December 12, 2005
Op-Ed Contributor
Robbing Joe College to Pay Sallie Mae
By ANYA KAMENETZ, NY TIMES
New Orleans

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THE higher education financing system in this country, like the health care system, is broken. In both cases, costs spiral out of control while millions of people, especially the poor, are not served. And in both cases, a few corporations are making hefty profits.

From the 1950's to the 1970's, college attendance grew along with federal student grant aid. Then, as tuition mushroomed and loans replaced grants, educational attainment stagnated. Today, those lucky enough to graduate from college end up with an average of $17,600 in loans, a burden that shapes decisions like buying a house or having children. But most young people are not so lucky - half of those who start college do not graduate at all, in part because of the financial burden of staying in school. As a result, Americans aged 25 to 34 are less educated than 45- to 54-year-olds - and more to the point, less educated on average than the citizens of several other industrialized nations.

The federal student aid system fails students, but it does a great job of delivering profits to private lenders, which issued $65 billion in loans last year. When it created the loan program, Congress assumed that banks would not lend to young people without extensive guarantees and incentives. So they guaranteed a certain rate of return on student loans, made up their losses on defaulters, created a secondary market for student loans by chartering the Student Loan Marketing Corporation (Sallie Mae) and allowed state lending authorities to issue tax-exempt bonds to raise loan capital. Student lending has grown into a highly profitable and low-default market, yet these special privileges persist.

Sallie Mae, the private company that makes, buys and sells the most student loans, boasted the second-highest return on revenue in the 2005 Fortune 500. Sallie Mae also happens to be the largest contributor, by far, to members of the House Education Committee. The Chronicle of Higher Education found that the committee chairman alone, John Boehner of Ohio, received $172,000 from student lenders and loan consolidators in 2003 and 2004.

It's thus no surprise that lawmakers are apt to protect lenders and not students. On Oct. 26, Mr. Boehner's committee approved more than $14 billion in cuts over the next six years, which would be the largest reduction in the history of the federal student aid program. Mr. Boehner defended the cuts by saying they mostly came from corporate subsidies to Sallie Mae, Bank One, Citibank and the rest. But that gets to the heart of what is wrong with this program - and the way to fix it. The best way to reverse the shocking trends in debt and educational attainment would be to switch from loans back to grants. Given ballooning deficits, though, that's a nonstarter. Instead, why not cut off subsidies to banks and give that money to needy students?

One way to do that is to expand a program begun in 1992 in which the government makes loans directly. A recent Government Accountability Office report showed that direct loans cost the government one-fifth as much as subsidized loans over the past 10 years. Mr. Boehner, however, kept the report under wraps for 30 days, and it was released just hours before the House committee vote. Representative George Miller, Democrat of California, estimates that the aid program could save $60 billion over the next decade by switching entirely to direct loans - enough for almost a 50 percent increase in Pell Grant money.

A group of students has also proposed a National Tuition Endowment, which would preserve an estimated $30 billion for need-based grants by cutting loan subsidies and finally closing an infamous loophole that has lenders collecting 9.5 percent interest from the government on certain loans.

Yet Mr. Boehner is heading in a different direction. He told an audience of commercial student lenders earlier this month that "I've got enough rabbits up my sleeve" to make them happier with the bill.

With the higher education budget scheduled for passage next year, this is a great occasion for a public debate on the values that conservatives claim, like individual self-determination, free markets and international competitiveness. Do we want to keep robbing from our future?

Anya Kamenetz is a columnist for the Village Voice and author of the forthcoming "Generation Debt: Why Now Is A Terrible Time to Be Young."

School As Lender: Issues to Consider
Private lenders claiming they can help schools generate revenue in tough times are approaching direct lending institutions, especially large graduate institutions, with offers to partner them in a transition to School As Lender. If this issue is being discussed on your campus, we hope you will consider the following information when making a decision.

Remember Why Direct Lending Was Created:

The Federal Direct Student Loan Program provides borrowers with flexible repayment options with a single loan holder. Borrowers and participating schools are provided with a simple, streamlined and accountable system that saves taxpayers billions of dollars. Direct Lending offers access for students who need money for college education and expenses. Direct Lending also allows more flexible repayment terms, providing borrowers and schools with income contingent loan repayment over time, which results in lower default rates.

What Happened to the Original Intent of School as Lender?

