Loss of Innocence: Universities and Student Loans

Going back to school for a Master's Degree had long been problematic for this author because of the time and economic demands of my day to day life. In 2005, I was a Mortgage Broker and a Co-Owner of a small business with an all too hectic life. It had been more than twenty years since I last went to school and the realities of money and debt had kept me from finishing my dreams. Still, one College Counselor after another peddled the all too easy easy availability of student loans for those who wanted to finish their teaching degrees.

Oddly enough, It took me awhile to figure out that there might just be something amiss with this whole picture. After all, these College Counselors were professionals looking out for the best interest of the student. Right? Universities were dedicated to the pursuit of knowledge and Financial Aide Counselors represented those same beliefs. Sadly, it did not take long to discover that there was a darker side to the student loan industry. "Gifts and payoffs to universities and their officials by student lenders were far more pervasive than had been disclosed and in some cases were demanded by university officials themselves in exchange for promoting lenders to students, according to a Senate report on the student loan industry issued yesterday" (Aronson and Schemo, 2007). How could an ex Mortgage Broker have failed to notice the curious links between the lending industry and academia?

College Cutbacks Lead to Shortcuts

Community Colleges and Universities are subject to frequent budget cutbacks and the resultant funding issues can cause schools to lean towards taking shortcuts in order to operate. The key to more money is more students and less overhead. Still, even a casual observer begins to quickly notice that some lenders are being touted by some schools and not at other schools. As a mortgage Broker, I was aware that Banks and lenders started with similar rates and that the lending rates remain fairly constant so the 'behind the scenes process' was not new to me. The reader might ask why would one lender be at one school and not at another school but the sales technique is apparent to mortgage brokers. Mortgage Brokers and School Counselors prefer dealing with representatives for one reason or another. For Mortgage Brokers, the usual reason was easy to use loan products or a better yield spread that lead to a greater income potential. For School Professionals, the reasons for choosing a lender turned out to be continued employment and the probable lure of gratuities.

Marketing, Money and Economic need were driving the school lending market in a manner similar to the way that lenders convert Mortgage Brokers to their cause. If the rates are similar, why not choose the lender that offers a little more rebate than the other guy? Rates are similar so what harm does it do to pick one lender over another? It seemed possible that the Public Education driven Community Colleges would line up for an economic trough from lender kickbacks but I had always been led to believe that Universities had higher standards. The University world always seemed a little more pristine to this naive author.

However, what some school counselors do not realize - and most educated Mortgage Brokers do know - is that the lending market is actually fairly small. Front end lenders may be numerous and operate under independent names but back end banks and lenders that buy the loans are down to just a few major players. Back end lenders make big money servicing and repackaging student loans to investors.

Can shortcuts lead to kickbacks?

Can shortcuts lead to kickbacks? "In some cases, colleges themselves demanded contributions from lenders. A Citibank sales report told how Chaminade University in Hawaii had asked the bank to hold receptions for admitted students in exchange for business. The bank held eight receptions and spent $2,000 on each with the understanding that that would increase the bank's "guaranteed share" of the college's loan business. The report added that the deal did not work out in Citibank's favor and that its loan volume decreased the next year" (Aronson and Schemo, 2007). Some Colleges, when faced with economic challenges, were turning toward easier roads for obtaining student money. In fact, the coziness between lenders and universities has gotten so out of control that "the Education Department, criticized for lax oversight of student loans, released proposed rules yesterday that would set new standards for universities and ban lenders' marketing practices that have resulted, in some cases, in loan company payoffs to university officials" (Glater, 2007).

Who Wants What and Why?

In reality, the student simply wants money for school, the University wants more money from the student to go to school and the Lender wants to make money from loans from the students who are going to school. What is the harm of a few deals? "Dozens of colleges and universities across the country have accepted a variety of financial incentives from student loan companies to steer student business their way, Attorney General Andrew M. Cuomo of New York announced yesterday. The deals include cash payments based on loan volume, donations of computers, expense-paid trips to resorts for financial aid officers and even running call centers on behalf of colleges to field students' questions about financial aid" (Glater, 2007). Attorney General Cuomo feels that the problem is more widespread than reported in the press. Cuomo recently stated that "there is an unholy alliance between banks and institutions of higher education that may often not be in the students' best interest," (Johnson, 2007). Why are student loans so valuable to lenders?

Student loans are liquid gold to lenders because students have little choice but to eventually pay off their loan under existing law. Even bankruptcy and death fail to halt the collection of federally guaranteed student loan debt. Most Americans are unaware that student loans are packaged and make tidy investments for investors both in America and Overseas. The same rising rates that beset the housing industry affect student loans and the availibility of money for the typical middle class families. Students are being encouraged to undertake large loans for Academic programs that may or may not offer promising careers. In fact, it is becomingly increasingly clear that the sole goal of universities is to recruit students for their programs. Recruitment goals lead to the possibility that the loan may not be in the best interest of the student and his or her future career.

The Greatest Investment

Has the coziness between universities and lenders created a system that entraps students into a lifetime of debt? Higher interest rates make for great investments but they may just be robbing the dreams of this next generation of students. "Indeed, mandating high interest rates is self-defeating public policy: The obligation to retire debt forces graduates away from important but low-paying careers. Students who aspire to be teachers, social workers, state prosecutors or public defenders soon learn that they cannot afford to pursue their passions" (The Ledger, 2006). For this author, it has become increasingly clear that going back to school to become a teacher is indeed a difficult step but one that will bring my business experience into the classroom. One wonders if there are other people debating this step and what cost their decision will have for our society's greatest investment - our youth.

References:

Aronson, K. and Schemo, D. (2007). Report Details Deals in Student Loan Industry retrieved June 17, 2007 from http://www.nytimes.com/2007/06/15/washington/15loans.html?_r=1&adxnnl=1&oref=slogin&ref=education&adxnnlx=1182143954-TS7qiLdFG6MlxbfJSndE1w

Glater, J. (2007). U.S. Puts Limits on Lender's Ties to Universities retrieved June 15, 2007 from http://www.fairness.com/resources/one?resource_id=57272

Glater, J. (2007). Lenders Pay Universities to Influence Loan Choice retrieved June 1, 2007 from http://www.nytimes.com/2007/03/16/education/16loans.html?ex=1331697600&en=8ec471348ace5c0d&ei=5090&partner=rssuserland&emc=rss

Johnson, M. (2007). MY AG Alleges Student Loan Corruption retrieved June 10, 2007 from http://www.boston.com/news/education/higher/articles/2007/03/16/ny_ag_probes_corruption_in_student_loans/

The Ledger (2006). Money Lenders Vs. Student Borrowers retrieved June 12, 2007 from http://www.theledger.com/apps/pbcs.dll/article?AID=/20061226/NEWS/612260338/1036