NEW YORK--I was 17, and it was the summer between my high school graduation and freshman orientation week in college. My mom drove me downtown to the Gem City Savings building, where I signed a pile of loan applications I wasn't given time to read. Which was just as well, since I was 17 and not a lawyer and wouldn't have understood them. If the banker had told me that I'd end up paying $820 a month until I was 32 years old--which was more than my salary--I might have reconsidered going to college.
Student loans are big business. In 2006 banks lent college students a whopping $85 billion. Choose your comparison: that's the same amount AT&T paid to purchase the BellSouth telephone company and that the U.S. paid for a year of the Iraq War. It was only a matter of time before this unregulated marketplace attracted the voracious vultures of corporate America.
The current student loan scandal highlights just how corrupt the system has become. It began when Attorney General Andrew Cuomo announced that New York State is investigating a company called Student Loans Xpress for sweetheart-deal stock transactions designed to enrich the company and corrupt financial aid officers at the expense of clueless college kids and their parents. (Student Loan Express' corporate parent is the CIT Group. CIT is a former subsidiary of Tyco, which itself became embroiled in a corporate scandal a few years back.)
According to Cuomo, financial aid officials at Columbia University, the University of Texas and the University of Southern California were paid kickbacks as compensation for steering students to them. (Disclosure: I'm a Columbia alum.) The three bought stocks and options at insider prices in Education Lending Group, the parent company of Student Loan Xpress until 2005, when it was sold to CIT. They then sold them at a profit that would make Donald Trump drool. David Charlow, executive director of financial aid at Columbia, paid $1 for each of 7,500 shares of ELG and dumped the stock two years later at $10 a share--a 450 percent annual rate of return on his "investment."
Student Loan Xpress, which uses phone-forwarding wizardry to masquerade as some institutions' financial aid offices, is recommended to students as a "preferred lender" at the three universities enmeshed in the scandal. As young, novice borrowers--most kids sign their first loan document at the tender age of 17--they trust their colleges' recommendations. "There's an implicit assumption that the financial aid office is an impartial, informed intermediary," says education expert Michael Dannenberg of the New America Foundation. "What we're finding out now is that some colleges and some financial aid administrators may not be so impartial."
The mess is spreading. The Johns Hopkins University admits that its director of student financial services collected $65,000 in cash and tuition payments from Student Loan Xpress. The dean of financial aid at Widener University in Pennsylvania took in $80,000. John Ryan, chancellor of the 64-campus State University of New York (SUNY)system, is under scrutiny for his spot on the board of directors of CIT, where he collects $150,000 a year on top of his $340,000 salary from SUNY.
Even the feds couldn't resist dipping their paws into the student loan jar. Matteo Fontana, the federal Education Department official charged with overseeing student lending, made a cool $100,000 from a sale of ELG stock. The Bush Administration shouldn't be too surprised at Fontana's conflict of interest. (No pun intended.) It hired him straight out of Sallie Mae, a student loan mill that rakes in spectacular profits on 10 million student loans worth $126 billion.
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Ted Kennedy, chairman of the Senate Education Committee, is promising an investigation of Student Loan Xpress. Fontana, along with three CIT executives tied to the sleazy deals, has been placed on leave. But no one seems to fully comprehend the scale of the problem or its cause.
As usual, Democratic presidential candidate John Edwards comes closest to getting it. "We need to fix the student loan program to take banks--which are just an expensive middleman--out of the process," he said in his call to have students borrow directly from the government instead.
Indeed, banks are soaking families with kids in college. It's appalling to watch student loan executives fatten themselves at the expense of middle-class kids (rich kids don't need loans and poor kids get grants) struggling to pay skyrocketing tuition bills on stagnant salaries. Sallie Mae CEO Al Lord, who retired in 2004, paid himself a personal salary of $225 million over five years. Meanwhile the government continues slashing real (direct grant) financial aid to needy students.
How did Sallie Mae make so much money? Price gouging. "Sallie uses high interest rates and fees to charge students as much as 28 percent annual interest on loans," reports Fortune magazine. "As a result, some have seen their school-loan debt balloon into six-figure delinquencies that they can't hope to pay when the collection agency (which nowadays may be owned by Sallie) comes calling."
Edwards is right. It's time to cut out the banks. But the elephant in the room is lending itself. Transforming an essential public service like education into a profit-based loan-shark business creates too much temptation to poorly paid, easily corrupted college administrators and corporate greed monsters alike.
Employers, economists and politicians in both parties agree that a college education is more essential than ever to achieving success in the workplace, as well as to America's ability to compete internationally. However, most other countries offer free or heavily subsidized tuition to college students--giving them a big advantage. Rather than saddle twentysomethings with debt loads the size of a home mortgage they can't possibly handle on starter-job salaries, wouldn't it make more sense to treat college as an extension of K-to-12--as free, public education?
It's time to end the student loan racket once and for all. Outstanding student loans should be forgiven. Non-repayable grants could cover 100 percent of tuition for those who can't afford it. Can the U.S. afford it? Yes. All we have to do is get out of Iraq.