School As Lender was originally and primarily intended to allow schools to serve as lenders of last resort to their students having difficulty in obtaining loans to meet educational expenses. School As Lender has now become a distorted business model that allows private lenders to extend a line of credit to schools with assurances of profit if they choose to partner with them. In a recent article the Wall Street Journal criticized schools and colleges with arrangements with lenders on the grounds they are making profits by encouraging students to enter deeper into debt. Congressional comment has begun to associate large tuition fee increases with more borrowing by students and increased profits for school lenders.

Impact on Students:

A move to School As Lender does not inevitably translate into best borrower benefits. For instance, once in repayment not all student borrowers will necessarily satisfy the conditions for good-borrower benefits  many will make 12 timely monthly payments and maintain the 1.5% origination fee discount. However, fewer will satisfy the requirement for 36, 48 or more months of timely payments and benefit from the 2% annual interest rate deduction. If your school becomes the lender for your graduate students, borrowers may lose the possibility of income contingent repayment and will lose the benefit of in-school consolidation. The history of FFEL demonstrates that sale of loans to secondary markets, an important component of the model being offered by private lenders, results in borrower confusion and can be a contributing factor in borrower defaults.

Impact on Current Program:

Any change to your schools direct lending program would likely cause delays in students receiving their financial aid and other services you might currently provide. It also might create a liability for your institution that will result in a reduction to your bond rating.

High Costs and Lower Profit Margins:

There will be expenses associated with acting as a school lender. Once a school becomes a lender, it is in competition with other lenders for its students business. Section 431(m)(1)(B) of the Higher Education Act requires that a borrower be permitted to choose his or her lender. Schools that have been lenders for many years now find that they must increase marketing efforts to maintain their market share  they are now incurring costs for the development and distribution of brochures, application wraps and advertising that are eroding anticipated profits. Competing with the zero origination fees and lower interest rates offered by other FFEL lenders with very large volume also has an impact on profit.

Impact on Taxpayers:

There will be costs to taxpayers. The Presidents Fiscal Year 2006 budget show that for every $100 spent on student loans, the U.S. government pays $12.09 of subsidy on government-guaranteed loans and only 84 cents for direct loans.

Important Questions to Consider:

Why is your institution considering becoming its own lender? Who really benefits from your participation in School As Lender?

If your school is a public university, does your state constitution permit it to 'extend the credit of the state'? Are there other state regulatory issues that your school needs to be concerned about? Are there local political issues that must be satisfied in order for your institution to become a lender

If your institution experiences difficult economic times, will the profits be used to offset financial aid spending rather than increase it?

Who will control the profits and how much input will the director of financial aid have in deciding how these funds are spent?

Will needy students always be the first consideration?

How does School As Lender effect your institutions bond authority used for capital construction (such as student housing, academic buildings, etc.)?

How will your school compete with commercial lending interests that are not your partners in School As Lender? (Fee discounts, rebates, repayment incentives, and more)· Will your institution issue a Request for Proposals (RFP) to identify a School As Lender Partner?

Will your institution phase in a School As Lender program or offer loans to 100% of its graduate population, regardless of their previous lending relationships?

How long will your institution wish to obligate to the School As Lender program (3 years, 5 years, longer)?

Is it Worth Moving to School As Lender?

Does your school really want to jeopardize its credibility with Congress, the Administration and the public?

Does your school think that making profits off of the indebtedness of its students will sit well with your institutions alumni as they send their payment checks each month?

l Will moving to School As Lender encourage your state legislature to increase tuition for all of your schools graduate students? By raising tuition  especially in cash strapped states  your institutions profits from student debt burden could lead to use of the extra money to help balance the states budget!

The National Direct Student Loan Coalition (NDSLC) is an alliance of schools participating in the Federal Direct Student Loan Program. We are the only organization solely devoted to representing the interests and concerns of direct lending institutions: 1,100 colleges and universities around the country.

NDSLC believes that Direct Lending provides an excellent, streamlined process that allows students and parents to focus on education, not the administrative challenges that are endemic in the guaranteed loan system. Click here to read the testimonials provided by DL institutions across the country.

The continuation of the DL Program is vital to quality service for students and to efficient use of financial aid resources. NDSLC provides a conduit in Washington for those who want to ensure the continuation of the DL Program. We are dedicated to improving the DL Program to assure institutions have a choice in the delivery of federal loan funds to students and to assure continued improvement to all loan programs.

Fact Sheets on Direct Lending

Schools Participating in Direct Loans

Helpful Links