LOAN REPAIR GOES HALFWAY

While lawmakers are right to want to stop improper practices in the student loan industry, stricter rules for the banks and businesses that make the loans will only solve part of the problem. Ensuring the Department of Education enforces the rules is also necessary.

In a report issued last month, the Government Accountability Office found the department’s oversight of lenders much too lax. The department has no mechanism to find abuses, instead relying on complaints. Worse, not much comes of the complaints.

The department has received complaints that lenders were offering inducements, such as $300 gift cards, to borrowers for taking out a loan with them. Schools have refused to process loans from borrowers not on their approved lists and financial aid administrators have received inducements from lenders, according to the GAO. All of these are illegal and can result in students paying higher rates and fees on their loans.

In other instances, state and congressional investigations have uncovered wrongdoing – such as a university financial aid administrator who owned stock in a lender’s parent company and made $100,000 on the sale of the stock or another administrator who placed a loan company on the school’s “preferred lender” list in exchange for meals and tickets to events. None of these were uncovered or dealt with by the education department, according to the GAO.

The department has sanctioned lenders only twice in the last 20 years. One lender was disqualified from the Federal Family Education Loan Program in 1988 for misleading advertising and providing incentives to borrowers. It limited the participation of another lender because of improper inducements in 1995.

Typically, when the department responds to a complaint, it sends a letter requesting that the problematic activity stop. It usually does not follow up to see if this is effective.

Without addressing this by ensuring the department improves its enforcement, Congress will only go part way in curbing abuses in the country’s lucrative college loan system by toughening the rules. It must ensure those rules are enforced for them to be effective.

Congress is cracking down on the student loan industry in the wake of an investigation by New York Attorney General Andrew Cuomo. The investigation, so far, has resulted in nearly $14 million in settlements with more than a dozen student loan companies. Mr. Cuomo is now looking into whether college athletic departments improperly received incentives for directing student borrowers to University Financial Services whether schools allowed use of team names, logos and mascots to imply the company was the school’s official lender.

In June, the department issued proposed regulations on inducements the provide examples of allowable and prohibited incentives and requirements for preferred lender lists. The rules could go into effect in 2008 at the earliest. However, they do not address the department’s oversight and enforcement shortfalls.

Unless this is fixed, congressional solutions will fall short.