Student lenders unhappy with budget resolution

By John O'Brien | May 21, 2007


While the cost of student lending goes up, so too might the cost of student loans.

The National Association of Student Financial Aid Administrators, recently criticized by New York Attorney General Andrew Cuomo, said Thursday that cuts in the federal budget will have an effect on the student loan industry.

The budget resolution that's terms will begin in October includes Reconciliation instructions for the Senate and House education committees to create $750 million in savings over six years through cuts to mandatory spending programs, NASFAA said. It adds that most expect this to come from the student loan program, one of the few mandatory spending programs under these committees' jurisdiction.

"In addition to taking $750 million off the top, according to Congressional leaders the budget agreement is intended to set up a back-door way to cut up to $22 billion from the Federal Family Education Loan Program over the next five years," Consumer Bankers Association President Joe Belew said.

"Cuts of the magnitude planned by Congressional leaders will raise the cost of borrowing for students by eliminating the ability of student loan lenders to offer borrowers discounts on loan fees and interest rates. The cuts will discourage investment in new technologies to make repaying a student loan easier and will lead to poor quality service."

Lenders also believe Democrats are planning to use the Reconciliation process to push usage of the Direct Loan program over the Federal Family Education Loan program.

"Most importantly, the leadership apparently wants to end the FFEL program and force all students who need loans to borrow from a government monopoly, the William D. Ford Direct Loan program," Belew continued. "This program eliminates all choice of lender and puts students' future in the hands of a system that has already suffered an interruption in service resulting from the inability of the Department of Education bureaucracy to manage it properly."

Cuomo's investigation into the student loan industry has seemed to create a lot interest in the business. He has settled with the four largest student lenders, all of which agreed to pay $2 million to a fund dedicated to educating prospective lendees and to abide by Cuomo's College Loan Code of Conduct.

New York's legislature passed the SLATE (Student Lending Accountability, Transparency and Enforcement) Act, modeled after Cuomo's Code of Conduct.

Cuomo has said that his investigation has revealed inappropriate relationships between lenders and schools. He alleged that Education Finance Partners, against whom he filed his first lawsuit and with whom he eventually settled, was put on schools' "preferred lender" lists because it offered a cut of its profit to those schools. EFP has since settled those allegations.

Meanwhile, he recently expanded his investigation to include alumni associations and last week told NASFAA that a code of conduct it proposed is not tough enough.

"The code you have proposed is inadequate in that it does no more than recite vague, lofty goals of generalized ethical behavior," Cuomo wrote Dallas Martin, president of NASFAA, according to a report by The Associated Press.

Several other states have joined in investigating the industry, including New Jersey, Ohio, California, Illinois and Minnesota.

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