For 8 years, students at Michigan State University borrowed tuition money directly from the federal government. But last spring, university officials shucked that arrangement and signed up with private lenders and a state agency that provided loans under a separate federal plan. They guaranteed a profit to the university—something the federal government could not do. Sounds sweet for Michigan State, but it's not so terrific for federal taxpayers, who will almost certainly wind up shelling out $23.5 million more each year as a result of the change.
Michigan State is not unique. Today, dozens of colleges and universities are abandoning the Department of Education's direct-loan plan, lured by the promise of a quick buck from banks, state lending agencies, and most significantly, Sallie Mae, the giant private lender based in Reston, Virginia. In all, 62 colleges and universities have dropped out of the Education Department's direct-loan program since 2000, and the list is growing. Sallie Mae has won over $1 billion in loan business from former direct-loan schools.