Student Loan Program Called a Failure : Education: A Senate panel finds the plan to be ‘riddled with fraud and abuse.’ Losses from defaults are about $2.7 billion annually.

Senate investigators charged Monday that the government’s guaranteed student loan program has become a costly failure, with fast-buck artists in some private trade schools reaping huge profits while students defaulted on nearly $13 billion worth of loans since 1983.

Lax government regulation in the 1980s allowed the program to be “riddled with fraud and abuse,” the Senate report said. As a result, more than half of all U.S. funds allocated for such student aid now must be used to pay off loans that go sour.

Without immediate and thorough reform, the report noted, Congress may choose to kill the program, which was established in 1965 and has underwritten more than $100 billion in loans to 48 million students beyond high school.

Although not the first expose of student loan fraud, the yearlong inquiry by the Senate permanent subcommittee on investigations is one of the most thorough. The panel’s findings are likely to bring a crackdown by federal officials who administer the loans and could lead to tough new borrowing rules when Congress renews the Higher Education Act this year.

In recent years, the subcommittee found, losses from loan defaults under the program have climbed by more than 500%, reaching an estimated $2.7 billion annually. During the same period, the dollar value of loans has doubled.

The subcommittee report accused the U.S. Department of Education of “gross mismanagement and incompetence” in policing private trade schools, which the investigators found to be the primary source of problems in the program.

The report sympathized, however, with the plight of their students, who took out the loans and then received “little or no training, no jobs and significant debts that they cannot possibly repay.”

Subcommittee members, led by Sen. Sam Nunn (D-Ga.), made more than two dozen recommendations for tightening oversight of proprietary schools and financial agencies that deal with student loans. They also proposed a ban on guaranteed loans to students enrolling in correspondence schools because of the difficulties in regulating that type of instruction.

“The subcommittee investigation uncovered overwhelming evidence that the guaranteed student loan program, particularly as it relates to proprietary schools, is riddled with fraud, waste and abuse, and is plagued by substantial mismanagement and incompetence,” the report said.

“Despite the acknowledged contributions of the well-intended, competent and honest individuals and institutions comprising the large majority of GSLP participants, unscrupulous, inept and dishonest elements have flourished throughout the 1980s,” it continued.

“The latter have done so by exploiting both the ready availability of billions of dollars of guaranteed student loans and the weak and inattentive system responsible for them.”

About half of the 2,200 private, profit-making schools participating in the program have default rates of 20% or higher, subjecting them to special rules.

The report singled out for special criticism the American Career Training Corp. of Pompano Beach, Fla., a school combining a residential program and correspondence courses for secretaries and travel agents.

The school spent one-third of its revenues on advertising to attract new students and only 1.4% of its income on instructors, the report said. The Florida institution received $150 million in federally guaranteed loans from 1985 through 1989, the committee said, allowing it to earn significant profits and pay more than $12 million in salaries and other benefits to its owners.

The report also assailed the defunct First Independent Trust Co. of Sacramento, which originated an estimated $1.5 billion of guaranteed student loans before it collapsed in 1989, forcing the government to make up losses estimated at $200 million to $400 million.