By Richard Vedder
I have long been uncomfortable with the power concentrated in student financial aid offices as a consequence of our massive and excessively complex system of financial aid. Power corrupts, and absolute power corrupts absolutely, or so said Lord Acton. By administering aid financed by others, financial aid officers have the ability to tailor institutional aid offers to fit their desires, not that of donors. If donor A wants to help student B a lot, she makes a gift to the institution to support student B. If the financial aid officer, however, does not much like student B, he gives far less institutional support to B than would normally would be the case, leaving total aid no greater than if donor A had given nothing at all. So the donor's wishes are thwarted.
My sidekick Bryan reminds me, however, that Andrew Cuomo, Attorney General of New York, is investigating financial aid offices and private loan firms for unsavory practices. Make it clear: we favor private student loans, indeed vastly prefer them to government ones. But we don't like the fact that students are guided to them by the same folks who give out all other types of loans and grants. There are huge incentives for private loan providers to try to get the edge over competitors by offering bribes, either directly to the aid officers (e.g., through trips to exotic resorts for sham financial aid conferences), or to the institutions through kickbacks. Cuomo claims that is happening and he is going after the participants. Good for him (and for me to praise crusading attorneys general is very rare). Universities are losing some of their moral authority and respect for them for their role in imparting values is declining, and appropriately so. This is another example of a practice eroding confidence in universities and reducing their case for considerable institutional autonomy.
The ultimate solution is not to crack down on private lending. Rather, it is to separate the counseling and funding of student financial aid offices from the awarding of aid. Indeed, I think I would limit student financial aid offices to giving institutional aid, and any federal aid (e.g., Pell Grants) should be awarded directly by the Feds to the students. Better yet, if the government got out of giving aid through institutions altogether, the problem would go away. In a true free academic market, private lenders would advertise their wares in such a way that students could readily learn of alternative aid possibilities, just the way banks do it today with home equity and car loans. Indeed, a case can be made to criminalize university's requesting information from students on how they intend to finance college -- other than the assistance provided by the institutions themselves.