Report Says Colleges Bilking Loan Program

Report Says Colleges Bilking Loan Program

By Charles Pekow

A program designed to provide student aid has spun out of control, becoming a cash cow for colleges and universities. The Department of Education has not adequately controlled the Federal Family Education Loan Program (FFELP), according to a recent report from the Government Accounting Office (GAO).

Originally, traditional lending institutions gave loans to help students pay for higher education, but schools themselves have increasingly become lenders. In the 1993-1994 school year, higher education  institutions disbursed about $155 million. By 2003-2004, that amount had mushroomed to about $1.5 billion, the GAO said in its report, “Federal Family Education Loan Program: More Oversight Is Needed for Schools That Are Lenders.”

“Several schools we interviewed reported that a primary reason to become a FFELP lender was to generate more revenue for the school,” the    report says. Most of the schools subsequently sold the loans to make money. They made profits ranging from two to six percent, generally.

The Office of Federal Student Aid at the Education Department hasn’t done much to keep track of whether the schools are complying with FFELP regulations. Those who lend more than $5 million, for instance, must send audited statements to the department every year, but more than one-third of the schools required to do so hadn’t. Nor has the federal aid office reviewed the lenders it’s supposed to.

The department agreed with GAO’s suggestion to step up oversight and said it started reviewing the schools last year. But it called the GAO’s charge that it doesn’t know what schools are doing “misplaced.”

Meanwhile, Reps. Dale Kildee, D-Mich., and Chris Van Hollen, D-Md., introduced the School-as-Lender Reform Act of 2005, which would seek to ensure that schools use some of their profits from the loans to provide additional grants to students. The bill also would require FFELP lender-schools to employ a full-time coordinator for the program and to not give such loans to more than half their students. The bill is currently being considered by the Committee on Education and the Workforce in the House of Representatives.

“I am absolutely appalled that (the Education Department) believes that we should not require the use of revenue generated by the school as lender program for student aid,” Kildee said in a statement.

The report is online at <www.gao.gov/new.items/d05184.pdf>. 

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