Insider aid

PROVIDING FEDERALLY guaranteed student loans is nice work if you can get it. The market, worth more than $50 billion annually, is protected against virtually all losses. The trouble is getting into it -- which is why an emerging scandal over so-called preferred lender lists kept by many colleges and universities is not surprising.

The as-yet-unproven allegations against administrators, one of whom is at USC, are troubling. But another aspect of the student-loan industry brought to light by the probes, undertaken by the New America Foundation and the New York attorney general, is even more disturbing: Some student financial aid offices share in the profits made by their preferred lenders.

Federal regulations bar schools from cutting revenue-sharing deals with lenders making guaranteed student loans. Nevertheless, some lenders and financial aid offices have found ways to share the wealth. For example, a university financial aid office might receive a fee on student loans not guaranteed by the government. Or it might make subsidized loans itself, then sell packages of loans at a profit.

It’s not clear how many institutions were involved in such practices. New York Atty. Gen. Andrew Cuomo alleges that one California lender had revenue-sharing deals with more than 60 institutions, which is just a fraction of the more than 6,000 U.S. colleges and universities. Many that did generate revenue from student loans used the proceeds to beef up financial aid programs that had been frozen for years by Congress. Still, even those efforts effectively taxed one set of needy students for the sake of another. They also undermined the colleges’ role as an honest broker for students.

Pepperdine University in Malibu, for instance, collected a fee from one of its preferred lenders on every non-subsidized loan its partner made. That fee, Pepperdine said, was used “to assist other students seeking financial aid.” Effectively, then, Pepperdine and its preferred lender forced some needy students to subsidize others -- with the subsidies flowing back to Pepperdine as tuition payments. Pepperdine recently announced that it had “reconsidered” this arrangement.

Despite these disturbing practices, there is no doubt that the vast majority of college and university financial aid officers provide invaluable help to students and parents. The U.S. Department of Education is developing new rules that would further limit financial ties between administrators, schools and lenders while providing better disclosure to student borrowers. Such rules are overdue.

Congress could help too, by simplifying the process of applying for guaranteed student loans. Although students are ultimately responsible for protecting their own interests, it’s easier for them to do so when their college has no skin in the game.