Business: Student-Loan Mess

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One case: Los Angeles-based West Coast Schools recruited mostly black and Chicano students—"because that's where the gravy is," as President Fred Peters told his exwife, according to subcommittee testimony. It then sold nearly $5.4 million in federally insured loans to financial institutions for cash, leaving the institutions to dun dropouts like Ponce for the money or collect from the Government. The Senators heard testimony that at least $312,000 of the school's money found its way into Peters' personal accounts. W.C.S. folded in 1973. Peters was excused from testifying because of ill health. His lawyer told TIME that Peters feels "he is a victim of a gigantic bureaucracy."

Another 5% of the losses are caused by students who, like Dr. Ward, declare bankruptcy shortly after finishing their education. In most cases the bankruptcies are quite legal: a recent graduate may have very high future earning potential, but his assets immediately after leaving school may well total less than the student loan and other debts, thus fulfilling the legal requirements for bankruptcy. Though the bankruptcy problem is small compared with the one represented by privately owned schools, it is growing. In California, Federal Bankruptcy Judge Robert Hughes estimates that as many as 20% of all personal bankruptcy claims are filed by student borrowers.

Many defaults, of course, come about because, at a time of high unemployment, new graduates either cannot find jobs or earn too little to pay off their loans. Still, the default rate obviously indicates lax Government administration of FISL. John J. Walsh, an investigator for the subcommittee, reported to the Senators that he found files on student loans strewn all over some HEW regional offices. HEW officials told the Senators that they have not kept track of the total number of loans outstanding, much less the amount of insured loans at any one school, or whether any particular student borrower is still in class.

HEW now is belatedly tightening up. It has charged nine schools with violations of loan-program rules, begun testing in California a computerized system of monitoring the status of loans, added 70 new field investigators, and established a staff of eleven people to keep a close eye on lenders who have outrageous default records. In addition, several bills before Congress would forbid students to declare bankruptcy shortly after graduation simply because their student loans exceed their assets. The Nunn subcommittee is expected to recommend prohibiting many schools from making Government-guaranteed student loans, and making it a federal crime for a school to falsify data to obtain grants and loans, or to divert such funds for personal use.

The efforts come none too soon. Says Howard Feldman, chief counsel of the subcommitee: "Unless we reform the program, conservatives, liberals, everyone is going to take a look at that half-billion-dollar default and say, 'Let's get rid of the whole goddam program!'' That would be a tragedy for needy and well-intentioned students—still the great majority—who fully intend to repay their loans, and for the society that needs their educated skills.