Student Loan Financing

The House of Representatives approved new regulations over the student loan industry Wednesday and the House education committee is set to question Education Secretary Margaret Spellings Thursday about millions of dollars in subsidies to student lenders.

Post reporter Amit Paley was online at Thursday, May 10 at 2 p.m. to help unravel the over the student loan industry's business practices.

A transcript follows.

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washingtonpost.com: Amit will begin answering questions shortly.

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Amit Paley: Hi All,

Sorry I'm late--just got back from a hearing on Capitol Hill where Education Secretary Margaret Spellings faced tough questions from lawmakers about the scandal engulfing the student loan industry. I'm ready to answer your questions on that or any other issue related to the $85 billion-a-year business.

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Reston, Va.: Hi Amit,

Thank you for all of the articles on this crisis! Is the Congress planning to do anything to help the students (like the one Sen. Kennedy had testify) who have themselves been bilked by the lenders? I read in several places that the average student ends up owing three to four times more than they borrowed and ends up paying nearly ten times more than they borrowed (I think origination fees were taken out of the borrowing figure since they are really upfront interest). Anyway -- any plans to do anything about that or are they just going to let Cuomo handle that side?

Amit Paley: Congress actually just moved yesterday to address some of the most controversial practices in the loan industry. The measure, which we covered on the front-page of The Post today, would ban gifts from lenders to school officials and require a lot more disclosure of the financial ties between loan companies and universities, among many other things.

The bill has unusually strong support--it passed yesterday in the House by a 414-to-3 vote.

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Alexandria, Va.: Don't you think that the student loan story will fade away when the public realizes that students are not being hurt by the corruption? The fiscal damage has been significant but the true loser has been the Taxpayer, not the student borrowers. In fact, the tough love reality is that students have been getting far too good of a deal, 4 percent interest rate for much of the 2000s. There is no collateral, so isn't it logical they should be paying more interest, not less, than consumers of mortgages and car loans? Even if each taxpayer in the USA has been injured to the extent of $100 in assumed liabilities over the next 50 years, readers don't tend to get excited about such generalized damage.

Amit Paley: There is a lot about this story that we don't know yet--but New York Attorney General Andrew Cuomo has already revealed at least once case where students were directed by their school towards 15 percent interest rate loans when they could have gotten much better deals elsewhere.

The conflicts of interest also raise serious questions for lawmakers and consumer advocates that students were not getting impartial advice on their financial futures, though I agree we still haven't done enough reporting on the question of how that might have negatively impacted students.

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Arlington, Va.: How many schools have agreed/pledged to scale back "preferred lender" agreements in the light of these investigations?

Amit Paley: New York Attorney General Andrew Cuomo, who has been driving much of the attention on this issue, has gotten the nation's four largest student lenders and 22 colleges and universities to sign his code of conduct, which places restrictions on how preferred lender lists work (which, for those of you new to the story, is a list where universities recommend to students which companies to borrow money from).

And the legislation passed in the House yesterday would essentially make that code of conduct into federal law, so it would impact every school in the nation, if, as expected, the measure is passed in the Senate and signed by President Bush.

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Edmond, Okla.: Tricking and lying to students in marketing student loans must stop! My sons receive letters every day from student loan companies using fraudulent means to coerce them into signing new loan papers. They also receive what appear to be their contracts at the first of the semester which are actually from different loan companies. Advertising comes disguised as certified mail purporting to be a final notice that must be signed. Phone calls misrepresent the status of their loans to scare students into signing new contracts. Can Congress do something?

Amit Paley: These are the sorts of complaints that are putting political pressure on Congress and on the Bush administration to reform the industry. Although many--some would say the vast majority--of lenders would condemn such practices, federal and state investigators are looking into these types of misleading tactics. Congress is looking into these matters--and so are journalists like myself. I'd appreciate it if you or anyone else with stories to tell would please e-mail me offline at paleya@washpost.com

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Arlington, Va.: How did Spellings justify forgiving a $286 million overpayment to a loan agency? It seems a bit more than the nuisance petty cash that government accountants forgive most of the time.

