GLOBE EDITORIAL - Financial aid 101

June 22, 2007

RECENT NEWS from the student loan industry has all the makings of a gritty
detective flick. Some shady financial aid officials cut dubious deals with
lenders at the expense of naive student victims.

The seen-it-all detective is Senator Edward Kennedy. He’s the chairman of
the Senate’s committee on health, education, labor, and pensions, which has
released a report on student loan abuses. It’s a troubling account of what
Kennedy calls “inappropriate marketing practices, conflicts of interest, and
back-room deals.”

The stories are similar. Students take out loans without asking a lot of
questions because this is the only way they can go to college. Those who get
what are called Direct Loans deal with the federal government. But students
who go through Federal Family Education Loan programs are borrowing from
private lenders.

This is where problems have festered. Some banks and colleges have had
ill-advised, even unethical relationships. In some cases, colleges steer
student borrowers by designating certain banks as “preferred lenders.” The
banks then reward college officials with services, consulting fees, or
positions on boards.

Meanwhile, students can be railroaded because they don’t know about all
their borrowing choices. It’s a national problem. Kennedy’s report
challenges practices at various lending institutions, including Citizens
Bank, Chase, Citibank, Nelnet, and Northstar. Some colleges have fired their
own financial aid officials, including Emerson College, which fired its dean
of enrollment.

But cleaning up student borrowing will take a lot more than throwing out bad
apples.

In a meeting at the Globe last week, US Education Secretary Margaret
Spellings called for greater transparency in lending and a greater public
role in financial aid, pointing out that many students go directly to banks
for private loans to pay for college. She promoted President Bush’s proposal
to raise Pell grants over five years to $5,400—a move that’s overdue,
since grants don’t add to the debt many students accrue by graduation.

Spellings also says colleges have to police themselves, making sure they
have ethical and well-enforced financial aid policies.

On Wednesday, Kennedy’s committee wisely approved a bill that would cut $18
billion in subsidies to student loan companies. Of this, $1 billion would be
used to reduce the federal deficit. And $17 billion would be used for
financial aid. Pell grants would go up to $5,400. The bill would cap monthly
loan payments at 15 percent of borrowers’ discretionary income. And the US
Department of Education would have to name colleges that raise prices faster
than their peers.

When it considers this bill, the full Senate should follow the committee’s
lead, cutting a fairer deal with college students.

–Jill McCarthy