The Student Loan Database Shutdown Debacle

Issue Brief

“So, have you decided where you are going to college?” For many of the 1.8 million members of the high school Class of 2007 headed off for higher education, May 1 is the deadline for the most important decision of their young adult lives. This year, though, the federal Department of Education, with help from some elected officials and some unscrupulous loan companies, appears to have really made a mess of things.

This week, right in the homestretch of decision time for the college-bound set, the Department announced that it was locking the National Student Loan Database System (NSLDS) to all loan providers. The database remains locked indefinitely.

As a result of the shutdown, students across the United States, for whom student loan decisions are a crucial part of their college choices, are stuck in limbo. While companies can still gain access to the information they need to make loan decisions through other means, such research is time- and labor-intensive and will likely result in major delays.

Senator Edward M. Kennedy, Chairman of the Senate Education Committee, wrote to Education Secretary Margaret Spellings this past Sunday, urging her to “shut down the database to lenders.” He cited concerns that lenders were using their access to compromise students’ privacy, targeting them with unethical marketing techniques. The database includes sensitive, personal information intended for lenders and colleges to use, with a students’ permission, to confirm and approve loan applications.

“The abrupt and complete closing off of access is severely hampering our members’ ability to serve their borrowers,” said Alexa Marrero of the Education Finance Council, which represents nonprofit organizations that provide student loans. “The information contained in NSLDS is used to counsel borrowers, resolve conflicts regarding enrollment dates, safeguard against fraud, and provide many other day-to-day necessary operational student loan functions”

In order to access the Department of Education’s database, lenders must be logged in as individuals. Senator Kennedy cited two examples of what he called “improper marketing” junk mail by companies misusing the database, one of which offered a free credit card offer to prospective student loan customers.

Private lenders seeking to target students with bogus or unethical offers, meanwhile, could potentially obtain such information from NSLDS, but such “data mining” is slow and expensive, given the structure of the database. Such lenders can also get much, if not all, of this same marketing information from credit bureaus, a common practice with other types of loans.

The Department is currently conducting a review of the database and has not given a timeframe for reopening it to lenders. Meanwhile, students across the nation are waiting on crucial loan decisions as the May 1 deadline for college commitments fast approaches.