The Student Loan Scandal – A Problem of Leadership

Editor’s Note: Peter Wood is executive director of the National Association of Scholars. A longer version of this essay was originally published May 14, 2007 on Minding the Campus

In mid-January, a brief item appeared on an inside page of The New York Times, headlined “Student Lender Investigated.” The article noted that the New York Attorney General’s office was looking into “student loan marketing” by Sallie Mae, “the nation’s largest lender to students.” Attorney General Cuomo had requested information about “preferred lender lists,” i.e. the lenders that colleges and universities recommend to their students. The article also noted that “some loan companies have criticized” such lists, alleging that lenders got onto the list “in exchange for payments or other benefits.”

The oil-slick spreading out from a scandal tells a story of its own. At first, the scandal seemed to be just about a handful of personnel in universities pocketing some freebies for steering students to particular banks. It took a while for reporters to grasp that students and their parents were, in many cases, being steered into more expensive options by corrupt college officials. It took even longer to realize—and many have yet to see the picture clearly—that these practices have something to do with the sky-high cost of education.

The details will keep spilling out. No doubt many more colleges and universities, state agencies, federal officials, and lenders will be implicated. The bribery plainly has increased the cost of education by leading large numbers of students to take loans on less favorable terms than they otherwise could have obtained. It would be good if we could quantify how much the corruption has cost students.

To the Rescue—or Not

As the scandal has accelerated, various folks have stepped forward to announce repairs. Secretary Spellings has announced a task force to recommend new federal rules—not that the old ones did much good.

I would like, however, to propose a different way of thinking about this scandal. I don’t believe that the problem, deep down, is about rules. It is about leadership—and about how we attempt to govern complex institutions like the university.

I’ve worked with university financial aid administrators for some 25 years. They know the rules. Financial aid is one of the most arcane areas of higher education. Colleges and universities have to qualify to be recipients of federal student loans and grants, and periodically re-qualify. They have to meet substantial disclosure requirements to students and pay attention to the separate regulations governing dozens of federal loan and grant programs.

These complications mean that financial aid officers have to be experts and in their expertise they are largely opaque to the rest of the college or university. Professors of biology, teachers of rhetoric, and post-docs in economics don’t have the time or interest to learn the mechanics of Pell Grants, Stafford Loans, and so on. Neither do most college and university administrators. So who oversees financial aid administrators? Usually some vice president for business, and we ought to be wondering about now: where were the auditors?

Large universities have internal auditors and all colleges and universities are subject to external auditors. PricewaterhouseCoopers maintains one of the largest practices in the nation for colleges and universities but it didn’t see this enormous scandal on the horizon. As it happens, a lot of people who work in university financial aid offices did see it. Their stories, however, failed to move the responsible authorities until an unnamed “industry whistleblower” got Cuomo’s attention. Cuomo told the Associated Press that he found that would-be lenders who offered excellent terms were being shut out of the market by colleges that maintained lists of “preferred lenders.”

All this is to say that the student financial aid system in the U.S. wasn’t vulnerable for lack of rules or the absence of people who knew how to enforce the rules. It was vulnerable—like Enron, WorldCom, and other companies brought low by accounting scandals—because the people in charge had been corrupted and because no one else had the combination of knowledge, interest, and authority to do anything about it.

Many Democrats in Congress were skeptical of the for-profit student loan industry prior to the scandal. Senator Kennedy characterized the student loan system as one that “squanders billions each year to provide corporate welfare to big lenders, rather than serving the best interests of our students.” The Democratic-controlled Congress will seize on the student loan scandal as further evidence that the for-profit student loan industry should be replaced. Many politicians favor switching to the Direct Loan Program, a system that currently accounts for about a quarter of federal student loans.

Elsewhere in the political spectrum, libertarians like Neal McClusky, a policy analyst at the Center for Educational Freedom, have seized the scandal to inveigh against federally-financed student aid itself. Government aid, argues McClusky, “increases the costs it is meant to defray.” That is, when government subsidizes loans, college officials realize that students can “afford” to pay more, so they increase tuition. As fast as the government subsidies go up, the costs of college increase.

I think that McClusky’s analysis is largely accurate but not likely to change the many minds in Congress, where pouring unaccountable billions into higher education is generally regarded as sound public policy.

Minding the Store

Once the attorney generals have done their part, once the Department of Education has added a new phone-book size body of regulations, once the lenders have all signed a pledge to play by the rules, and once the chastened financial aid officers have decided to abide by “professional ethics,” we will still have a troubled system for providing financial aid to students who need it. That’s because higher education has become a kind of Leviathan. As the free-market types like to emphasize, it is hugely wasteful. But wastefulness isn’t its central characteristic. Mindlessness is.

Higher education in the U.S. today is mass higher education. We have some 16 million students enrolled in U.S. colleges and we send about two-thirds of our high school graduates to college—mostly on the theory that a college degree will magically multiply their life-time earnings. Mass higher education is not something that “just happened.” It is a phenomenon brought about by a series of policy decisions beginning with the 1944 G.I. Bill that brought several million returning World War II vets into American universities. In the 1950s, the G.I. Bill benefits were extended and expanded along with other state and federal incentives for students to attend college. Colleges and universities themselves developed a taste for the resources and the institutional growth that came with these incentives.

The student loan scandal is a predictable result of a liberal welfare state policy that ballooned a modest-sized institution into a mammoth one with little regard for how that unchecked growth would change the institution itself. Among the changes it brought were the need for a vast bureaucracy staffed by people who rarely have any real understanding of what’s “higher” about higher education.
Leaders in the student financial aid business believe that they serve a worthy purpose. No surprise there. Bland self-approval rules the universe. But we don’t have to accept these conclusions as the final word. We might, for example, consider that more and more college graduates with the same credential often means the credential itself loses value and that a good portion of these students will need to earn graduate degrees—and pile on still more debt—to achieve the same marketability that an undergraduate degree provided a generation earlier.

Politically, this scandal looks like a winner for Democrats, but it may be more complicated than that. Shake the student loan tree too vigorously and instead of harvesting votes for Direct Lending (and more government control of higher education), you might end up with voters wondering why we spend billions of public funds to send kids to college who refused to learn what was to be had for free in high school.

Colleges and universities have been, for the most part, willing and often enthusiastic collaborators in this government project, and they have grown their own bureaucracies to manage their role as a subsidized provider of a welfare service. But the transformation from the old idea of the university (as an institution devoted to higher learning and to shaping the character of those who are capable of such pursuits) to the new idea of the university (as a government-subsidized credentialing service for young adults regardless of intellectual talent or aspiration) has been uneven. Colleges and universities are generally set up as though they are to be governed by wise men and women who understand in some depth the nature and the nobility of intellectual inquiry. Faculties usually have an important say in policy matters, and college presidents are usually expected to be more than efficiency experts.

Keeping the real university alive in the midst of government-subsidized mass higher education is our great challenge.