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Ralph Nader > In the Public Interest > The Student Loan Scandal

AUSTIN, Texas — John L. Hill is angry at the Department of Health, Education and Welfare (HEW). As attorney general of Texas, he has his lawyers looking into the mushrooming scandal of federally insured student loans (FISL) involving proprietary schools and banks. The more they investigate, the more they believe that HEW offi­cials bear a heavy complicity in a nationwide con­sumer fraud that will end up costing taxpayers about a billion dollars. Approximately 10 years ago, Congress recog­nized the need of students to borrow money for fi­nancing their education and made the federal gov­ernment a guarantor of loans extended by banks to students. It was accurately believed without Uncle Sam lending his credit and an interest subsidy, the banks would not loan money to students.

IN THE PAST decade nearly five million stu­dents received over $8 billion of federally guaranteed loans. But, as is often the case in subsidy programs, Congress neglected to write into the law safeguards against abuse, misman­agement and fraud. It also failed to provide any­thing other than ridiculously small funding for HEW to hire investigators and adjustors to protect both taxpayers and students.

Whenever the taxpayer is made the payer of last resort, the seeds for business crime are sown. Abuses in the student loan program arose heavily out of the fast growing world of vocational train­ing at private-for profit business or trade schools.

In recent Senate testimony, Hill said:

“These students, rather than becoming the beneficiaries of the FISL program, became its unwitting victims. They became easy prey for an all too statistically significant number of knowl­edge hucksters whose deceptive and fraudulent business practices were directly subsidized by the federal government through the U.S. Office of Education.

Cases investigated by state and federal law en­forcement agencies in various states have pin­pointed the following patterns:

Proprietary or vocational schools going bank­rupt, leaving students with the obligation to repay loans for education they never or only partially re­ceived. Advance Schools, Inc., a Chicago-based giant in this industry, filed for bankruptcy over a year ago with about $100 million in government guaranteed student loans outstanding.

Proprietary schools that lure students by false or misleading claims of employment and salary opportunities.

Banks that take incentive payments for pur­chasing the note paper from the schools or charg­ing illegally high interest rates, engaging in illegal discounting or kickbacks to bank officials.

Under prodding by such units as the Texas Attorney General’s office, HEW began, in 1975, tightening its regulations governing participating schools and banks in student loan programs. The scandal-ridden local HEW office administering the program in Dallas was closed. Several former employees of this office are now facing charges.

The picture which emerges from HEW’s role is one of serious negligence with the taxpayers’ money. Former HEW Secretary Caspar Wein­berger, who liked to tout his determination to cut federal spending, was quite willing to overlook the need to stop the massive criminal fraud effecting the billions of Medicare and Medicaid disburse­ments as well as the student loan fiasco, A new of­fice of investigations, headed by John Walsh, a former congressional prober, is a modest im­provement.

MUCH MORE remains to be done. Last week, as a start, the Senate passed and sent to the House amendments that stiffen penalties.

Hill and the U.S. Attorney in Texas believe the indictment trail will lead to HEW officials in Washington. Hill’s office is also going to sue HEW for not honoring, as it should, valid student de­fenses in cases of defaulted loans, in order to pro­tect the banks which are reaping great profits from this no-risk program. Hill’s attorneys believe HEW is ignoring the fact in many instances the banks are not independent third parties but are really the undisclosed principles, with the schools acting as agents or credit arrangers.