The Loan Scandal

Study Examines Loan Aversion by Population

A new study out of Vanderbilt University seeks to quantify loan aversion among different populations.

The study, “Understanding Loan Aversion in Education: Evidence From High School Seniors, Community College Students and Adults,” is based on survey data from 6,000 people.

Among high school seniors, students at community college and adults without a college degree, the majority of each group believe it’s a good idea to save up enough money before making a purchase (as opposed to borrowing money to buy). More specifically, 21 percent of high school students and 20 percent of non-college-educated adults did not think it was acceptable to borrow money for education, while only 9 percent of community college students felt that way. Over half of the community college students surveyed had borrowed money to attend their current school.

The authors -- Angela Boatman, Brent J. Evans and Adela Saliz, all three of whom are assistant professors of public policy and higher education at Vanderbilt -- also found that women are less loan averse than men and that Hispanic students tend to be more loan averse than white students.


Ad keywords: 
Is this diversity newsletter?: 
Disable left side advertisement?: 
Is this Career Advice newsletter?: 

More Than Band-Aids

In response to New York Attorney General Andrew Cuomo’s inquiries and a spate of unseemly behavior in student lending, federal officials have quickly embraced patchwork solutions for the industry. As a consequence, they are in danger of overlooking the opportunity for a thorough reassessment of college financing.

Some of the behavior raising eyebrows is clearly troubling and inappropriate, such as incidents at Johns Hopkins University and the University of Texas of lenders and financial aid officials engaging in “payola” and in-stock dealings. Other reputed scandals, however, are more ambiguous and say more about the state of the loan sector itself than those involved in it. For instance, Nelnet has been under scrutiny for its marketing deals with university alumni associations; Sallie Mae for providing call-centers for colleges and universities and offering “opportunity loans” to students who might not otherwise qualify; and various lenders for “revenue sharing” with universities and paying for travel and lodging while courting financial aid officials.

These “scandalous” behaviors actually amount to the relationship-building and aggressive marketing one finds in any business dependent on sales. They may be uncouth or unlovely, but these activities simply reflect loan providers struggling for advantage within the murky rules of the existing market. Meanwhile, financial aid officials juggle considerations of cost, institutional need, and provider quality in a constantly changing market place. It’s no wonder that we are unhappy with the results.

We should expect private enterprises to tiptoe up to the edge of what’s permissible. Pushing boundaries is what drives the process of innovation, marketing, and cost cutting, the results of which we enjoy until we are exposed to their unseemly underbelly. If we do not like where those lines are drawn, then it is appropriate to move them.

Cuomo’s code of conduct will help on this count, but criticizing loan providers or financial aid offices for fostering associations with one another is unfair when we remember that today’s reviled “preferred lender” lists themselves were largely a response to federal direction. In the Omnibus Budget Reconciliation Act of 1990, Congress made reasonable student default rates a condition for the participation of colleges and universities in the FFEL program, thereby giving institutions incentives to prefer lenders with a record that federal officials would deem satisfactory. Compelled to favor lenders with lower default rates, colleges and universities created “preferred lender” lists, and lenders began to compete for places on them. In short, Congress’s earlier directive -- reasonable and eminently defensible -- helped foster the relationships that legislators now decry.

The Big Picture

When the Guaranteed Student Loan program was created in 1965, just 18 percent of college age students pursued college. Today, that number is over 50 percent. Federal lending has played a key role in expanding access to college, but its success has created a new world with its own challenges.

Policy makers in the 1960s and ’70s assumed that banks would be reluctant to provide the necessary funds to students who are mobile, small-dollar and risky borrowers, and thought it necessary to provide resources and incentives to ensure an adequate financing pool.

In response, Uncle Sam promised to reimburse lenders for defaulted loans, raised the statutory interest rate, provided a supplemental rate of return for lenders (called the “special allowance”), and created the Student Loan Marketing Association (known as Sallie Mae) to buy extant loans, thereby creating liquidity for new loans. Those efforts have succeeded to a degree that their early architects could scarcely have imagined. Private student lending has exploded to over $17 billion a year, equal to about 25 percent of the federal loan volume, suggesting that those early efforts and developments in credit markets have met many of their goals -- at least for serving some segments of the lending market.

