Prometheus 6

Quote of note:

Few schools had the cash on hand to lend to their students, and so the program wasn't very popular. But in the last few years, loan companies have started enticing colleges with favorable deals. A university doesn't even have to put up its own money up front -- it can borrow the cash from a bank. The loans are the same federally guaranteed loans that banks offer, and college finance officers report receiving dozens of phone calls from counterparts at other schools who want to know how it's done.

This is how it works: The university makes a loan to a graduate student, either with its own money or borrowed funds. At some point, the school sells the loan to a bank, which pays a premium for it and then eventually collects from the student. This premium is what provides the bulk of the school's profit.

More colleges replace banks for student aid
Some see conflict of interest in loans
By Marcella Bombardieri, Globe Staff | November 26, 2004

Tufts University expects to earn at least $1 million this year by lending tuition money to its graduate students, and Simmons College will make nearly that much -- both among the growing number of colleges playing the role of banks to their own students.

As tuition rises, colleges are increasingly seizing on a 1965 law that allows schools to act as lenders, charging students about the same interest rate as banks would. Although there aren't any official statistics, it is estimated that about 70 schools nationwide are now acting as lenders, many of them new to the practice in the last few years.

As their numbers grow, so does the criticism that schools like Tufts and Simmons don't belong in the business of lending money. School leaders say the arrangement saves money for both students and colleges, but to some it presents a conflict of interest: Nonprofit colleges are essentially profiting from higher tuition, since the more money students need to take out loans, the more the colleges earn from their payments.

''It seems to me they've crossed the line from being an institution of higher education to being a business entity seeking loan volume," said Eileen K. O'Leary, associate vice president for finance at Stonehill College and chairwoman of the National Direct Student Loan Coalition, a group that advocates a rival lending program.

Officials at colleges that have decided to participate in the school-as-lender program couldn't see it more differently.

''We are in fact taking money away from the banks and giving it to our students," said Humberto F. Gonalves, vice president for finance and treasurer at Simmons, which is in its fourth year of lending to its graduate students. ''It's a modern version of Robin Hood, almost."

For student borrowers, the loans aren't much different from bank loans, and can be somewhat cheaper. At Tufts, students borrowing directly from the college don't have to pay the usual 3 percent ''origination fee," and they get discounts for making their payments on time. And critics have not shown any link between the loans and higher tuition.

As the practice becomes more widespread, however, some members of Congress are debating whether the program should be changed, or even abolished.