Jonathan Glater and Karen Arenson report:
In a fierce contest to control the student loan market, the nations banks and lenders have for years waged a successful campaign to limit a federal program that was intended to make borrowing less costly by having the government provide loans directly to students.
The companies have offered money to universities to pull out of the federal direct loan program, which was championed by the Clinton administration. They went to court to keep the direct program from becoming more competitive. And they benefited from oversight so lax that the Education Departments assistant inspector general in 2003 called for tightened regulation of lender dealings with universities.
Advocates of the direct loan program say that it has been held back from offering more competitive rates and benefits, and that a very small percentage of students can take advantage of the private rivals advertised rates and incentives. They argue that private lenders cost the government vast amounts of money because they are subsidized and guaranteed against default.
President Bushs budget reports that in 2006 for every $100 lent by private lenders, the cost to the government of subsidies, defaults and other items was $13.81, while the same amount lent through the direct loan program cost the government $3.85. The battle for dominance in the loan market has escalated as tuitions have soared and students have borrowed more. This is the context for many of the payments to universities and financial aid officials that have come to light as a result of recent investigations into student loan practices.
What has happened is unbridled competition meets lack of oversight, said Terry W. Hartle, senior vice president at the American Council on Education.
For a few years after direct lending went into effect, it grew quickly. But as student loan volume has risen, climbing above $85 billion in 2005-6 from just over $30 billion 10 years earlier, the governments share as a direct lender has declined, and now amounts to less than a quarter of the total.
When direct lending was created, the initial assumption was that the bank-based program would be quickly overwhelmed by the government program, Mr. Hartle said. No one counted on the strength of the reaction from the lending industry, he and others said.
The Education Department fought back. Richard W. Riley, then the secretary of education, tried to make the direct lending program more competitive in 1999 and 2000 by reducing origination fees and interest rates. The private lenders sued, saying Mr. Riley had no authority to do this because these rates were set by Congress under the loan legislation. (Last year, lawmakers set the interest rate on new Stafford loans, one of the most popular federally guaranteed loans, at 6.8 percent; many private lenders offer to reduce that rate for borrowers who make payments on time or meet other goals.)
In response to the lawsuit, the Education Department argued that the public and private loan programs had the power to offer the same terms and conditions, and added that better loan terms would make loans more affordable and thus reduce defaults, benefiting taxpayers.
With the Bush administration more sympathetic to the private market, the lenders withdrew the lawsuit last year, and the direct loan program has offered some of the incentives used by its private rivals.
The Bush administration took virtually no action as lenders offered special pools of money if universities would leave the direct loan program. Lenders, by law, are barred from offering inducements to gain loan applications. But what is an inducement is not entirely clear.
Republicans in Congress have issued a continuing stream of criticisms about the direct lending program and tried to restrict it in a variety of ways.
Just last year, they voted to give lawmakers the power to cut the budget of the Education Department office that oversees the student loan program a looming if indirect threat to direct lending. They also made it more difficult for many borrowers with multiple loans to combine them into a single, larger direct loan, effectively making it harder for students to refinance their debts.
The federal government should be in the business of student loans as the lender of last resort when private lenders cant offer competitive opportunities, said Senator Michael B. Enzi, a Wyoming Republican who is the former chairman of the Education Committee.
In the absence of any crackdown on inducements, banks and other lenders showered universities with incentives to leave the direct lending program.
The kids, they don't vote. But I wonder whether this issue might induce a few more students and people with student loans to visit their local polling place next November. Accountability in education, a favorite theme of the Bush administration, isn't limited to teachers in publicly funded primary and secondary schools.