Conflict of Interest...
Within any business, there are financial pressures. The college industry is no different. One of the most recent changes to help colleges combat these financial pressures has been a dramatic one, and has created a huge conflict of interest.
There are two basic types of federally backed loans to help pay college costs: those that are borrowed directly from the government and those from a lender such as Sallie Mae. Government loans are called direct loans and those from a lender are a part of the Federal Family Educational Loan Program (FFEL). Both programs are guaranteed against default by the federal government. Schools choose which loan program they will participate in. Most often, a college or university selects one loan program or the other, but not both.
In the past, most all schools participated in the direct loan program (keep in mind that the direct loan program basically cuts the "lenders" out of the loop). There are now hundreds of colleges, however, that are abandoning the Department of Education’s direct loan plan. Schools are being "lured" away from the government’s direct loan program by banks, state lending agencies, and most significantly, Sallie Mae, the giant, private lender.
Since 2000, there have been 200+ schools that have dropped out of the government’s direct loan program. Why? Money! Schools are being pulled away by the promise of a quick buck and future revenues.
Lending agencies are guaranteeing schools a profit – something the government cannot do. Basically, the loan company gives the money to the institution (generally in the form of a credit line). The school then, in turn, loans the money to the students. Next, the loan company buys the "paper" back from the institution and the school pockets a premium as profit. College is a business – big business!
As loan companies pick up more business, and the government loses it, federal taxpayers will be greatly affected. In fact, taxpayers may end up paying over $20 million more each year as the result of just one major school dropping the direct loan program and going into business as a lender.
How do the lenders get the schools to come over to their programs? They go after them. Lenders use proceeds from federal loans to entertain Financial Aid Officers and swing the "business" their way. Sallie Mae will even offer schools special funds to loan to other students if the school agrees to promote other Sallie Mae loans on campus.
Win – Win Situation
For the private lenders, the FFEL program is a win-win situation. They can’t lose due to the fact that the federal government guarantees each loan against default. As you may have guessed, these private lenders are seeing very lucrative bottom lines.
Conflict of Interest
With the financial pressures most schools face, they are practically "forced" to drop the direct loan program and go with a private lender. At many schools, it has already meant millions of dollars in additional revenue annually.
There is, however, one major catch. When the school becomes the lender, every new loan that is put on the books brings in extra revenue. Isn’t this a conflict of interest? The institution’s Financial Aid Director’s job is to be an objective counselor and guide students to the most lucrative financial aid packages. Will their focus change? Won’t they be tempted to cut the amount of free money they give a student and propose more loans? They win both ways – they not only get to keep gift money in their coffers, they also reap the profits from the additional loans.
Business is Business
By abandoning the direct loan program and working with private lenders, all of the benefits seem to revert back to the institutions. There seems to be no benefit to taxpayers, or, even more importantly – students.