Education Groups Form Student-Loan Consortium

By Mark Walsh — May 23, 1990 3 min read

Three major education organizations are forging ahead with plans to offer student aid through their own consortium, despite strong opposition from banks and loan-guaranty agencies and concern on Capitol Hill.

The College Board, the Student Loan Marketing Association (Sallie Mae), and the Teachers Insurance and Annuity Association-College Retirement Equities Fund this month formally announced the creation of the CollegeCredit program.

Under the program, students at participating colleges and universities will be able to get Stafford student loans and other federal student loans without going through a bank.

All three organizations stand to make money from fees or investment income from handling loans in the program.

Officials of the program say it will provide loan servicing and counseling to students and their families as well as simpler administration of student-aid options for colleges, which currently must deal with a wide array of federal and state agencies.

Critics charge, however, that the program is unnecessary and that the CollegeCredit backers will skim the most profitable loans in the student-aid industry--those that go to students at degree-granting institutions.

Such an approach, critics say, will leave banks with higher-risk loans to students at non-degree-granting schools, which have traditionally had the highest loan-default rates.

Under the program, the pension fund tiaa-cref will be the lender, using an initial $50 million contribution from cref, with additional funding expected from a consortium of other financial institutions.

The College Board will process loan applications and provide student-counseling services; Sallie Mae will service the loans and purchase them from tiaa-cref

Upsetting the Balance?

CollegeCredit is being marketed through college and university financial-aid offices, not directly to parents or students.

“The financial-aid administrator at a participating college will be free to decide whether, when, how, and to whom CollegeCredit information should be provided,” Hal F. Higginbotham, the College Board’s vice president of student-assistance services, wrote in a letter to college offi4cials.

Lenders and state guaranty agencies have charged that the new program will upset the delicate nature of the student-aid system.

“We perceive the way the program is oriented it will cream the best loans from the marketplace,” said Craig Ulrich, vice president and general counsel of the Consumer Bankers Association.

Banks will be left with loans for students at trade schools and other non-degree-granting institutions, which are much more likely to go into default, resulting in less profitability for the banks, he said. That could push some banks out of the student-loan business.

“Unfortunately,” he said, “the people in most need of loans are going to be the ones left holding the bag.”

The banks, along with the National Council of Higher Education Loan Programs and various state guaranty agencies, have lobbied members of the Congress to use their influence to halt the CollegeCredit program.

Noting that the College Board holds a contract with the federal government to process aid applications, detractors have also expressed concern that the organization’s involvement in the program may pose a conflict of interest. And Sallie Mae is violating its federal charter as a secondary market for student loans through its direct involvement with original loans in the CollegeCredit program, the bankers charge.

In response to meetings with critics and members of the Congress, the three organizations have agreed to limit the loan program to a volume of $150 million.

The groups have said they will honor that limit at least until the reauthorization of the Higher Education Act, which is scheduled to be considered next year and which could involve major changes to federal student-aid programs.

“As CollegeCredit develops, we will be able to demonstrate that there is a demand for the program, and that it serves a broad cross-section of eligible institutions without substantial disruption to the status quo,” Donald M. Stewart, president of the College Board, wrote in a letter earlier this month to Senator Claiborne Pell.

Mr. Pell, the Democrat from Rhode Island who is chairman of the Senate subcommittee on education, arts, and the humanities, responded that the loan limit “certainly helps ease my concerns” about the program.

A version of this article appeared in the May 23, 1990 edition of Education Week as Education Groups Form Student-Loan Consortium