Student-Loan Program Lambasted in Subcommittee Report

By Mark Pitsch — May 29, 1991 4 min read
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A Senate subcommittee issued a report last week that calls for sweeping reforms in the Guaranteed Student Loan program.

“Plagued by fraud and abuse at every level and lacking meaningful oversight and management controls, the program has become inefficient, ineffective, and far too costly,” said the report by the Senate Permanent Subcommittee on Investigations.

The report noted that the program, which includes Stafford Student Loans, Supplemental Loans for Students, and Parent Loans for Undergraduate Students, “has vastly expanded accessibility” to higher education for needy students.

However, the subcommittee found that the program has failed to ensure “that federal dollars are providing quality, and not merely quantity.”

In particular, the report focused on the operations of the nation’s trade schools. It said unscrupulous practices by some schools and lax oversight by accreditors and the Education Department have led to dangerously high default rates.

It noted that between academic years 1983 and 1987, the student-default rate for trade-school students was 39 percent, compared with 10 percent for four-year public and private schools. Between fiscal years 1983 and 1989, loan defaults by these students increased by 338 percent--from $445 million to just under $2 billion, the report said.

Inquiry Began in 1989

The report is the culmination of an inquiry into the program begun by the subcommittee in 1989. Chaired by Senator Sam Nunn, Democrat of Georgia, the subcommittee last year heard from nearly 50 witnesses during a series of hearings on the role of trade schools, lenders, loan servicers, secondary markets, and guarantee agencies.

An aide to Mr. Nunn said the Senator may prepare legislation based on the findings of the report. It was released as House and Senate authorizing committees are holding hearings on the extension of the Higher Education Act of 1965.

Members of the Congress and the Education Department have acknowledged that the loan program must be changed to make it more responsive to students and responsible to taxpayers.

The department recently announced it will take a series of steps to better oversee the program. Senator Claiborne Pell, the Rhode Island Democrat who chairs the Senate Education, Arts, and Humanities Subcommittee, said in a statement that his panel is looking into several areas of concern the report mentioned. The report’s recommendations will be taken into consideration during the reauthorization process, he added.

In concentrating on proprietary schools, the subcommittee portrayed the loan program as being riddled with fraud, abuse, waste, mismanagement, and ineptitude.

Some school owners have manipulated the system by recruiting unqualified students and obtaining loans for them, opening branch campuses that did not offer high-quality education, and failing to give students adequate refunds, the report said.

It also said states lack standards for licensure and that accreditors--often trade-school owners and officials--fail to scrutinize the schools’ business and education operations.

‘Gross Mismanagement’

The report said the Education Department’s oversight mechanisms were overcome by “gross mismanagement, ineptitude, and/or neglect.” The Congress, however, has failed to assist the department by agreeing on a comprehensive default-reduction strategy, the report noted.

William J. Bennett, who served as Secretary of Education from 1985 to 1988, criticized the report for failing to emphasize the latter point.

“We proposed some things with teeth in it,” Mr. Bennett told The Washington Post last week. “And they chickened out of any serious proposals. They had the opportunity to do something about this four years ago, five years ago, and they didn’t take it.”

Among the recommendations in the report are the following:

The Congress and President Bush must revamp the loan program during reauthorization of the Higher Education Act.

The Congress should consider limiting the amount of federal aid given to students attending proprietary schools.

The Congress should remove correspondence courses from federal aid programs.

The Education Department should overhaul its management of the aid programs, and appoint an assistant secretary for student financial aid.

The department has announced such steps, and Michael J. Farrell has been named as a special assistant on student-financial aid to Secretary Lamar Alexander.

The Education Department must assist students who have been victimized by trade-school owners and who often are left with debts they cannot pay.

The Congress should require the President and Secretary Alexander to report on such broad topics as developing greater support for skills training, determining what skills the nation needs, balancing this training with academic development in postsecondary education, and developing the most effective balance between loans and grants in the federal financial-aid system.

A version of this article appeared in the May 29, 1991 edition of Education Week as Student-Loan Program Lambasted in Subcommittee Report


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