The Guaranteed Student Loan Program: Do Lenders\u27 Risks Exceed Their Rewards

With the troubled economic conditions and skyrocketing educational costs of the 1970\u27s and 1980\u27s, an increasing number of students have come to rely on the federally insured Guaranteed Student Loan Program established in 1965. A concommitant effect of this greater student dependence has been the greater dependence of post-secondary schools on the availability of such loan monies to establish and maintain enrollment levels. The key to the GSLP is the willingness of private lenders to participate in the program. Such willingness is dependent on a balancing of the lenders\u27 risk and their expected rate of return from their GSLP investment. A large student default rate and the special allowance payments to lenders have combined to make the program much more costly than the Department of Education expected. This Article examines how the Department reacted to these events by reallocating the risk of the loans from the government to the lenders through changes in regulatory interpretation. The Article focuses on two major areas where the Department has changed its attitude: the payment of illegal inducements to lenders and the imposition of due diligence requirements for loan collection and default claims submission. After discussing the implications of the Department\u27s treatment of lenders, the Article concludes that the new policies are misplaced and threaten the future of the GSLP; a change is necessary for the good of students and the educational community