Bad Credit Online Magazine - Daily News and Advice on Credit, Debt and Mortgage : Colleges lend money directly to the students

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September 11, 2005

Colleges lend money directly to the students

College gives you a student loan. That was almost unheard of just 10 - 15 years ago. Now in the effort to make money, more universities and colleges originate student loans. It mostly limited for graduate and professional schools, so medical and law students are likely candidates. The program is called "school-as-lender" and today, about 100 schools write loans directly to their own students. Then university holds such a debt for several months and sell it for a premium to a third party. Those premium vary anywhere from 2 to 6 percent of the given student loan.
So on the $100,000 loan which is pretty common for a medical or law school, university can make up to $6,000.

Supporters of such student loans point at lesser fees and convenience. They also say that the profits mostly go back to fund all types of financial aid for the needy students.

But critics say these programs create incentives for schools to encourage more borrowing. "Universities themselves set the price of attendance, and play a big role in determining how much financial aid students receive. If schools stand to gain from an increase in loans, they could offer debt-heavy aid packages that aren't in the students' best interest."

The federal Higher Education Act that governs student loan programs ends this month. Both versions of legislation in House and Senate will require that all profits from student loans made by schools be used for aid to needy students. Universities claim that they do it already, but now, there will be a law. So much for the free enterprise.

 
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