Knee-jerk opposition to private sector solutions in higher education is misguided

The U.S. Department of Education is currently initiating another round of “negotiated rulemaking.” This session will look at rules and regulations governing higher education issues including for-profit third parties that assist colleges in disbursing student aid.

Some might say these new rules and regulations will benefit students, which should be government regulators at the Department of Education’s top priority.  But I believe there is another issue at hand – one that has less to do with students’ well being and more to do with a philosophical belief by some higher education policy makers in Washington that anyone seeking to make a profit from educating students is ignoble.

This rationale is misguided because it refuses to accept that the private sector does some things more efficiently than government or non-profit entities.  More importantly, if we are to better educate all Americans, and not just 18 – 22 year old students from upper and middle-class families, the private sector must play a role to keep education accessible and affordable to the millions of non-traditional students. 

While the fight between for-profit colleges and the Department of Education has garnered a fair amount of media and political attention over the last few years, the Obama administration’s plan to regulate third-party servicers that disburse federal student aid should be on people’s radar screens as well.

These companies charge schools a fee that is significantly less than it would cost the schools to manage dispensing student aid themselves. While it is difficult to quantify exactly how much this industry is saving these schools, it is in the millions each year.  In a time of shrinking budgets for institutions of higher education across America, these cost savings are critical to keeping administrative costs down and allowing colleges to lower tuitions and educate more students.

Higher One is an example of this industry. It works with around 1,600 schools around the nation, most of them community colleges and trade schools.  The company says that its average checking account holder is considered non-traditional: they are typically 29 years old and take out $3,000 a year in federal student loans, and get back around $1,500 (after tuition) for things like books and living expenses. Higher One has come under scrutiny because it provides students with debit cards to access their federal student aid as opposed to old-fashioned paper checks sent via regular mail.  Higher One makes money from the same type of fees you and I pay for our debit cards, such as when we take money out of an ATM that is not owned by our bank. 

Critics of these types of third-party servicers like Higher One say they are profiting from students.  While no one loves students paying fees for their debit cards, this is an important service to help students receive and use their student aid money.  Unless a charitable organization is willing to be a free bank to millions of students around the nation, someone has to charge them fees in order to provide banking services.

Despite these critiques, this type of service has a lot of benefits.  Companies like Higher One discourage the use of cash and encourage safer electronic banking which allows students to make multiple withdrawals rather than receiving one lump sum. Because many non-traditional students are unbanked or under banked, without Higher One, some of these students have no other option than to take their checks to check cashers that charge up to 10 percent of the check’s value as a fee. That could mean the average student would pay as much as $150. 

The elimination of paper checks also helps reduce fraud from the process.  The Department of Education has estimated that over $600 million dollars last year was lost in scams targeting federal student loan programs.  The scams most often involve creating fake identities to get paper checks. Third-party servicers that offer direct deposit to checking accounts help eliminate this serious problem that burdens American taxpayers. 

Before I got into politics, I was an educator in Mississippi.  I know firsthand the benefits of education and the downsides for those who lack an understanding of the world around them.    If schools and even for-profit student aid servicers can help make higher education more accessible to non-traditional students, then we should rally around these businesses that help them.  Opposing them is not only misguided, it hurts the very students that government officials are hoping to help.

Shows represented Mississippi’s 4^th Congressional District from 1999 to 2003.