Defaulters vs. taxpayers

• Article
• Comments ()
• Click-2-Listen

By

New York State Attorney General Andrew Cuomo on March 22 announced a civil lawsuit against Education Finance Partners, a student loan company based in San Francisco, for offering colleges incentives to steer student borrowers toward the company's loans.

American colleges accept a variety of financial incentives from some large student loan companies to steer students to borrow from them, according to Mr. Cuomo. Such goodies include substantial cash payments, free trips to resort destinations for campus financial aid officers, and company-manned call centers to answer students' financial aid questions. Institutions that have accepted such incentives include Long Island, Boston, Clemson, Baylor and Drexel Universities.

"We believe these revenue-sharing agreements are really no different than kickbacks," Mr. Cuomo charged at a news conference.

Senate Health, Education, Labor and Pensions Committee Chairman Edward Kennedy, Massachusetts Democrat, sent a letter to several other large student loan companies, including Sallie Mae, Citibank, Bank One and Bank of America, demanding information about their financial relationships with colleges.

These actions will no doubt energize politicians eager to take credit for clipping the wings of private lenders who earn profits from federally guaranteed student loans.

The Bush administration has proposed reducing the amount the government insures private companies against defaulted loans and increasing the fees companies must pay. But for an industry that operates on slim margins such measures would likely reduce competition and hurt students when companies simply pass these increased costs on to their customers.

Others propose more direct lending by the government. But such a shift could increase the taxpayers' burden and drive up the overall costs of college.

As many taxpayers may not be aware, the U.S. Department of Education operates two competing loan programs, and the taxpayers bear the risks of both. Under the William D. Ford Direct Loan Program, the department makes and administers loans directly to borrowers. Under the Federal Family Education Loan (FFEL) program, private companies provide the capital and administer the loans, but the loans are largely federally subsidized and insured.

Some believe one way to rein in costs would be to scale back the FFEL program and expand the Ford Direct Loan program, thereby cutting out the middleman and potentially reducing costs.

But the devil is in the details -- or, in this case, the defaults. The default rates under the Ford Direct Loan Program are higher than under the FFEL program, and the gap is widening. When a college grad defaults on a federally insured student loan, the taxpayer is on the hook for most of the balance.