The Deepening college loan scandal is a classic case of what can happen when government uses private companies as middlemen to carry out public goals. Lately, investigations by New York Attorney General Andrew Cuomo, US Senator Edward Kennedy, and others have revealed a number of problems: Bribes paid by loan companies to colleges and universities. For example, Drexel University in Philadelphia was promised $250,000 in exchange for designating Education Finance Partners as its sole "preferred lender." Since 2005, according to Cuomo's office, Drexel has steered more than $16 million in loans to the company, costing students more than available alternatives. Personal conflicts of interests by some college student aid officials. At Columbia University, an associate dean owned substantial stock in a "preferred lender." At Johns Hopkins, a financial aid officer got consulting fees and had her graduate school tuition paid by Student Loan Xpress, one of the worst offenders. Self-dealing by US Department of Education officials. Matteo Fontana, a senior department official held at least $100,000 in stock of one loan company he was overseeing. Several other Bush officials in charge of student aid come from the industry. Exorbitant profiteering in this industry, which is subsidized by taxpayers. The biggest private student loan company, Sallie Mae, is being sold for $25 billion. Its former chairman, Albert L. Lord, got $228 million in salary and stock options in 2005, according to The New York Times.In response, Cuomo is promoting a code of conduct, and Kennedy has proposed legislation that would prohibit bribes, conflicts of interest, and kindred abuses. But, as Kennedy points out, the problems go much deeper.The private student loan industry exists side-by-side with a more efficient and corruption-free direct loan program run by the federal government. This program, whose origins date back to 1958, passes along the government's own low borrowing rate. Congress added the subsidized private loan program as an alternative in 1965.
The oddity of having two programs side by side has been repeatedly criticized by the Government Accountability Office. The proliferation of private student loan programs adds complexity as well as cost. Filling out student loan applications is literally more complex than doing your taxes -- in this case the complexity is brought to you by the private sector.
The private lending industry adds nothing of value and takes no real risk, since loan repayment is guaranteed by the government. It simply skims off exorbitant profit at taxpayer expense -- and then adds further costs of marketing and bribing college officials. According to government figures tabulated by US News & World Report, the direct loan program does better than break even, while the private loan program costs taxpayers $12.80 for every $100 borrowed. Most of those extra costs go for company profits. If all reduced-rate loans had been made through the direct loan program, Kennedy reports, we would have saved $30 billion since 1994, the year Congress revised and expanded the federal program.
Over time, the private student lending industry has become a major lobbying force, using political connections and campaign contributions to hobble its more efficient direct government competitor and block limits on its own profits. The industry succeeded in rigging the rules so that the more efficient public program is losing market share. One provision rammed through the Republican Congress prohibits the public program from marketing itself. Another kept Congress from reducing the maximum interest rates private lenders could charge.
In the 2004 and 2006 election cycles, Sallie Mae donated at least $877,000 to the election campaigns of President Bush and Republican candidates; $122,470 went to the PAC of Representative John Boehner , then head of the House education committee, according to the group Campaign for America's Future. To add insult to industry, the Republican Congress and the Bush administration have cut funding for Pell grants, so that students and parents are more reliant on the tender mercies of private lenders.
The private student loan industry adds nothing of value. The policy of subsidizing private lenders to serve public purposes (and to corrupt our colleges and universities) should be scrapped in favor of the direct federal loan program.
If this saga sounds familiar, it exactly parallels the privatized Medicare drug program and the efforts by the insurance industry to turn the rest of Medicare into a taxpayer subsidy for private industry. Though three decades of government-bashing have left many politicians reluctant to draw the obvious conclusion, it is often more efficient and less corrupting for government to do the public's business directly.
Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His column appears regularly in the Globe.
2007 The Boston Globe