the U.S. Treasury, rather than a private company.

“Rep. Petri wants to make the direct loan program more competitive and more attractive to colleges,” said Jason Belisle, legislative assistant for Petri. “Schools decide whether to use direct loans, or private loan lenders. They’re both the same for the student, so far as interest rates go, but the private lenders are trying to undermine the direct loan program by going to schools and saying, ‘We’ll give you these kickbacks if you switch over to us.'”

Steve Van Ess, University of Wisconsin’s director of the Office of Student Financial Services, said UW uses the private loan lender system.

“Because it’s private, the investors can afford to be competitive and provide benefits to student borrowers, such as for early loan payments. UW allows any lender to make any loan offer to our students,” Van Ess said. “Our primary lender is the Great Lakes Higher Education Corporation, although some of our students do use Sallie Mae, but there are no extra borrower benefits or private inducements.”

Van Ess added, however, that current pending legislation, if passed, might make direct loan programs more beneficial to students, in which case UW might consider that program.