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Student Loan-Gate

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New York State Attorney General Andrew Cuomo has got the student loan industry running scared by pointing out an open secret: Student lenders pay various kickbacks to financial aid offices to drive business their way, rather than negotiate the best deals for students. With barely a few letters sent, six schools have agreed to repay students $3.27 million on private loans, while Citibank, one of the largest student lenders, is paying $2 million into a financial education fund.

No one is admitting any wrongdoing. But cash speaks louder than words. $5 million, in an $85 billion industry, is a small price to pay to deflect further scrutiny of the obvious conflicts of interest inherent in this system. To take another example, lenders have been involved in marketing "enrollment management" software to help financial aid offices allocate grant aid to the most attractive students, leaving needier students to borrow more.

When I wrote my first piece about the student debt crisis in the Village Voice in June 2004, the future looked grim. Average student loan burdens doubled in the 1990s to nearly $20,000, and in February 2006, barely a year ago, Congress passed the largest cuts to student aid in history .

I never would have guessed that the tide would turn so quickly and that the loan industry, with its fat profits, billions in government subsidies, private jets and baseball teams, would be on the defensive. But here we are.

Cuomo's investigation has already found its counterpoint in Senator Kennedy's Student Loan Sunshine Act, which would bring full disclosure to the process. This is part of a larger bundle of reforms and relief packages, many with bipartisan support.

A 50% student loan interest rate cut was the most popular measure passed in the Dem's first 100 hours. Then, in a real surprise, Bush proposed a hike in the largest federal student grant from just over $4,000 to $5,400, to be paid for by a half-a-percentage point cut in lender subsidies--a move described by analysts as "throwing the student loan industry under the bus."

I say, let them go play in traffic. There's a much-cheaper-for-taxpayers student loan alternative that already serves 1/4 of the market: The Direct Loan Program. Switching, as described in the reintroduced STAR Act, would save billions we could then use for much needed grant aid. And a "single payer" Direct Loan program would save on marketing costs and limit the potential for scandals like the current one.

BREAKING NEWS UPDATE: From the New America Foundation's Higher Ed Watch blog, referred to me by an alert reader--

"...Several financial aid administrators...had significant personal investments in a publicly traded, for-profit student loan company. Following a request for university comment, an implicated Dean [at Columbia University] was placed on leave by his parent institution."

The three college aid advisors--Lawrence Burt of University of Texas at Austin, David Charlow of Columbia University, and Catherine Thomas of University of Southern California--were compensated with stock options for sitting on an "advisory board" at the same time that their schools had Student Loan XPress as a preferred lender. In Charlow's case, the options were worth about $72,000, and Student Loan Xpress was by far the school's biggest private lender. Cuomo is issuing fresh subpoenas.