In fact, the furor about the cost of college centers on the price of private schools; two-year and four-year public schools -- which enroll 80 percent of college students -- remain a remarkable bargain. While the median price tag for tuition and fees at a private four-year college is $22,000, and well over $40,000 at top-tier schools in college ranking surveys, it is less than $6,000 on average at a public four-year university. Four years of tuition and fees at a public institution average less than $25,000. In short, college is extraordinarily expensive -- for those who choose to attend extraordinarily expensive private institutions.

Contemporary discussions about student lending often fail to distinguish between two very different aims: the first is that of access, which is primarily important for low-income families; and the second is that of educational choice, which is most relevant for middle-income students weighing more expensive schools against cheaper, in-state public institutions.

Expansions in the federal loan program since the 1970s have primarily called upon taxpayers to help subsidize college choice and cash flow management for families without demonstrated need. The Middle Income Student Assistance Act (MISAA) of 1978 removed the income cap on loan eligibility, and today even students without subsidized loans still benefit from deferred interest payments and taxpayer-provided loan guarantees. In 1980, the Parental Loans for Undergraduate Students (PLUS) program began allowing parents to take out additional, separate loans under the Stafford program, with no restrictions on family income. By 2005, PLUS loans constituted 14 percent of Stafford borrowing.

Today, less than 60 percent of federal student aid is provided on the basis of need. In fact, Harvard University’s Bridget Terry Long has calculated that in 2003-4, nearly one in three dependent students from the highest income quartile took out Stafford loans and borrowed just as much on average as students from the lowest income quartile. It’s one thing to argue that taxpayers should help ensure that every child has the opportunity to attend college; it’s another thing entirely to suggest that they should subsidize the ability of students to attend any school they want.

A Forward-Looking Agenda

What does all this mean for the future of student lending?

First, and most obviously, the push for increased transparency in the industry, clear codes of conduct, and a more level playing field are all to the good. But transparency alone won’t change existing incentives -- and reactionary policy making could forfeit important opportunities.

For instance, Cuomo has expressed concern that lenders are engaging in differential treatment depending on the institution a student attends. However, should this be regarded as a problem, or an opportunity? If lenders are eager to serve some students, either because they appear to be good credit risks or because lenders are eager to cultivate banking relationships with prospects deemed likely to be high-earners in time, this may be a development worth celebrating.

As with any publicly nurtured market, the optimal course is the development of a mature, responsive and transparent private market, in which students’ needs are met, to the extent practicable, without public guarantees or funds. Obviously, given the fact that the private market will not serve all students, there remains an important role for public subsidies and loans, but that ought not blind policymakers to the fact that the contemporary loan sector can and will serve a substantial population of middle- and upper-class students without public subsidies or financing.

Second, there are few incentives for financial aid officers or guarantors, beyond benevolence, to be innovative or efficient, or to safeguard the interests of borrowers. While this model may have worked in the cloistered, paternalistic lending environment of an earlier time, recent headlines suggest the need to revisit assumptions about roles, rewards and accountability.

Third, if the federal mission is to ensure access to college rather than choice of college, better targeting of the allocation of funds is necessary. Policy makers might focus on using guarantees and subsidies to ensure access to loans for low-income students who are often higher credit risks and on establishing strong consumer protections for borrowers better served by the growing private loan industry.

Today, Washington seems to be leaning the other way. Earlier this year, in line with its Six for ’06 pledge, the Democratic majority in the House of Representatives voted to cut interest rates on student loans in half, without any effort to direct this new benefit to low-income students. Given that the 6.8 percent rate for federal Stafford loans was already highly competitive with market interest rates, such untargeted measures seem a poor use of taxpayer funds.

Fourth, we should embrace the success of earlier efforts to create liquidity and credit availability in higher education. Private loans comprised just 6 percent of the loan industry in 1996-97 but now amount to roughly 20 cents of every dollar borrowed. The $17 billion that for-profit lenders are eagerly offering to college students suggest that a vibrant credit market has been created for at least part of the college-going population. The challenge is to understand how large of a population that sector can serve and what will most effectively help the students whom lenders deem less attractive.

The emergence of private lenders and the accumulation of data on borrower performance have led to new advances in pricing models and customer service. The risk is that private lenders use aggressive marketing to entice students into debt they are unprepared to handle. On the other hand, these providers also have the potential to experiment with pricing and repayment options and otherwise pioneer loan products that may be cheaper, more convenient, and more customized than those that exist today.

