Lenders take their lumps from student-aid legislation

Thanks to Congress' recent student-aid legislation, the gravy train may be coming to an end for student-loan providers.

Last week, both houses of Congress passed a comprehensive student-aid bill that considerably raises the maximum Pell grant and halves the interest rate students pay on federal loans.

But to pay for the cuts, there has been one loser in the aid legislation - student-loan companies.

As part of the bill, loan providers will lose an estimated $20 billion worth of subsidies, a move from Congress partly in response to what critics have called a greedy student loan industry.

The pressure on student lenders began in April when New York Attorney General Andrew Cuomo announced an investigation into improper relationships between lenders and universities, including kickbacks and free trips for financial-aid officers who recommended the right provider.

Penn was implicated in the investigation along with partner CitiBank for a deal in which Penn did not disclose that it received a two percent kickback on any loan in CitiBank's loan program.

And while Cuomo's investigation was not directly aimed at the excess profits being made, it did bring tremendous attention down on the industry's practices, including the exorbitant profits companies were making through federally subsidized loans.

The new bill cuts the subsidy lenders had previously received by 0.55 percentage points.

Cuomo's investigation "helped further expose the problems within the industry and the excess subsidies they received," said U.S. Public Interest Research Groups higher-education specialist Luke Swarthout.

"That climate contributed to greater bipartisan support for cutting these subsidies," he added.

The federal subsidy system - which guarantees a minimum rate of return and repays the lender in case of student defaults - was originally designed to encourage companies to provide loans to students with no credit history.

Swarthout argued, however, that it was ultimately used by lending companies to make far more profit than was intended.

"This is an industry that has a hard time distinguishing between taxpayer dollars and their own profits," he said.

Business and Public Policy professor Betsey Stevenson said that, with this bill, Congress is doing away with a government regulation that creates waste.

"If it was a competitive industry, what they would do is lower their prices," Stevenson said, "but it's a government-regulated one."

While lending companies have argued that the legislation will reduce the number of options available for students, experts say it will instead simply eliminate those companies that were making profits by taking advantage of students.

"The reality is that most of the legitimate student loan companies are going to stay in the business, continue to make money, and continue to make loans," said Bill Andresen, director of Penn's Federal Affairs Office in Washington.

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