Reauthorization of the Higher Education Act of 1965
Public Hearing on Reauthorization - March 7, 2003
Archived Information

Panel 5
Question and Answer Session

MR. ANDRADE: Harrison, I have one question that does get to the school as lender proposal that you have on the table. That has been around for awhile. There are schools, some schools currently in the direct loan program have been lenders in the FFEL Program at one point. There haven't been any complaints.

Why should originating lenders try to take this right away from the schools if it works for them or there haven't been any problems and have them make whatever you can make on an origination of a loan rather than a bank?

MR. WADSWORTH: Well, I appreciate you asking that question because it allows me to say what I had to cut out of my presentation.

It's true that there hasn't, that it has been a very small part of what's been occurring over the years and so there have not been any scandals yet.

The problem is that it's changing. I'm not saying there's going to necessarily be scandals. The problem is that it is changing. It is given the current fiscal environment in so many states in that there are some commercial entities going around and putting together or helping schools put together RFP's to find commercial entities to act as their lender to work with them to set up the schools and the program. There is a dramatic expansion apparently that is underway.

So what has been a small kind of a niche for certain graduate students at certain schools is, in fact, becoming much more widespread. And it really puts pressure on schools. You'd say it's a reverse incentive, like people have talked about, I mean, over the years to try to make more loans rather than try to reduce loans.

And as I've said in this presentation, the financial aid office sets up these programs thinking we'll use this to expand our grants to the premiums that are paid for these loans when they sell them to the private sector, which is what happens. They will use that to encourage grants, make more grants.

And the fact of the matter is money is fungible. Once somebody mentioned this to me so it's not an original idea on my part but once, for example, say a state legislature that is faced with tremendous fiscal pressures to reduce the cost of higher education finds out this is a way they can do so, there will be tremendous pressure to set up these programs and instead of actually increasing funds for grants at the campus what we increased is funds for pothole filling or other things that the state does.

So we feel like it's a problem that we think ought to be headed off in developing the future. That's a long-winded answer but you gave me a chance to finish my speech.

MR. ANDRADE: Thank you. No further questions. Thank you very much.


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Last Modified: 02/20/2009