Editorial | College-Loan Industry

An obscene system

Posted: August 27, 2007

Why do we even have a "college-loan industry"?

In this country, where education is supposedly valued so highly and where almost every student is counseled to take courses beyond high school, why has usury become the vehicle that so many must endure to reach their desired academic goal?

Hear that? That's the sound of the "industry" crying foul. How dare anyone compare to usury the public service it claims it provides?

But it's hard to not think of loan sharks when you read that the five top executives of Pennsylvania's government-run student-loan agency are being given bonuses totaling a half-million dollars. That's actually down from $850,000 in bonuses last year.

Think that's obscene? Get this: The nation's largest provider of college loans, SLM Corp., is raking in so much cash that a group of investors wants to buy it for $25 billion. If the deal goes through, former CEO Albert L. Lord's share will be $135 million.

What's SLM? You might know it as Sallie Mae, a nickname it acquired when it began more than 30 years ago as a quasi-government agency similar to its banking cousins Fannie Mae and Freddie Mac.

Unlike Freddie and Fannie, Sallie walked out on the government years ago, ostensibly to better serve its clients as a private company. Since then, it has become the money-making machine that two years ago was ready to plunk down $1 billion to take over the Pennsylvania Higher Education Assistance Agency.

The "industry" can't claim it has always been scrupulous in amassing its fortune. Substantiated charges that some of its minions bribed college officials to steer students to specific loan programs have given it a black eye.

The scandal has also spurred Congress to speak up for students. When it returns from summer recess, a conference committee will be set up to reconcile House and Senate bills concerning college loans. Proposed legislation would cut government subsidies to banks and others that make college loans and use the cash to increase the amount of student grants that don't have to be repaid. The House bill would also halve the interest rate on government-backed loans to 3.4 percent.

The bills on Capitol Hill have the "industry" screaming like a baby being denied its bottle. If subsidies are cut, it says, many of the 3,500 lenders making college loans will opt out of the business. The lenders say they also will have to stop providing rate discounts and fee reductions, meaning students will pay more for loans.

That could happen. And the moon could fall out of the sky, too.

Then again, maybe the 2,000 to 3,000 or more lenders still in business will continue to offer discounts and reduced fees to remain competitive.

But if the federal government will handle more loan business directly and offer fewer subsidies to the fat-cat industry, then less money that ought to be used to help low- to middle-income kids go to school will end up in some executive's pocket as a bonus.

Congress is right to seek that goal. But it will have to overcome the objections of President Bush, who threatens a veto if the bill creates a host of new entitlement programs to provide more student grants and loan forgiveness. Bush also wants to cut subsidies, but he has proposed a $16 billion reduction, while the House bill requests $18 billion.

Is it mere coincidence that, according to Bloomberg News, the agreement to buy Sallie Mae allows the buyers to walk away if the subsidy cuts total more than $16 billion?

The loan industry is right about one thing: The cost of a college education itself is too high. Too many universities with gaudy endowments would do well to follow the Princeton example and use more of that money to pay the way for needy students.

Some competitive pressure needs to be brought to bear on colleges, so that cheaper credit for students doesn't simply lead to higher tuitions.

That said, there is no excuse for allowing the middle man - the college loan industry - to saddle students with unnecessarily high interest charges that they'll be paying off deep into their adult lives.

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