The House is preparing to hear testimony about New York's investigation into the student-loan industry, even as the U.S. Education Department plans to address the issue. But there are signs that abuses in the student-loan industry stem from the laws that are meant to govern it.
Education Department Secretary Margaret Spellings said she would form a task force on student loans, to recommend federal rules to govern the relationship between schools and lenders.
Her announcement comes days after state attorneys general around the nation joined the bandwagon by investigating the student loan industry.
Critics point to three major flaws in the Higher Education Act, first enacted in 1965.
First, they say, a lender can own a company that is charged with keeping students from defaulting on their loans. But it can also own the company that collects on the debt if the student defaults.
Five years ago, the Government Accountability Office found that for some loans, companies can make more money by letting the student default on their loan than by helping them avoid default.
The inspector general of the Education Department noted the "inherent conflict of interest" in that part of the law, as well — but it has not been changed.
The law also allows lenders to offer schools software — or access to their computer systems — to make it easier for the schools to handle their loans.
The Education Department has identified 300 schools where one lender controls 99 percent of that campuses' loan business.
And finally, critics point out that the law allows lenders to loan money to schools that can then be loaned to students. Then, the schools "sell" the loans to the lender — and the schools keep part of the revenue.
The Education Department challenged that part of the system, back in 1995. But a federal appeals court judge ruled the scheme was perfectly legal under the Higher Education Act.
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