Oct 27, 2009

Lawsuits Mount Against FFELP Lender

The reasons to eliminate the Federal Family Education Loan Program (FFELP) grow by the lawsuit. FFELP allows private banks to receive billions of dollars in government subsidies to issue federal student loans. However, participating lenders have become notorious for exploiting the program by cutting corners and taking advantage of students. Recently, according to Bunsinessinsider.com, banking giants JPMorgan and Citigroup have joined the fray and are being sued for conspiring with education financing company Nelnet to falsify government claims and illegally recruit student borrowers.

Nelnet, which has a history of shady dealings with financial aid administrators, has been accused of issuing false reports to the U.S. Department of Education in order to receive more subsidies under the FFELP program. The charges include illegally pushing students to apply for loans, paying telemarketers to aggressively sell packages, and engaging in false advertising to increase sales. While Nelnet was in litigation for these accusations, JPMorgan and Citigroup loaned them $500 million and provided and additional $120 million themselves for assistance. Nelnet faced similar charges by the New York and Nebraska Attorney General offices as recently as 2007.

Congress is working to address these problems by passing the Student Aid and Fiscal Responsibility Act (HR 3221), which would end FFELP. Private lenders are trying to maintain their profits in the student loan industry by developing a counter-proposal. Instead of having Congress invest in low-income financial aid programs like the Pell grant and Perkins loan, lenders want those dollars to go towards banking fees and other services that pad the pockets of executives.

Bank lobbyists argue that direct government lending limits competition. Yet with all the back-dealings and illegal solicitation from private lenders, FFELP runs counter to everything free market principles stand for. Instead, direct government loans offer students more secure aid with increased public accountability. Congress must send President Obama a student aid reform bill this year that eliminates FFELP and invest in direct student aid to help reduce the level of debt students graduate with, allowing them to grow the economy and help America regain its educational prestige.

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