The Dirty Secrets of the Privatized Student Loan Industry

Jul 30, 2007

Thanks to the privatization of student loans, college students and their parents are at the mercy of an $85 billion industry that is all too content to make students pay dearly for a college education. The problems with the system are appalling, causing everything from campaign abuses and conflicts of interest to taxpayer theft.

In a recent poll by Mathew Greenwald & Associates, college students admitted that the burden of student loans affected the choices they made later in life.

Out of the 1,508 Students Surveyed:

  • 44 percent postponed buying a house because of student loans
  • 32 percent were forced to move back in with parents after college because of student loans
  • 28 percent delayed in having children because of student loan obligations
  • 27 percent skipped medical and dental procedures because they couldn't afford to pay for the procedure and pay their student loan payment in the same month

There is a very definite reason why the average student is forced to struggle after college. The sad thing is, our policy makers don't seem to care.

The Problem: Privatized Student Loans.

Just ten years ago, private loans accounted for only 4 percent of the student loan industry. Today, these loans account for 20 percent of the volume.

The increase is phenomenal mainly because it is typically cheaper to get a loan direct from the government versus a private loan. The interest rate that some private lenders charge can be astronomical-the top allowable rate is 18 percent.

Such high rates leave many students saddled with debt they cannot reasonably afford to pay back before the age of 40, while the lenders who provided the loan make money hand over fist.

The other problem with the privatized loan system is the conflicts of interest and campaign finance abuses that the system itself elicits:

Conflicts

Recent scandals have rocked the industry after student aid officers across the nation have been caught accepting perks from private lenders. Others have been caught owning stock in various student loan firms. The corruption goes as high as the Department of Education itself, where one federal employee (a financial aid staffer, or course) was put on leave after admitting that he owned a very significant amount of stock in Education Lending Group.

As reported earlier, 921 universities were also recently issued stern warnings by the Department of Education after 80 percent of each university's student body were found to be working with the same lender.

But the conflicts don't end there.

Thanks to a law enacted by Congress in 1980, the U.S. government accepts the risk of a privatized loan while the lender is guaranteed to profit. For example, say a student defaults on a loan--it's no biggie for the lender because the government has guaranteed that the lender will get his money.

But here's the rub: that 1980 law has something known as the '9.5 percent rule'. Under this rule, the lender collects 9.5 percent in interest. So, if the lender was charging the student 6 percent interest on the original loan, the lender can bill the government for the additional 3.5 percent. The money paid is known as a subsidy.

In 2001, taxpayers shelled out $209 million in subsidies to these lenders. In 2006, the amount rose to $630 million. If tuition costs continue to rise, and lenders continue to pass the risk that the private system is supposed to be based on, it will be more than $10 million by 2010.

Campaign Finance Abuse

By now you are probably wondering why this barely concealed criminal activity is being allowed to continue. The answer, according to those who vehemently oppose current private loan standards, lies with the government officials who have accepted millions in campaign contributions from student loan lenders.

The lending industry spends just as much on campaign contributions as oil and pharmaceutical industries. In fact, a student loan company by the name of Nelnet was the single biggest contributor to the National Republican Congressional Committee in 2006.

(Ironically--or perhaps not ironically at all--the Bush Education Department later ignored requests by other federal government officials to attempt to recover the $278 million in subsidy payments Nelnet improperly obtained.)

In a more just system, such slimy partnerships would not be allowed. Although Democrats promised change in the 2006 campaign, and have since managed to get a bill approved in the U.S. Senate that will cut subsidies to student loan firms by more than $18 billion, change is still rather far away.

The passed Senate bill will need to be agreed upon by the House and slipped past the Bush Administration before activists can claim a victory over the greedy student loan firms.


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