Fifth, we should rethink the machinery that impedes comparison shopping and makes loan providers less sensitive to student needs and repayment ability. The need to rethink the FAFSA and move to a more user-friendly and predictable system for determining student aid has been widely recognized. Another step is to push state-funded institutions to be more transparent about the provision of student aid.

A less familiar measure would address the risk that securitization encourages originators to issue loans with little concern for a student’s ability to repay. Loan originators package and resell loans to third party companies. In purchasing these “securities,” these third parties adopt the risks associated with those loans. This process of securitization diffuses loan risk and protects loan originators from the risk of ill-advised loans; this process may, in turn, encourage originators to make loans to borrowers who are uncertain credit risks.

This sequence of events has recently played out in the subprime mortgage industry. A corrective might be new guidelines requiring the lender or school in question to adopt a credit risk position in the loan, thereby incentivizing loan originators to exercise prudent judgment when originating loans and financial aid officials to more carefully monitor the quality of the loans their students are receiving.

While attending to student need, it is also important to foster student responsibility. It is widely estimated that students who graduate from college will earn $1 million more than their peers over the course of their working lives. There is, of course, a tension between ensuring that cost considerations not deter students from attending college while asking those who reap the benefits of higher education, rather than third parties, eventually bear the costs. Precisely how to balance this tension is an open question, but—frequent caterwauling about the put-upon student aside—it is not inappropriate to ask students to accept loans that will permit them to ultimately shoulder a substantial portion of the cost of postsecondary schooling, lest opportunity be mistaken for entitlement.

Frederick M. Hess and Juliet Squire
Author's email: 

Frederick M. Hess is director of education policy studies at the American Enterprise Institute and editor of Footing the Tuition Bill (AEI Press 2007). Juliet Squire is a research assistant at the American Enterprise Institute.

The Shamrock Principle

When I was an undergraduate, the saloon I frequented most often was called the Shamrock. The owner had a sign over the bar which read "We have an agreement with the bank, they don't sell beer and we
don't cash checks." As someone who had then recently encountered Adam Smith's arguments about division of labor, that seemed like a very fitting sentiment.

In the last few months we've heard a lot of commentary about developing problems in the way that higher education dealt with student loans. Several public officials have made a point to describe all relationships where the campus receives a fee as inappropriate.

Indeed, some of the relationships that have been discovered relating to student loans were problematic. Individuals, in some instances, benefited inappropriately. But as often happens in these circumstances, some public officials, for their own narrow benefit, have tried to paint with too broad a brush.

Many of these preferred provider relationships were designed to benefit students both in the negotiated rates under the contracts and in the transfer of resources back to student aid. The worrisome thing to me about all this coverage is that some of the most ambitious public officials are beginning to question all financial relationships that colleges and universities have with outside providers.

It is time for higher education to take a deep breath and begin to respond to these calls from the public and our elected representatives in two ways.

First, it would be timely for us to think about the adoption of a broad based set of conflict of interest standards by which institutions could judge their behavior. In some cases we may have slipped from high standards, but in others the ground may be shifting. Either way, some careful review would be appropriate.

In this case we have a responsibility to restore trust by looking at how to respond to some of the pitfalls that have been discovered in the loan crisis. But higher education needs to take the responsibility for thinking about the issues rather than in just responding to the lead of lawmakers.

A base for those standards would be a prohibition on personal inurement for most financial relationships. It may well be appropriate for experts from a campus to benefit when others want to use their expertise, but the general rule should be to disclose these kinds of relationships in the same way that many state corporation codes require disclosure of self-dealing transactions. There are undoubtedly many instances where these kinds of activities are appropriate, but the sunshine standard should be the first step.

The second set of issues will require higher education leaders to be a bit more proactive than they have on the loan stories. We've allowed others to define us and we should not let that happen. Over the last two decades American businesses have spent a lot of time readjusting their organizational structures to improve efficiencies. They have, as Waterman and Peters suggested in the 1970s, practiced "sticking to the knitting" or focusing on core competencies. For the same reason colleges and universities have been moving areas they accumulated over the last several decades to outside providers.

Some in the political class are trying to get the public to believe that any financial transaction between an outside provider and a college or university is dirty. That is nonsense, and we should not let them get away with those outlandish claims.

