How Commercial Banks and Private Firms Are Dictating Who Goes To College

By Nomi Prins, Newsday. Posted June 21, 2007.

New York State Attorney General Andrew Cuomo addressed the U.S. Senate Banking, Housing and Urban Affairs Committee recently on his continuing investigations into the conflicts of interest in the student loan industry.

He concentrated on private loans, not guaranteed by the federal government -- recommending a code of conduct to keep lenders from receiving university "finders-fee" kickbacks.

He also suggested the federal government get involved. Easier said than implemented.

First, the federal budget has consistently slashed education funding. In his last budget, President George W. Bush even called for cuts in subsidies to companies participating in federally guaranteed student loan programs to force diversion of loan business to private programs.

Second, there wasn't a word of caution uttered on Capitol Hill when the nation's largest education lending institution -- Sallie Mae, which manages $150 billion in student loans -- decided to sell itself to Wall Street: to Bank of America, JPMorgan Chase and two private equity companies, to be exact.

Not that education lending privatization is something new. Sallie Mae was created in 1972 as a government-sponsored agency. During the Clinton administration in 1997, it began turning private, completing the task under the Bush administration in 2004. It was no coincidence that between 1997 and 2004 the amount of total college funding received from private institutions quadrupled.

On April 11, Sallie Mae came to an agreement with Cuomo: It would limit conflicting relationships (limit, not cease) and pay a $2-million fine. Five days later, the company announced its $25-billion sale, not a bad price for that payoff. Its stock has leaped 30 percent since, and not because it will make loans more affordable to more students.

The deal is the largest indication of how commercial banks and private equity firms will be able to dictate who goes to college. Banks advertise the advantages of consolidating existing student loans, much as they do for home loans and credit cards. But this line is merely attractive bait used to capture market share now, in return for higher fees and interest rates later.

Similarly, private equity firms won't have affordable education as their top priority. It's just not profitable. Instead, they will determine how to squeeze the most out of students and parents, which is far more lucrative.

This issue has not been seriously addressed by any of the presidential candidates, although former North Carolina Sen. John Edwards has proposed College for Everyone, a national program modeled on one he launched in Greene County, N.C. Students there would receive free freshman-year tuition in return for agreeing to work at least 10 hours a week.

Still, no candidate has raised a flag linking the increasingly racially and economically segregated education financing due to the privatized nature of lenders. Yet, the situation is getting worse fast in the absence of federal attention.

Last year, the Department of Education spent $38 billion. But federal spending accounts for only 9 percent of education spending. The rest comes from state and local sources, and isn't enough to go around. Six of 10 high school graduates go to on postsecondary education, more than half to cheaper two-year colleges.

Minorities get hurt. Just 38 percent of black high school graduates and 28 percent of Hispanics enroll in college. One of five students enrolling in college are in the bottom 25 percent in family income, while 7 of 10 are from the top 25 percent. Talk about educational class segregation. A year of private college costs half the average American family's income per child.

Meanwhile, interest rates have been rising. This means student loans, in the noose of private lenders, will find their unregulated, uncapped rates rising, too. This pain would be alleviated if more lending returned to the federal government's hands.

Supporters of education privatization, such as Senate Banking Committee ranking Republican Richard Shelby (R-Ala.), say that because college costs are rising we should encourage the growth of private lending. Yet, privatization makes it harder for the already economically disadvantaged to afford the education they need to turn their lives around.

The solution, beyond establishing a code of conduct between lenders and universities, is to increase federal funding for college and graduate school education, establish national federal guidelines a la Edwards' work-for-tuition programs, regulate existing privatization, cap interest rates and establish debt cancellation programs for important professions in which salaries hamper one's ability to repay loans.

While our presidential candidates are spinning such topics as Iraq and religious faith, they should think about whether they'd be where they are if they weren't able to finance their college educations -- and they should consider making this issue an important election topic.

See more stories tagged with: debt, student loans, sallie mae, federal government, borrowing

Nomi Prins is a senior fellow at the public policy center Demos and author of Other People's Money and Jacked: How "Conservatives" are Picking your Pocket (Whether you voted for them or not).

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