(U-WIRE) BOSTON -
Politicians, universities and loan companies are working together to restructure a shattered private student loan industry that has come under fire in previous months after reports that university officials have been fired for accepting kickbacks for recommending specific lending companies to students.
The scandal hit Boston when the dean of enrollment at Emerson College was fired for accepting payments up to $36,000, according to a June 21 Boston Globe article.
U.S. Sen. Edward Kennedy (D-Mass.), Massachusetts Attorney General Martha Coakley and New York Attorney General Andrew Cuomo began investigations in early May in Massachusetts to determine whether relationships between schools and private lending companies in the state were improper.
In addition, Cuomo discovered during his investigation that some lending companies were discriminating against applicants based on what school they attend - some historically black schools were hit with higher interest rates -and other factors not directly tied to their credit history, according to a June 6 New York Times article.
"We absolutely need to revamp this industry," American Association of Collegiate Registrars and Admissions Officers spokesman Barmak Nassirian said. "There needs to be a complete overhaul in student lendings - there is too much stress and debt to approach this in a conventional way and we need new and innovative options."
Nassirian said that the industry's downfall stems directly from the "failure of the government to protect students" and said there is far too little oversight focused on the relationship between schools and lending companies.
"The ideal distance between the two should be arm's length," he said. "Lenders should compete on the basis of service and what they offer to students - not what they offer to a third party - the school.
"It allows third parties to have a say in who gets which loans, and that's a decision the students should be making for themselves," he added.
Karin Pellman, a spokeswoman for the private student lending company My Rich Uncle, agreed and said that students lose out when they are not given the opportunity to choose.
"What we're seeing in the industry is fallout and conflict of interest," she said. "Lenders are being viewed by admissions officers as customers of loans, and the current direction is not in the best interest of students."
Pellman also agreed that more government intervention is needed to make the student loan market safer and more cost-efficient for students.
"Since the investigations, the government has taken a much closer look. They've come down hard on the Department of Education and they're coming down to assist the borrower's right to choose," she said.
"There are laws that prevent these unacceptable relationships but they are simply not being enforced."
Pellman said My Rich Uncle, founded in 1999, works with students and not directly with financial aid offices. She said that financial aid officers complicate the student loan process and the relationship between student and lending company would be "ideal" without them.
Illinois Senator and Democratic presidential candidate Barack Obama is one politician that has recommended reforming the student loan industry by simply relying on federal student aid and eliminating private subsidies -which he called "wasteful and unnecessary" - he told The Daily Free Press in May during a telephone conference with college newspapers.
Though Pellman agreed change is necessary and imminent, she believes the step is overstated and unnecessary.
"We do need to open the road to banning the preferred lending list offered by colleges to students," she said. "But the cost of education is rising four to six percent each year and federal loans are not enough.
"The private student loan market is worth $18 billion; it's one of the fastest-growing sectors of consumer finance, and it's a viable market."