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Student loan deal has a Catch-22
By Michael Dannenberg
Missouri's pending plan to sell its student loan not-for-profit's assets in order to pay for $350 million in college construction is doomed to fail. What seems like a great arrangement for everyone has two major problems: First, the deal depends on an illegal bribe. Second, it's actually not that great for either students or taxpayers. But there are ways to turn it into a good deal, if Washington and Jefferson City work together.
The plan calls for Missouri's Higher Education Loan Authority to sell hundreds of millions of dollars' worth of existing student loans -- most likely to the for-profit student-loan giant Sallie Mae -- and transfer profits to a state agency. The state agency would then dole out the proceeds to colleges for construction projects.
Here's the catch: In exchange for $94 million in construction on the campus, the deal requires the University of Missouri-Columbia to make a "good faith effort" to shift new student loan business from the federal Direct Loan program it uses now to MOHELA.
But the federal Higher Education Act prohibits MOHELA (as well as the Direct Loan program) from offering inducements to colleges for funneling student loan business its way. Section 435 of the law includes this passage: "Disqualification for Use of Certain Incentives -- The term 'eligible lender' does not include any lender that ... offers, directly or indirectly, points, premiums, payments, or other inducements, to any educational institution ... to secure applicants for loans."
Either, as Attorney General Jay Nixon claims, a "good faith effort" is insufficient consideration for MOHELA and puts the deal at odds with state law, or, as Gov. Matt Blunt claims, MOHELA is getting enough, which puts the deal at odds with federal law.
Even if the MOHELA proposal were legal, it still would not be that great for students or taxpayers.
Students need bigger scholarships, cheaper loans and lower tuition far more than the pet construction projects. Two weeks ago, a national report gave Missouri an "F" for college affordability. What good are new buildings, if students can't afford to walk through the door?
Taxpayers are also shortchanged by the Missouri deal -- although "overcharged" might be a better word. Why? The Direct Loan program provides federally guaranteed loans to students at the same interest rates as MOHELA and Sallie Mae. But the cost to taxpayers is less because, as its name indicates, the loans go directly to students. No banks are used as middlemen.
And -- as if a guarantee of repayment weren't enough -- lenders like Sallie Mae also receive federal subsidies to make student loans. The lenders dispute it, but three different independent agency studies confirm that by cutting out the middlemen and not paying subsidies, the Direct Loan program saves billions.
The subsidies, the result of intense industry lobbying, have been good for the for-profit student lenders. On the Fortune 500 list of companies ranked by rate of return on equity, Sallie Mae, far and away the nation's largest holder of student loans, placed second in 2005. Microsoft ranked 18th.
What should be done? Washington should cut excess taxpayer subsidies to student loan providers and use the funds to make Missouri colleges more affordable for students and families:
* Stop giving subsidies to for-profit student loan providers like Sallie Mae. Taxpayers don't need to pad shareholders' bottom lines. At least MOHELA has been plowing its profits into higher education.
* Make not-for-profit lenders like MOHELA compete at auction for the government-guaranteed loan business. As one of the country's largest student-loan lenders, MOHELA would do fine in an auction.
* Most important, change federal law to let MOHELA and the Direct Loan program fully and fairly compete for loan business at campuses like the University of Missouri-Columbia -- so long as every inducement dollar goes to reduce tuition, cheaper loans or expand need-based grant aid. Together, Washington and Missouri can make college more accessible and affordable at no additional taxpayer cost. But they have to commit to making sure that financial aid helps students and their families -- not politicians, college presidents, construction companies or big for-profit lenders like Sallie Mae.
Michael Dannenberg directs the Education Policy Program at the New America Foundation in Washington, D.C.