When we discovered that we were not especially adept at retailing we found partners who could run our bookstores. When we found that our core competencies did not include running a restaurant, we found partners to run our food services. There is some evidence that our long term role as hoteliers will also be outsourced so that our dormitories may be run by outside operations.

It is timely to reexamine all of those contracts, but because it is timely to review the arrangements does not mean that we should be cowed by politicians whose standards of ethics routinely accept convoluted justifications for the acceptance of donations.

In most of the contracts to run campus functions two things happen. First, the outsourced service is better than the one that was run by campus personnel. At the same time, the outside provider pays a
contractual fee to the campus to run the operation. That revenue helps to subsidize other campus functions. Some politicians have tried to establish a prohibition on certain loan practices and have even begun to extend the logic to almost any arrangement where a college derives a payment from an outside provider.

At a minimum it would be timely, for those institutions that have not thought about it, to define the appropriate limits of relationships between vendors and the campus professionals who have responsibility for the areas where the vendors are working. It might also be timely to develop a reasonable standard of disclosure on the revenue arrangements.

But campuses, not the political process, should take the lead in examining and defining how these arrangements can continue to benefit the campus and students. Now is not the time to abdicate our responsibility to manage our institutions to the whims of the political process.

Jonathan Brown
Author's email: 

Jonathan Brown is president of the Association of Independent California Colleges and Universities.

What's Ahead on Student Loans in 2008

After a year in which it dominated the headlines, the student loan “scandal” has lost its head of steam. New York Attorney General Andrew Cuomo has largely moved on to other areas of interest. And the U.S. Senate and House of Representatives, which have each passed different Sarbanes-Oxley-like versions of legislation to address the issue, have also taken up other matters for now.

But that doesn’t mean that colleges and lenders are out of the woods, as the U.S. Department of Education is just getting started with administrative investigations and enforcement actions that will make the department ground zero on this issue in 2008.

In response to criticism from Cuomo, the Congress, and the General Accountability Office, the department increased its oversight of colleges and lenders during the latter half of 2007. In July, the Federal Student Aid office (FSA) sent letters to 921 colleges whose student-loan volume was almost entirely, if not entirely, with one lender. The letters were intended to remind the colleges of the requirement to provide borrowers a choice of lender. Then, on October 24, FSA sent letters to 55 of those colleges, as well as 23 lenders that held loans with one or more of the originally identified 921 colleges, requesting information and documents that could indicate the existence of improper inducements, in violation of the Higher Education Act of 1965, as amended (HEA), and its regulations.

Those 78 colleges and lenders (and perhaps many others) should be prepared for the possibility of an administrative investigation and enforcement action by the department in 2008. Here are four things they can expect:

1. More Adversarial Program Reviews

Based on my personal knowledge of the department’s prior practice, and its current organizational structure, two different divisions that report to the Federal Student Aid Program Compliance office are currently reviewing the responses of the colleges and lenders: (1) the School Eligibility Channel is examining college compliance, and (2) Financial Partners Eligibility & Oversight is examining lender compliance. Although FSA, and not the department’s Office of the Inspector General (OIG), is conducting the oversight, I expect OIG to be working behind the scenes with FSA to ensure that colleges and lenders are held accountable for regulatory violations.

An examination of colleges by FSA’s School Eligibility Channel typically takes the form of a program review, which is FSA-speak for “investigation.” A program review entails an on-site visit by FSA that generally involves the collection of financial-aid documents and interviews with financial-aid administrators. Colleges receive notice that a program review will be initiated and are provided the opportunity to respond to a preliminary program review report before FSA issues a “final program review determination” letter. Colleges can expect the School Eligibility Channel to be reluctant to accept their explanations for business arrangements with lenders. There will be findings of regulatory non-compliance in the program review letters.

Lenders have historically had a much more cooperative relationship with Financial Partners Eligibility & Oversight than colleges have had with the School Eligibility Channel. Financial Partners once boasted that, as its name suggests, it works in partnership with lenders to promote best practices and to provide technical assistance. However, that collaborative approach was criticized in September 2006 by the OIG as one that “emphasized partnership over compliance.” As a result, lenders should expect a more adversarial relationship with Financial Partners, which, like the School Eligibility Channel, will conduct program reviews and make findings of regulatory non-compliance.

