Tracking the Money in the Student-Loan Industry

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Reports say a senior official at the Department of Education and financial aid directors at three major universities own stock in companies that issue student loans. The student-loan industry has become a complicated mix of public and private money.

SCOTT SIMON, host:

The latest twist in the growing student loan scandal, the U.S. Department of Education has put a senior official on paid leave for owning stock in a student loan company he was responsible for overseeing. Financial aid directors of three major universities are facing similar allegations.

NPR's Libby Lewis reports on how the student loan program has changed and grown since it was started 40 years ago.

LIBBY LEWIS: The vision was this. Poor students would get government grants. Middle-income students would get loans. But vision hit reality pretty quickly.

Mr. STEVEN BURD (Senior Research Fellow, New America Foundation): The problem that the government had was that many banks didn't want to get into the loan program because students were not credit worthy.

LEWIS: Stephen Burd is with the New America Foundation, a nonpartisan think tank.

Mr. BURD: And because they didn't have credit, it was a big risk for lenders.

LEWIS: So over the next decade or so, the federal government kept sweetening the deal. So much so that by the early 1990s, student loan lenders had a deal they couldn't refuse.

Mr. TOM STANTON (Government-sponsored Enterprise Expert): In the student loan program, the government gives almost, not quite, 100 percent coverage on the guarantee.

LEWIS: Tom Stanton is an expert on government-sponsored enterprises.

Mr. STANTON: What that means is that the lender bears virtually no loss.

LEWIS: That's unlike any federally guaranteed program. Pretty sweet. Now add to that pot a lot more people going to school and college tuition is rising much faster than family income. Tom Stanton.

Mr. STANTON: So the need to borrow has gone way up. The student loan market has gotten much larger.

LEWIS: Get the picture? By the early '90s, the student loan industry was glutted with lenders. Some critics began asking, is there a better way? Among them were aides to the first President Bush. Stephen Burd.

Mr. BURD: A lot of the budget people there had seen that taking the middlemen out of the program would save the government a lot of money.

LEWIS: Government studies have shown that when the government loans money to students directly, taxpayers save. Bill Clinton loved the idea, and he made it a hallmark of his presidential bid.

President BILL CLINTON: Throughout this campaign, I've talked about my plan to open the doors of college to every American.

LEWIS: Many schools liked it too. And direct government lending grew to take more than a third of the market. But the GOP Congress hated the idea. They liked private lenders. And over time, says Robert Shireman of the Project On Student Debt, the lenders began to win schools back.

Mr. ROBERT SHIREMAN (Director, Project On Student Debt): They can lure and encourage and cajole schools to move out of the direct loan program and into the guaranteed student loan programs.

LEWIS: Now student loans from the government are down to 21 percent of the market. Private lenders have the lion's share. Kevin Bruns says that's the way it should be. He represents student loan lenders.

Mr. KEVIN BRUNS (Executive Director, America's Student Loan Providers): It's a better product. You get better service. You get the best of the private sector. You get the best of the government safeguards.

LEWIS: He believes the only thing that's lacking is enforcement of the law restraining lenders from enticing schools. But Stephen Burds says that's an understatement. It's been more like the Wild West.

Libby Lewis, NPR News.

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