Reflections on the Student Loan Industry: Recent Scandals and Long Meetings at the Department of Education

by Deanne Loonin

[Ed. Note: Deanne Loonin, a staff attorney at the National Consumer Law Center in Boston, is a leading expert on student loans and the author ofStudent Loan Law, among other publications. We asked her to give us her reflections on the ongoing student loan scandal and recent rulemaking at the Department of Education.]

The recent student loan industry scandal has been brewing for years, but is coming to the surface now because of the increasing complexity of the student loan programs (there are over 3,000 lenders offering student loans) AND the explosive growth of private loan products. Lenders clamor to get on school preferred lender lists only partially to capture government loan business. This is not where the big money is these days and if anything, Congress has begun to cut back lender subsidies from the guaranteed loan programs. Rather, high status on a preferred lender list is a way of pulling students toward a lender’s much more lucrative private loan products. These loans are tremendously profitable, especially since there are no loan limits as there are with most government loans. Further, lenders don’t have to worry about the "inconvenient" interest rate and fee caps and consumer protections that come with government loans. The main down side to private loans is the lack of guaranteed pay-offs when borrowers default, but lenders have addressed this by such techniques as requiring co-signers, and most notably, the provision in BAPCPA that made private students loans as difficult to discharge in bankruptcy as government loans.

I do not believe that all schools are in the pockets of lenders nor do I believe that all financial aid administrators are corrupt. However, there are serious issues even with well-intentioned administrators. What was most striking to me during the recent round of Department of Education negotiated rulemaking was how remiss financial aid administrators have been in explaining their practices to borrowers and the public. I got the impression from many that they don’t think they should have to be transparent because they are "good guys." They see themselves as a key buffer between lenders and students. I agree that there is an important role for objective counselors to help students navigate the system. (Would we rather have a system based exclusively on direct marketing from lenders to students??).

The key question is whether financial aid administrators can be objective when they are so tied to lenders, even if there is no explicit quid pro quo arrangement. (We’ve been asking the same question about the credit counseling industry for years). Second, even if they do not have improper ties, are all financial aid administrators savvy and competent enough to understand the complex student loan market and impart this information effectively to students?

At the recent meetings, the financial aid administrators, lenders and schools were so worried that they might face liability for making "bad" recommendations to students that they proposed "immunity from liability" provisions. The reality is that they have been using preferred lender lists and working closely with lenders for years and seem to be reacting now only because they are worried about the spotlight. (The spotlight is thanks mainly to NY’s AG Cuomo, members of Congress such as Sen. Kennedy and Rep. George Miller, and excellent media coverage, especially in the NYT). One participant at the meeting argued that she doesn’t want to change her practices, she just doesn’t want to be transparent because she might be sued.