The nation's student loan program is supposed to make higher education a reality for those without the means, but the sordid tales of Roger Wayne Morgan and Joseph A. Pursley show how the program's guaranteed profit and lax oversight can write entrepreneurs a blank check.
Morgan, a convicted felon, and Pursley, a man in perpetual debt, each came to Florida and ended up striking gold through the Federal Family Education Loan Program. As reported by Times writers Tom Marshall and Thomas Lake, the two men formed different student loan companies with the same goal: to take advantage of the built-in profit Congress has provided businesses that issue student loans carrying the guarantee of the federal government.
Neither the federal nor state Departments of Education performed any real background check before approving these men for the program. Even if they had, it's not clear whether the federal law would have disqualified the men from participation.
The crash landing was foreseeable. By late 2005, Morgan's Academic Financial Services was bouncing employee paychecks and, according to shareholders, Morgan was using the company account as his own piggy bank. He was arrested in March on charges of writing bad checks. Last May, federal agents raided Pursley's Student Funding Services in Largo after an employee told regulators the company was forging electronic signatures on student loan applications.
The profit incentive that Congress has built into the student-loan program has too often put students themselves at risk. Already, the program has had to deal with universities that are steering students to certain lenders in exchange for a piece of the profits. The Morgan and Pursley meltdowns show how easy it is for anyone to be granted license to profit from financially desperate students.
Last year, following a U.S. Government Accountability Office study that reported a $3.1-billion subsidy for student loan companies in fiscal year 2006, Congress did reduce the potential for profit. But that's not enough. At a minimum, the companies should have to bid for the right to sell loans – a market approach that has been endorsed by Federal Reserve Chairman Ben Bernanke.
The far better approach is to expand the Federal Direct Loan Program, which accounts now for only about 22 percent of student loans. Direct loans strip out the profit, save tax money and provide a more stable environment when the private credit market is tight. More important, they leave no role for entrepreneurs who see students only as dollar signs.