Student loan companies – an $85 billion industry – are facing scrutiny from lawmakers for abusing borrowers’ private information, as well as for offering kickbacks such as vacation trips and discounted stock options to university officials to coerce them to prioritize certain companies on the school’s preferred lenders lists.
The National Student Loan Database System, used by student loan companies, was formed by the U.S. Department of Education in 1993 to organize 60 million students’ financial aid needs, hold records of payments and keep track of the loans any particular borrower uses.
D.O.E. spokeswoman Katherine McLane told the Washington Post that the bureau has spent more than $650,000 in the past four years to secure the student database, blocking thousands of access attempts from unauthorized personnel. Still, concern over lenders breaking confidentiality by leaking student profiles to numerous marketing agencies has threatened the database’s purpose.
“”[Lending companies] are interested in getting access to borrowers – one way is to encourage schools to recommend them by using kickbacks,”” U.S. Public Interest Research Group Higher Education Advocate Luke Swarthout said. “”Another is to directly find borrowers [through consolidation loans] using the database for marketing; the incentive to capitalize on tremendously lucrative subsidies from the loan program is behind both the kickbacks and the data-mining issue.””
In recent years, consolidation loans – which allow students the option to merge all loans borrowed throughout their university career upon graduation to secure a low, pregraduate-level interest rate – have seen an increased prevalence in the loan business. This triggered abuse of the database, as companies attempted to inconspicuously search for more borrowers with the potential for consolidation. The abuse stirred concern about the security of students’ phone numbers, addresses, Social Security numbers and financial information.
Universities across the nation are also being investigated for accepting kickbacks from loan companies. Among those are the University of Southern California, Columbia University and the University of Texas, where loan transactions and aid directors’ portfolios are being reviewed. Various officials have been suspended until their records have been cleared.
UCSD Financial Aid Director Vincent De Anda released a letter during the loan controversy to discuss the university’s process of choosing companies on its preferred lenders list. De Anda reiterated the department’s integrity and assures that its lender list was established for students and parents’ benefits, not for the personal gain of administrators. The statement further emphasized that the decision ultimately lies with the student regardless of whether the chosen lender is on the university’s preferred lenders list.
“”UCSD does not enter into any financial contracts with the lenders on our list; we do not receive ‘kickbacks’ from any lender, nor do we share in any profits from student loans,”” De Anda said in a press release. “”It is immaterial to UCSD which lender [the student] choose[s].””
The university’s preferred lenders list was composed solely to assist students and parents searching for loans with the lowest interest rates and most efficient customer service, but now the financial aid department’s integrity is being questioned – and rightfully so, De Anda said.
According to Swarthout, the education department is responsible for safeguarding the confidentiality of student information, but apparently previous security measures were insufficient.
“”The government is tremendously involved in the loan program – they fix [interest] rates and give lucrative subsidies to the banks; these industries are profitable because of generous government funding,”” Swarthout said. “”But when you provide these tremendous subsidies, you ought to also provide serious oversight – and unfortunately, there’s been a lack of effort.””
He also said that Congress should look to more stringent reforms and protections for borrowers.
The student loan controversy has drawn national attention from prominent political figures, including New York Attorney General Andrew Cuomo, who is leading the investigation, and Sen. Edward Kennedy (D-Mass.), the chairman of the Senate Education Committee.