2. Application of an Uncertain Legal Standard

What types of agreements between colleges and lenders transgress the current prohibition against inducements? Only FSA knows. It is very difficult to discern the legal standard that FSA will apply.

The department’s longstanding interpretation of the anti-inducement provisions is that a violation requires there to have been a quid pro quo, i.e., something given for something taken. In other words, there must be a payment or other inducement provided in exchange for FFEL loan applications. That interpretation finds support within the department as far back as 18 years ago and remained the department’s position through this past summer.

In a February 1989 Dear Colleague Letter, the department described several types of business-development activities between colleges and lenders that would be deemed permissible so long as they were intended as a form of advertising or as a creation of good will, “rather than as a quid pro quo for loan referrals.” Secretary Margaret Spellings actually attached that guidance to her August 9, 2007 letter to the higher-education community urging colleges and lenders to act in the best interests of students and parents. Indeed, three months earlier, in May, the Secretary testified to a congressional committee that a payment can only constitute an improper inducement where there is a quid pro quo.

The department, however, published new regulations on November 1, 2007 that changed its interpretation of the HEA’s anti-inducement provisions. The regulations, which become effective on July 1, 2008, eliminate the requirement of a quid pro quo and replace it with a standard that will prohibit virtually all business-development activities between colleges and lenders, including efforts to create good will. The department made this change of interpretation by giving itself the authority to limit, suspend or terminate a lender from the FFEL Program if the lender is unable to present sufficient evidence that payments or services provided to a college were provided “for a reason unrelated to securing applications for FFEL loans or securing FFEL loan volume.”

In the preamble to the regulations, the department signaled that the new regulatory language is intended to prohibit virtually any payment that is provided merely for the purpose of securing FFEL loans. This would prohibit virtually all payments because FFEL lenders are, after all, in the business of securing FFEL loans. With the quid pro quo requirement eliminated, nearly all business-development and good-will activities will now be prohibited.

FSA should, of course, wait until the effective date of the new regulations before it applies this new interpretation of the anti-inducement provisions. And, even then, FSA should apply the new interpretation only to payments offered on or after that date or else risk holding colleges and lenders liable for activities that were not illegal at the time they were conducted. But FSA’s intentions are unclear, considering that it seems to already be looking to the new regulations to support its probe of agreements between lenders and affiliates of colleges.

3. Probes Into Lender Agreements With College Affiliates

Based on FSA’s letters, lenders can expect FSA to examine not only agreements between lenders and colleges, but also those between lenders and affiliates of colleges. By "affiliates of colleges," FSA undoubtedly means entities such as alumni organizations. In July 2007, as part of a highly-publicized settlement agreement with Cuomo, Nelnet agreed to stop paying alumni associations for exclusive referrals of their consolidated loans. However, agreements with alumni organizations and other college affiliates are not yet covered by the federal anti-inducement statutes and regulations.

The HEA’s anti-inducement provisions prohibit lenders from making payments “to institutions of higher education or individuals.” Although the current regulations use the slightly different phrase “to any school or other party” to describe the scope of covered recipients, once that phrase is read in the context of the HEA language (as it must be so read), the term “other party” in the regulations can only mean “individuals.” It cannot be construed to mean or to include college affiliates because such entities are neither “institutions of higher education” nor “individuals.” So FSA seems to be probing lender agreements with some entities that are not currently covered by the regulations.

The new regulations will, however, add “school-affiliated organizations” as an additional class of covered recipients and, therefore, in a matter of six months, give FSA authority in this area. The term “school-affiliated organization,” which was defined broadly by the Department, covers any organization that is directly or indirectly related to a college, regardless of whether it is within the college’s structure and control. It includes alumni organizations, foundations, athletic organizations, and social, academic, and professional organizations. But because the HEA’s anti-inducement provisions for lenders only cover payments to “institutions of higher education or individuals,” the new regulatory prohibition against payments to “school-affiliated organizations” appears to go beyond the HEA.

4. More Limitation, Suspension and Termination Proceedings

Colleges that are found in regulatory non-compliance generally receive an FPRD letter that assesses a liability against the college, or they receive a notice imposing an administrative fine. In the past, FSA initiated limitation, suspension, or termination proceedings against colleges only in the most egregious cases. FSA has never terminated a large, well-respected college from the Federal Family Education Loan (FFEL) Program, and no one thinks they will do so over this. But FSA might place limitations upon them. Smaller colleges -- particularly for-profit, career colleges -- may not be so lucky.

