"The Best Class Money Can Buy"

Is it a good idea for the country to have for-profit student loan companies so heavily involved in individual colleges' financial aid processes? Might they not encourage higher net prices and more borrowing?

We at Higher Ed Watch increasingly are coming to the view that it is a bad idea to let for-profit loan companies be so heavily involved in the institutional financial aid process, because for-profit lenders are helping many schools increase net prices and consequently individual student borrowing as well.

Undercover, Sallie Mae has been the biggest player in this process, selling enrollment management and financial aid leveraging services to higher education institutions through a subsidiary known as Noel-Levitz.

Here's how Sallie Mae / Noel-Levitz' secret enrollment management and financial aid leveraging system works:

(1) College and university personnel are trained how to assess families ability to pay and how to exploit their willingness to pay in order to maximize revenues. The colleges are told about how much federal aid a low- or middle-income student gets, including federal education tax benefits, and the student's private borrowing credit worthiness.

(2) The colleges take that information and cut back their own planned level of institutional financial aid to the relevant student knowing that (shh, very high cost) private loans are there to fill in the gap.

(3) The colleges then take their saved institutional funds and increasingly spread them around in small amounts to upper-income students who otherwise would not attend the university.

Doesn't sound particularly pernicious. But as the Atlantic Monthly has described, what happens is that a college, for example, takes a $20,000 institutional grantthe full tuition for a needy student--and breaks it into four separate institutional scholarships of $5,000 each that are targeted for wealthier students who probably would attend another institution without the $5,000 discount. These wealthy students are lured by the $5,000 "merit" scholarship. They pay the outstanding tuition costs ($15,000) once lured. As a result, over the course of four years, the college reaps an extra $60,000 for its four merit students. The original $20,000 institutional grant for a poor kid converts into $60,000, which can then be used to buy more rich studentsor gifted students who will improve the school's profile and thus its desirability and revenue. Not terrible until you see what it does to the economic diversity of a school.

Institutions are advised by Sallie Mae's subsidiary that it's a must do to engage in the opaque art of financial aid leveraging, which at the end of the day moves grants from the most needy to the most desirable students, and consequently loads up low- and middle-income families with student loan debt, supplied by . . . yup, Sallie Mae.

A few leading universities have broken away from the pack and are not engaging in this kind of enrollment / institutional financial aid gamesmanship. But the influence of the for-profit student loan industry in the institutional financial aid process seems only to be growing and at peril to the goal of upward social mobility.

American colleges, particularly high tuition institutions, are vulnerable to criticism over their failure to serve as engines of socioeconomic mobility. We think smart politicos are going to tap into that exposure. They may find a lot of allies inside and out of higher education.