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The effort to clean up the student loan business is being fought on a couple of different fronts. More state attorneys general are getting into the act of investigating the industry. Earlier this month, several universities signed a settlement with the New York attorney general to repay millions of dollars to students. The AG found one private company essentially bought its way onto the school's list of preferred lenders. And Congress is considering new legislation.
NPR's Libby Lewis reports, Democrat George Miller of California will hold hearings tomorrow on federal oversight of the student loan industry.
LIBBY LEWIS: After six years of Republican rule, Miller sounded, well, almost gleeful when he spoke to reporters and asked where has the Bush administration's Education Department been all this time.
Representative GEORGE MILLER (Democrat, California): Hello? Where have you been?
LEWIS: Today, Education Department Secretary Margaret Spellings said she would form a task force on student loans to recommend federal rules to govern the relationship between schools and lenders. Her announcement comes days after state attorneys general around the nation joined the bandwagon on investigating the student loan industry.
The star of tomorrow's hearing before Miller's committee is New York Attorney General Andrew Cuomo. He'll testify about his trailblazing investigation of schools and student loan lenders. Miller, as you can tell, is just getting warmed up.
Rep. MILLER: I appreciate Attorney General Cuomo did, really, a dramatic job of opening up to the public what was taking place here. But that's really not the end of the story.
LEWIS: Miller and others say, many of the conflicts of interest Cuomo exposed have their roots in a lack of enforcement of the industry by the Education Department. But there are clues some of the problems are in the law itself. The law is the Higher Education Act that's been on the books since 1965.
Here's a look at three things the law allows. They're all likely to come up as Congress takes it turn. First, a lender can own the company that's charged with keeping students from defaulting on their loans. But it can also own the company that collects on the debt if the student does default. What's the problem with that?
The Government Accountability Office explained the problem five years ago. It found that for some loans, companies can make more money by letting the students default on their loan, than by helping those students avoid default. That's because when a students defaults, lenders can pile on huge penalties in fees. Tom Stanton, an expert with the American Enterprise Institute explains.
Mr. TOM STANTON (Expert, American Enterprise Institute): In fact, there may be more money to be made on the collection side of the business than simply keeping that loan alive. So they might not take the extra steps that are needed in order to keep that loan going.
LEWIS: In other words, the law skews the incentives. Who loses? The student. The inspector general of the Education Department noted the inherent conflict of interest in that part of the law as well, five years ago. And it is still the law.
Second, the law allows lenders to come in and offer school software or access to their computer operating systems to make things easier for the school. Those offers also designed to capture and keep a school's business. Craig Munier is director of financial aid of the University of Nebraska-Lincoln. He says, once a school adopts a lender's operating system, it's hard to let it go.
Mr. CRAIG MUNIER (Director, Financial Aid, University of Nebraska-Lincoln): It becomes, almost, an addictive process because that business process and that software becomes fully integrated into the school's routine and systems. And consequently, it's very painful and very costly and very difficult…
LEXIS: To get out. So, technology is one way a lender can become a preferred lender. Something Miller says may not be in the best interest of students. And it can lead to a near monopoly. The Education Department has identified 300 schools where one lender controls 99 percent of that campus' loan business.
Finally, the Higher Education Act allows lenders to loan money to schools to loan to students. Then, the schools sell the loans to the lender and the schools get to keep part of the profits. Does that sound fishy to you?
It did to the Education Department back in 1995. They called it an illegal inducement by lenders. But a federal appeals court judge ruled the scheme was perfectly legal under the Higher Education Act.
Libby Lewis, NPR News, Washington.
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