Monday, October 02, 2006
Department of Education Improperly Paid Lender $278 million in subsidies
Lender Nelnet received payments with a much higher return than lenders are normally entitled to receive on student loans.

I don't like the guaranteed interest rate provision for non-direct lenders to begin with. It costs the federal government a lot of money even when a lender doesn't "move loans through a series of transactions" to keep qualifying for the payout (of possibly another $882 million!).

One of the proposals that I really liked in Generation Debt comes in one of the later chapters. I don't have it to hand, and there's not the same citation in the blog, but I remember that the administrative costs of managing loans through the non-direct lenders were MUCH higher than administration through the Direct Loan program. Kamenetz argued that the non-direct programs should be scrapped and everything should be returned to the direct loan program. She suggested that the savings could pay for Pell Grant expansions, but that's not the only possible outcome.

At any rate, stories like this make me a lot more sympathetic to her view. (For full disclosure: I moved my loans to the Direct Loan program because everyone else promised me incentives after 24 months, when DL gave me one right away.)


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