And while limitation, suspension and termination proceedings for lenders were extremely rare in the past, FSA will now choose to initiate them. This is so because FSA can require “corrective action,” which includes a monetary payment, only as part of a limitation or termination proceeding. As a result, lenders can expect such proceedings.

That is what colleges and lenders can expect from the department in 2008 in terms of administrative enforcement. Here is what they (indeed, every American) should demand of the department: Responsible and principled leadership.

The Department Should Enforce the Law Responsibly and in a Principled Manner

Increased accountability in the FFEL Program should be greatly welcomed by all. Every taxpayer should demand that colleges and lenders, like any other recipient of our hard-earned tax dollars, play by the rules. And colleges and lenders, themselves, should insist on accountability in the FFEL Program. Where true violations of the statutory and regulatory anti-inducement provisions are discovered, FSA should put an immediate stop to it. And where those violations are flagrant or committed with a fraudulent intent, FSA should impose the most serious administrative sanctions.

But internal pressure from the OIG and external pressure from Cuomo, the Congress or the news media to severely punish violators should not be perceived by senior department officials as “cover” for FSA to impose unnecessarily harsh penalties. Getting a “pound of flesh” by reflexively imposing large administrative fines against our nation’s colleges or by unreasonably limiting, suspending or terminating the very lenders that help put our college students through school would be counterproductive.

Instead, FSA should carefully exercise its inherent administrative enforcement discretion by thoroughly reviewing each violation on a case-by-case basis to determine whether a sanction is even needed. For example, regulations allow for informal compliance procedures to permit a lender to show that the violation has been corrected or to at least present a plan for correcting the violation and preventing its recurrence. However, if a sanction is needed, then FSA should fashion a penalty that is sufficient, but not greater than necessary, to achieve the purposes of the FFEL Program and to ensure its continued viability and integrity. Among the factors FSA should consider are the nature and circumstances of the violation and the violator’s history of regulatory non-compliance.


The coming year of administrative enforcement will make some people within the FFEL Program very anxious, but it will serve an important purpose. Colleges and lenders must be held to account for conduct that denied borrowers a true choice of lender as a result of improper payoffs. And the department, acting in the best interests of those same borrowers, should strictly enforce the laws on the books and exercise sound discretion in doing so. Administrative enforcement is not a one-size-fits-all process.

Jonathan Vogel
Author's email: 

Jonathan Vogel is a former Deputy General Counsel of higher education at the U.S. Department of Education and a former federal prosecutor with the U.S. Department of Justice. He is now a partner with the law firm of Sonnenschein Nath & Rosenthal.

Reclaiming Our Birthright

As written in Genesis, Esau, exhausted from his labors and faint from hunger, sells his birthright for a pottage of red lentils. We are reminded of Esau’s bargain through the seemingly unending revelations of distasteful contracts between higher education and the corporate world. These contractual relationships raise the question: Has the modern university, in its quest for resources, likewise sold its birthright?

It is a question not easily answered, for the concept of a higher education birthright is nebulous. Yet it is clear that society, through elected representatives, personal philanthropy, and religious authorities, has accorded to the Academy great autonomy, and deferred to the judgment of faculty and administrators on weighty issues expressed in policies, programs and the tenets of academic freedom. The public’s support of the Academy is rooted in its belief that colleges and universities are altruistically motivated and have at heart the best interests of students and society.

It is that premise that has been shaken by revelations that several student financial aid offices have sacrificed the best interests of students for operating dollars and personal aggrandizement, and that some alumni affairs offices have sold student and graduate addresses to credit card companies and loan consolidators. To many it appears that university officials have abused the public’s trust.

Three recent news stories, months removed from the New York attorney general’s revealing investigations, illustrate higher education problems. The president of Iowa State University acted forthrightly in calling for an end to the practice of selling undergraduate names and addresses to Bank of America’s credit card marketing division. For this and other contractual considerations, including higher credit card interest rates for students than for alumni, Bank of America annually gives the Alumni Association $500,000 and a guaranteed $40,000 to the University. Not surprisingly, none of the $40,000 goes for student financial aid; the full amount is directed to intercollegiate athletics.

