A Fox Guarding The Hen House

Paul Basken's article in today's Chronicle of Higher Education does a great job of laying out the conflicts of interest and perverse incentives in the student loan industry that can lead to unsavory business practices.

As the article describes, a former Sallie Mae employee has filed a lawsuit alleging that the company engaged in fraudulent debt collection practices resulting in ballooning debt for some students. At the heart of the issue is the increasingly interwoven relationships between guarantee agencies and loan companies. Guarantee agencies are supposed to be independent entities that oversee the collection activities of loan companies like Sallie Mae in order to protect both students and the federal government from fraud. But, at least in Sallie Mae's case, this relationship has gotten a little too close for comfort:

Most guarantee agencies are independent of the lenders they oversee. Sallie Mae, however, has a contractual arrangement with USA Funds, the nation’s largest guarantee agency, that gives Sallie Mae extensive financial and operational control over the guarantor that oversees its work. USA Funds, with only about 75 employees of its own, pays Sallie Mae about $250-million a year to provide hundreds of workers to perform most of its guarantor operations. That effectively has left Sallie Mae since 2000 in the role of overseeing its own lending activities.

Whether the lawsuit is legitimate or not, it's clear that the safeguards and oversight in the federal loan system designed to protect students and taxpayers have broken down, putting everyone at risk. And this guarantee agency-loan company entanglement is only the beginning - to understand the extent of the troubles, read the whole article here.