Robert Shireman, the founder and president of The Institute, has been guest-blogging for Higher Ed Watch, a higher education news and policy initiative from the New America Foundation. Here's an excerpt from "A Questionable Arrangement":

An internal strategy document from Sallie Mae says a whole lot about how the company makes its money from taxpayers, from students, and then again from taxpayers. On Tuesday, Higher Ed Watch described the subsidies on federal loans that remain Sallie Mae’s priority #1 to keep, while yesterday’s item explained why the company is intent on maintaining the special status that private student loans have in bankruptcy (priority #2).

Next on Sallie Mae’s list is to protect its debt management operations, "especially Guarantor Services." In two recent articles (here and here), Paul Basken of The Chronicle of Higher Education revealed how Sallie Mae employees in one division of the company effectively run a student-loan guarantee agency that is in charge of monitoring the activities of other divisions of the company, while both sides aim to maximize profits.

That questionable arrangement came into existence in 2000 when federal and state regulators turned a blind eye to Sallie Mae’s purchase of virtually all the assets of a non-profit guarantor known as USA Funds. The deal left in place a non-profit shell that contracts with Sallie Mae, whose employees now do the federal oversight work for which USA Funds is responsible. Last year, federal money passing through USA Funds accounted for 32 percent of the revenue in Sallie Mae’s debt management operations division.

Posted by Edie Irons at 10:40 AM | Permalink

Robert Shireman, the founder and president of The Institute, is guest-blogging this week on Higher Ed Watch, a higher education news and policy initiative from the New America Foundation. Here's an excerpt from his first post:

For most unsecured loans, the debtor who runs into difficulty can file for Chapter 7 liquidation or Chapter 13 reorganization, so a judge can sort out the appropriate treatment of the various loans. But there is a short list of debts that the law subjects to a different standard, allowing for discharge in only the most extreme circumstances. Generally the items on this special list make intuitive sense; for example, it seems appropriate for it to be especially difficult for people to escape child support responsibilities, overdue taxes, and criminal fines.

Federal student loans don’t quite seem like they deserve to be on that same list, and until 1998 they were not. Instead, there was an intermediate approach: they had special treatment, but only for the first seven years in repayment. After that, they were treated like other debts. There is at least some justification for making federal loans hard to discharge: they are backed by taxpayer dollars, and they come with some borrower protections in cases of economic hardship, unemployment, death, and disability.

But private student loans? There is no good reason that they should be accorded any heightened status, much less the exalted category that competes with criminal fines, child support, taxes, and now federal student loans. How and why did they gain this status in the 2005 bankruptcy bill?

Posted by Edie Irons at 2:33 PM | Permalink

The Institute's president, Robert Shireman, was interviewed for the Washington Post. This article (subscription only) was printed on May 17, 2007.

Every spring, many thousands of students in the Washington region face the complex task of putting together a financing plan for college. This year, controversy has grown over how the $85-billion-a-year student loan industry operates, with revelations from a New York state investigation and other probes about loan companies' ties to university financial aid offices and the government.

The Post's Amit R. Paley spoke with Robert Shireman, executive director of the Project on Student Debt, about the controversy and what it means for students and families. The organization, based in the District and Berkeley, Calif., aims to increase public understanding about debt and help students make informed choices. It is funded by the William and Flora Hewlett Foundation, the Pew Charitable Trusts and other sources. Shireman was an education adviser to the Clinton administration.

Q What are the major revelations students and parents should know about?

A The investigations revealed gifts, trips and [payments] from student loan companies to universities and to some college financial aid advisers. In at least some cases, these conflicts of interest resulted in students and parents getting steered towards unnecessarily large or expensive loans.

What do the revelations mean to consumers?

We used to think of financial aid officers as impartial professionals dedicated to helping students pay for college. I still believe that most are. But every day we hear about another conflict of interest, so consumers need to be cautious about the financial aid recommendations that they get.

Make sure the advice is in your best interests, not designed to make money for the school or get the adviser a free trip to the Bahamas.

What are the basic questions to ask financial aid officers?

What are the total costs I will need to cover as a student at your school? How does the package of aid you have offered me cover those costs? How much will I need to borrow, and with what types of loans? What lenders do you recommend, and why? Do you have any financial relationships with the lenders you recommend?

What are the major types of student loans?

The best loans are Federal Perkins and subsidized Stafford loans. They have fixed, reasonable interest rates, and the government covers the interest while you are in school. Students from higher-income families are not eligible for those loans, but they can still get federal "unsubsidized" Stafford loans, which I put in quotes because the government actually does subsidize them by keeping the interest rate reasonable. These are the next best choice for any borrower.

Federal PLUS loans are available to parents and graduate students as long as they don't have any bad marks in their credit history. Again, the interest rate is fixed, but some families may find that a home equity loan rivals the rate on PLUS loans.

Private or alternative loans are the ones to avoid. Their rates are almost always variable, without any cap. The rates can be as high as a credit card. Some families may be able to find a good deal, but these loans lack the borrower protections that come with federal loans, such as assistance during unemployment and disability.

How do students know which lenders they should choose?

Despite the scandals, the financial aid office is not a bad place to start. Ask for their recommendations, and ask whether there are lenders that offer lower rates. For private loans, get actual rate quotes from at least three companies. The charges can vary a lot. Don't trust the "as low as" rates that lenders advertise.

What are preferred-lender lists, and are they good or bad for students?

Colleges usually recommend a few lenders, or even just one. These lists have been at the heart of the controversy.

Students usually use lenders suggested by the financial aid office. If they are chosen based on what's best for the borrower, that's fine, and it can help simplify an already overwhelming decision-making process for students and families. But if campus officials are getting gifts, trips and [questionable payments], then the recommendations are tainted.

What sort of reforms do you expect in the industry as a result of the investigations?

We're already seeing campuses canceling questionable arrangements with lenders, prohibiting gifts, and revamping or even eliminating their preferred-lender lists. I expect this trend to continue, and that Congress will ban or restrict many of the disturbing practices that have been revealed in the past few months.

If done right, the result will be a much more transparent, accountable and consumer-friendly student loan process.

Posted by Edie Irons at 10:17 AM | Permalink