In contrast to Iowa State’s call for corrective action, University of Miami officials seek to justify the university's transmission of private student information (including Social Security and driver’s license data) to the Sallie Mae Corporation, which in turn personalized student loan applications and mailed them to incoming students. Miami steadfastly has refused to reveal the financial compensation it receives from Sallie Mae for facilitating this marketing ploy, except to acknowledge that the firm controls approximately $70 million or 95 percent of the University’s federal loan business.

Now comes the NCAA with a proposal to permit companies contracting with collegiate athletic programs to use images of individual student athletes for commercial usage. Of course, none of the revenues or royalties from these contracts will reach student athletes, but will undoubtedly benefit their coaches, athletic officials, and conference coffers. NCAA officials shamelessly deny that the proposal constitutes an exploitation of student-athletes -- which, of course, is precisely what it is.

Rather than bringing this controversial proposal to a January vote, it has now been referred to a committee of presidents for additional study. It may or may not surface again, but the fact it had the support of the NCAA Academic and Eligibility Committee in order to provide “greater flexibility in developing relationships with commercial entities” bespeaks the values dominating the current state of intercollegiate athletics. Esau may have favored a pottage of red lentils, but today’s preference is green.

We have not arrived at this ethical crossroads through greed or mal-intent. Economic pressures born of diminishing revenue streams, the counsel of Boards and advisory bodies to be more entrepreneurial, and the desire to enhance the stature of institutions we serve have facilitated higher education’s commercial embrace. We are now paying the price for imprudent decisions, ineffective oversight, and diminished commitment to serving students and society.

Rebuilding the public’s confidence and trust in our institutions must occur in the same settings where that confidence and trust were eroded: on individual campuses and through higher education’s governing structures. The historic values of the Academy must be reaffirmed both by governing boards and by campus presidents and chancellors. Comprehensive, clearly enunciated conflict of interest policies are part of the answer, but in a larger sense those who work for and those who work with our colleges and universities need to inculcate ethical guidelines and community values and see them reflected in decision-making throughout the University. Processes by which proposed contracts and agreements, particularly with external vendors, can be reviewed prior to effectuation, and an enhanced internal auditing function will likewise be needed. Of course, institutional funding must be found for those important functions which have become financially dependent on questionable external arrangements.

Most importantly, each college and university will need to clarify its priorities and reaffirm its core values. I would expect that most institutions will incorporate three principles in its credo. First, transactions and relationships with external entities must be public and transparent. It is not enough for the public to have access to information, external relationships should be explicated in a way that salient information is readily recognized and understood—and presented in a manner that permits knowledgeable discussion and accountable decision-making.

Secondly, affirmation is needed to insure that the best interests of students will be a primary consideration in all external arrangements. (One could persuasively argue that this principle should be extended to faculty and staff as well, though it is clear there is a special relationship born of tradition and public expectations between the college or university and its students.) Formal agreements and informal arrangements which adversely impact students presumptively should be eschewed. It is difficult to justify any external agreement which consciously increases student costs, limits student choices, disseminates private records, or exploits individual students for individual or corporate gain.

Lastly, there must be a recognition that the integrity of the decision-making process and an institution’s reputation are intertwined. Irrespective of whether the college or university is public or independent, its foundation is built on public trust. The institution should never engage in any activity or execute any external agreement which erodes the public’s conviction that the Academy has society’s best interests at heart and so conducts its affairs.

Reclaiming the public’s trust (truly the Academy’s historic birthright) should be an overarching goal for all higher education.

Constantine W. Curris
Author's email: 

Constantine W. Curris is president of the American Association of State Colleges and Universities.

New Targets in Loan Inquiry

New York's Cuomo takes aim at college alumni associations and at Nebraska lender largely cleared by its own state's attorney general.

Another Lender Relationship Questioned

Latest twist in student loan inquiry finds N.J. guarantee agency profited from Sallie Mae and Nelnet loans it helped market.

House to Act Fast on Student Loans

Bipartisan bill would ban lender gifts to colleges and service on advisory boards; U.S. student loan official quits.

Nearly Unanimous Vote, Divergent Views

House Republicans join Democrats in backing student loan reform bill, but parties disagree on extent of underlying problems.

Sparring With the Secretary

House Democrats pummel Spellings over Education Department's perceived failure to rein in abuses in student loan industry.


Subscribe to RSS - The Loan Scandal
Back to Top