Buried in Debt

Over the last year, as we have investigated and reported on the "pay for play" student loan scandals, we have heard from some skeptical loan industry and college officials who question whether any students have actually been hurt by the unethical practices that have been revealed.

Typical is a comment we received from a loan industry advocate this fall: "Citizen Cuomo as far as I can tell has never proven any harm to the consumer from all of the boat trips and the like. It's very hard to do so since student lending is such a regulated marketplace to begin with."

Well, if these lenders and college officials are truly interested in assessing the damage, they may want to start by talking to students in Iowa and examining the practices of the Iowa Student Loan Liquidity Corporation, the state-affiliated "non-profit" lender that dominates the state's student loan market. As The New York Times reported on Sunday, officials in Iowa are investigating whether the company's aggressive marketing practices and its cozy relationships with area colleges have pushed students to take on unnecessarily high levels of expensive private student-loan debt.

Questions about the company's deals with schools first arose in the spring, when The Des Moines Register revealed that the company had been offering kickbacks in the form of payments to colleges that recommended its private "Iowa Partnership Loans" to their students. Company officials said that the payments, which totaled at least $1.5 million to 50 colleges over five years, were meant to reimburse schools for the cost of administering the Partnership loans and were not intended to get colleges to steer students their way. But as the Register noted, the payments -- which the corporation has since stopped offering -- gave the company a huge competitive advantage as it was the only lender in the state sharing earnings with colleges.

Officials at the company have not exactly been shy in their quest to expand their market share and reap the financial rewards. In internal company e-mails obtained by the Register, they said their aim was to achieve "continued 'hypergrowth,'" by pursuing "an aggressive, offensive strategy to bring in new loan volume." In fact, Iowa Student Loan Corporation was one of a handful of "9.5 percent loan" abusers.

A HEAVY LOAD

Iowa students have certainly seen "hypergrowth" in their loan debt. In fact, college seniors in Iowa are graduating with the second highest debt burden in the country. According to the Project on Student Debt, 74 percent of Iowa's college students graduate with student loan debt averaging nearly $24,000. In comparison, 58 percent of college seniors overall graduate with debt averaging a little under $19,000. Meanwhile, private loan borrowing in the state has skyrocketed by rates five times as large as it has in the rest of the country, according to the Iowa College Student Aid Commission.

The numbers are particularly dramatic at Iowa State University, where nearly 70 percent of students graduate with an average debt of a little more than $32,000. The university, which enrolls more than 20,000 students a year, participates in the federal direct student loan program, meaning that its students receive their federal loans directly from the U.S. Education Department. But nearly one quarter of Iowa State students take out uncapped, variable rate private loans to supplement their federal loans, and almost all of them take out the loans from the Iowa Student Loan Corporation. Nationally, only about 5 percent of students attending four-year public colleges borrow private loans.

According to the Register, Iowa State has been one of the primary beneficiaries of the Iowa student loan company's largesse, having received from the corporation nearly $500,000 in reimbursement payments between 2002 and 2006. In turn, university officials, at least for part of that time, routinely included the private Partnership loans in the financial aid packages they offered students to meet their financial need. The rates on these loans start at about 8 percent for students with the best credit ratings, and up to 21 percent for those with the worst.

As we have said previously, including private loans in a student's financial aid package is a deceptive practice because it gives students the misleading impression that they have no other choice but to take out these loans. It also gives the impression that the loans have the colleges' imprimatur -- and therefore must have reasonable terms, which they often do not. As a result, students rarely explore alternatives, such as applying for scholarships, having their families take out federal parent loans to cover the costs, or at the very least, shopping around for cheaper private loan alternatives. According to the Project on Student Debt, Iowa students with the highest credit ratings could have gotten better deals from the loan giant Sallie Mae. Without better data available, it's hard to say how other students would have fared if they had shopped around.

Roberta Johnson, Iowa State's financial aid director, told The New York Times that the school no longer automatically includes Partnership loans in students' financial aid packages, and hasn't done so for several years. But state officials told the Times that other colleges in the state, which have received the reimbursement payments, continue the practice.

Officials with the Iowa student loan corporation deny any connection between their marketing practices and the heavy debt load of Iowa students. They argue that Iowa students borrow larger loans because their families are poorer and college prices have risen at rates higher than the national average since the mid-1990's.

But their evidence is weak. In reality, the median income of a family of four in Iowa is nearly identical to the national average, and the tuition and fees charged by public and private four year colleges is close to the national average for institutions in these sectors. The truth is the loan company successfully wooed schools with kickbacks as part of its "aggressive, offensive strategy" to achieve "hypergrowth."

CALL TO ACTION

In addition to enforcing existing anti-inducement law and passing new legal barriers to various lender-college kickback schemes, either the federal government or the state attorney generals need to:

(1) Require non-profit and for-profit private loan providers disclose, up front before a promissory note is signed--

(i) uniform annual percentage rate (APR) amounts for relevant private loans,
(ii) payment amounts by month and over the life of a loan, and
(iii) maximum interest rates;

(2) Prohibit use of--

(i) "false insignia" that give impression of federal government or school imprimatur,
(ii) checks and other "deceptive" rebates,
(iii) "opportunity pools" and other financial compensation for or discretion over private loan capital,
(iv) school packaging of private loans in financial aid award letters; and

(3) Require colleges--

(i) inform private loan borrowers that "best deal may be through a federal loan, which are available to all regardless of income" and
(ii) refer borrowers to a Department of Education sponsored clearinghouse providing comparable APR information on at least all federal, if not private student loans as well.

Private loans for college are at times a necessity, but often not. Regardless, they're exceptionally dangerous to vulnerable and often uninformed student borrowers. The industry and colleges have evidenced an inability to police themselves. It's time for the government to fill the void, especially in Iowa.