Edition 76 - August 2007

US government tackles student loan oversight

After a cascade of indictments revealing the tangled relationship of US universities and private students loan lenders (see ACA Newsletter Education Europe April and May), the US government has finally taken steps to improve its oversight of student lending practices. The Government Accountability Office (GAO) has recently produced a report analysing the governments’ ethical guidance and enforcement of the largest federal student loan programme, the FFELP (Federal Family Education Loan Programme). In the US, student loans are provided via various channels: public (Federal Government Ford Direct Loan Programme), private (banks and lending companies), and public/private mix (private lender gets subsidies from the government that allow them to lower the interest rates they charge students). The recent GAO report identifies many weaknesses of the US Education Department’s ability to monitor this complex web of student loan provision:

  • The government has no mechanism to determine whether universities are improperly limiting students choice of lenders
  • The education department has ‘no oversight tools’ to determine corrupt practices of lenders such as providing incentives to universities to utilise their services.

The Department of Education has concurred with the GAO’s recommendations to tackle these two points. Further, the House and the Senate have recently passed bills to reform student lending.  These bills include measures such as increasing maximum grants for low-income students, cutting some of the subsidies for lenders, and capping graduate loan repayments at a manageable percentage of income.

While these measures are encouraging, they do not tackle the heart of lending problem. Student tuition costs have risen much faster than inflation or financial aid. Students are obligated to turn to private lenders and the student loan industry has risen to a whopping 85 billion dollars a year. Many European countries are currently debating the introduction and/or modification of tuition fees. Amidst this important debate, the dire situation in the US should certainly be observed.

GAO report
Department of Education
Full report

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