Lender's Paradise

Monday, April 23, 2007

BAD BEHAVIOR is not the only reason to scrutinize the federally subsidized student loan business. But it is a good place to start after reports of ethical lapses at student loan firms.

First, an investigation by New York Attorney General Andrew M. Cuomo revealed that financial aid officers at a number of prominent universities held stock in a loan company that they recommended to their students. The company's executives appear to have brokered deals, presumably intended to persuade those university officials to recommend its services. Last week, Mr. Cuomo announced that he will sue Drexel University for sharing revenue with a student loan firm it recommended. Industry groups have insisted that keeping private lenders in the student loan game enhances choice and, therefore, maximizes benefits to students. Universities can recommend the companies with the best rates and the best services to their students. Now, students will have to wonder if that advice reflects impartial judgment or inappropriate industry lobbying.

The Post's Amit Paley reported this month that student loan companies had improperly gained access to a government database containing a huge amount of sensitive student information. An official at the Education Department believes that they did so to harvest information that would assist them in marketing loan consolidation services. The department shut down the database last Tuesday. Federal managers must be more vigilant in restricting access to legitimate queries. In this case, more caution is better than less.

All of this misbehavior leads to a broader question: Why continue to subsidize these firms? Currently, universities can participate in the public-private program, in which private lenders pony up the principal and collect low-interest payments from students while receiving a government subsidy that, in effect, increases the interest these companies receive. Or universities can choose to have their students borrow money directly from the government. Either way, Congress sets the general interest rates students pay on most loans. And the Congressional Budget Office and the Office of Management and Budget have both concluded that the government's direct lending program is significantly cheaper for taxpayers.

As Congress prepares to take up education policy, it should look to enforce stricter ethics rules on private lenders and to cut their federal subsidies, wasteful corporate welfare that removes much of the risk of doing business. Savings might go to enhancing the Pell Grant program, to deficit reduction or to other worthy causes. Some would also like to see private companies compete for the privilege of lending to students, a program that might more efficiently set student loan rates than congressional fiat can. It is an idea worth considering.

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