Amit Paley: Spellings faced tough questions about this on the Hill today. The background: her inspector general found that a lending company called Nelnet had improperly collected almost $300 million through a controversial accounting loophole. Spellings agreed that the money was improperly collected--and decided not to allow the company to get any more money through the loophole. But she decided not to collect the almost $300 million already taken by the company.

She told the House committee today that she didn't want to risk going to court and having to continue paying hundreds of millions of dollars to the company.

But Democrats disagreed--quite strongly--and said they thought Nelnet should not have been allowed to keep any of the money.

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Washington, D.C.: Amit:

Back in March, you wrote a story about a lawsuit filed charging the Department of Education's Direct Lending program with overcharging millions of borrowers by hundreds of millions more than they owed. Did anyone bring that up in today's hearing?

Amit Paley: Nope, didn't come up in today's hearing. There are so many stories and allegations of problems--many of them still unproven, I should not--that some relatively major ones didn't come up at the hearing today (the focus of the hearing also seemed to get a bit sidetracked by a more than hour-long recess in the middle when lawmakers ran off for a series of votes).

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Arlington, Va.: Do you think it is likely that this will spur more schools to join the Direct Loan program? I am grateful every day that I was able to get a straightforward consolidation with them.

Amit Paley: It's possible, though I would say it is still too early to tell how everything is going to shake out with this emerging controversy. Clearly there are some who are hoping to take this into a political issue and some who are hoping to use the allegations against lenders into an effort to have more loans provided directly by the government instead of loan companies.

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Washington, D.C.: Any room for a class-action lawsuit by students against Sallie Mae?

Amit Paley: I get lots of calls and e-mails from readers wanting to sue loan companies who they believe have violated the law. But I have not heard of a class-action lawsuit filed recently or in the works against Sallie Mae. If you know of one, please let me know.

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Brooklyn, N.Y.: I have a massive student loan that I literally won't live long enough to pay back. Is there any chance this scandal might result in some student loan charges being rolled back or forgiven?

Amit Paley: Nope, no indication that loans would be rolled back. Who would reimburse the lenders? But President Bush and Congress have worked to boost federal aid to students, though many hope lawmakers will go even further.

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Washington, D.C.: Why isn't the Education Inspector General being called into question? He was aware of and was assigned to look at the student loan issues for a number of years (including, but not limited to review under their IT audit division) in his workplan and ignored it. Sure, now he says they're "looking into it." In the meantime, other officials like Theresa Shaw are taking all the blame.

Amit Paley: The Inspector General's Office has played a key role in bringing a lot of these scandals to light--both for student loan issues and also for Reading First. If you're aware of areas where the IG has fallen short, please e-mail me at paleya@washpost.com with an e-mail or phone number so we can discuss this further.

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Wellesley, Mass.: From what I understand about the student loan program is that there are two big winners -- banks and colleges. What about the students? Is this program a winner for them?

Amit Paley: It's hard to refer to any single student loan program--the federal government has several different kinds and then there are private, or alternative, loans that are not federally guaranteed.

But the sense of many consumer advocates--and many in the Bush administration and in Congress--is that students are not making out as well as they should in the student loan system. That's part of the reason there is such a massive push for reform right now from both Democrats and Republicans.

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Reston, Va.: Has there been any talk of having an audit of the Student Loan industry? The Department of Education keeps track of ALL student loans and I should think an audit where the promissory notes, etc., are reviewed would go far in examining the extent of the fraud.

Amit Paley: The department performs specific audits in problem areas and the inspector general's office performs audits of the student loan programs themselves. And now, of course, state attorneys general across the country and Congressional investigators are probing how they system is working, so definitely expect more revelations soon.

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Washington, D.C.: In response to Brooklyn, the lenders have already been amply compensated and I think forgiveness of the fees and interest for the past 15 years is as fair as letting Nelnet keep $300 million!

Amit Paley: The view of one reader....

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Amit Paley: I've got to run and file a story about Spellings's appearance on the Hill today, but thanks for all your questions!

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