The New Corruption

Stories are breaking about corruption in the Student Loan business. Several universities, including Columbia and John Hopkins have suspended their financial aid advisors for conflicts of interest. Apparently, advisors have been taking kickbacks, stock options, and expense paid trips from student loan companies without disclosing this to students and families looking to take out student loans.

I can't say I am surprised. The way these loans are managed is corrupt as it is. We have discussed this on this blog before. There are many things they don't tell you. Student loans are treated as "unsecured" loans, thus interest accrues daily; when you consolidate, you are locked in at a set interest rate and you can't refinance if rates drop; only death will get you out of the loan. If you send in extra money, interest accrues until the check is processed, meaning that you have less money going to the principle. If you have a combination of subsidized (government pays the interest while you are in school) and unsubsidized loans and you consolidate, your payments go to paying the subsidized portion of the loan first, leaving the unsubsidsed portion untouched. All of these are typical practices used by the credit industry. But none of them make paying down student loans all that easy, even when you make every payment every month. As I have said before, I understand what it is to be Argentina. You pay and pay, but don't see the principle drop off. I've paid over $25K in interest and only $7K in principle over the last 10 years. It is depressing.

Here is the interesting part: banks who offer these loans get incentives from the government and they take on no risk since all student loans are backed by the government.

Student loans are an $85bil. industry controlled by only 32 companies. The Clinton Administration attempted to cut out these middle men by having the US Department of Education give students loans directly. This is a much cheaper way to go for the government and is better for the students in the end. However, a vast majority of universities have chosen not to use the Direct Loan Progam, opting instead to continue using Sallie Mae or other private lenders. Private lenders and consolidaters (who send me as much junk mail as credit card companies) have a pretty rich lobby in Washington and big expense accounts with which to woo university financial aid officers.

In a day and age where the housing market and sub prime lenders are being looked at more carefully we need to start poking needles into the lending market as a whole. Greed and coruption is driving lending industry.