The Ticks and Leeches of Higher Education

Student loan lenders, investment firms and banks feed off higher education and its students, much like ticks and leeches who feed on the blood of other animals—slowly infecting and weakening the body. These industries act as an extraction pipeline by charging higher and higher interest rates and fees on student loans, overseeing investments and providing debit services at an unsustainable rate. The compounding effect of these industries is deleterious to the health of higher education and its ability to serve students.

The Federal Student Aid FY2024 Annual Report from the U.S. Department of Education illuminates the issues. The U.S. student loan market was valued at approximately $2.8 trillion in 2024, with federal loans comprising roughly 90 percent of the total portfolio. The Federal Student Aid office, the primary federal lender, paid approximately $2 billion to legacy Federal Family Education Loan program lenders in FY2024 for interest and special allowance subsidies. Federal Direct loan interest rates rose to 6.53 percent for undergraduates and 8.08 percent for graduate students in 2024–25, up sharply from the pandemic-era low of 2.75 percent in 2020–21.

Private student loans constitute a smaller but growing segment; the private market was valued at approximately $12 billion and is projected to reach $21 billion by 2032 at a 6.5 percent compound annual growth rate (CAGR). Major private lenders include Sallie Mae, Citizens Bank, SoFi, Earnest and College Ave. Sallie Mae, the largest private lender, reported net revenue of approximately $1.6 billion in fiscal 2023. The overall student loan market is projected to grow at approximately 8-9 percent CAGR through 2033, powered by rising borrowing demand and the accumulated cost burden on students rather than attributing growth solely to rising tuition.

Investment companies are among the largest endowment managers for colleges and universities. Firms such as BlackRock, Vanguard, Fidelity and TIAA-CREF manage substantial portions of higher education endowment assets. Historically, TIAA has been the leading retirement and investment provider specifically for the higher education workforce.

The endowment managers make their money by charging management and administrative fees (generally between 0.35 and 2 percent of an endowment’s total asset value annually). In some cases where endowments are heavily invested in hedge funds and private equity, managers may also extract incentive fees of 15 to 20 percent of investment profits. Fees vary significantly depending on the size of the endowment, asset classes and whether funds are managed internally or outsourced.

Most colleges and universities target at least a 7 to 9 percent annual return on investments to ensure an annual available spend (3 to 6 percent), which impacts the operating budget, with the remaining percentage returned to the corpus to ensure growth. In doing so, the amount paid to management firms can be massive.

On May 22, 2024, Alex Richwine and Dean Baker wrote, “University Endowment Returns Don’t Measure Up” for the Center for Economic and Policy Research. They explained what’s known as the Yale model, pioneered in the 1980s by the late Yale CFO David Swensen, who championed increased investments in hedge funds and private equity: “Swensen was adamant about tailoring the endowment approach to the particular institution. He warned that many endowment funds that try to imitate Yale will ‘end up with bloated, fee-driven investment management businesses,’ and that is precisely what happened.”

Emphasizing the problem of fees related to the Yale model, the authors note, “The relationship of today’s large endowment funds to hedge funds should raise serious questions. The hedge funds that help manage many endowment portfolios charge exorbitant fees, and it is not clear their services are worth the bill.”

“A simple example will illustrate the stakes. If a university hands over $1 billion of its endowment to be managed by a hedge fund with a 1.5 percent charge plus performance fees, it is giving away $15 million a year to someone who may be losing the endowment money.”

Finally, how do banks and private lenders prey on higher education and students? Three main avenues include student loans and securitization, campus partnerships and student accounts, and institutional services and debit services, as explained by a ProtectBorrowers.org article. After federal loans and grants, institutional aid (scholarships), and family contributions, students often have funding gaps, which are filled by private lenders, who charge higher interest rates than federal loans and charge origination fees. The lender often bundles loans and sells student loan asset–backed securities, in which it profits from underwriting and management fees.

In addition, Protect Borrowers (formerly the Student Borrower Protection Center) explains, while banks often pay universities royalties for exclusive rights to market credit cards, checking accounts and student debit cards, the cost is borne by students. Some universities outsource financial aid refunds to partner banks. Students who use these linked accounts frequently incur overdraft fees, monthly maintenance fees and out-of-network ATM fees. Every time a student swipes their co-branded debit or credit card, the bank collects a percentage of the transaction (interchange fee) from the merchant.

Additionally, investment banks underwrite municipal bonds to fund construction projects such as dormitories, stadiums and academic centers. Banks profit by taking a cut for facilitating the debt and selling interest rate swaps to the universities. Banks also handle the day-to-day liquidity of colleges and universities by processing deposits (e.g., student payments and contributions) and payments (e.g., vendor payments), for which the banks charge fees.

The banking industry is profiting, in part, from higher education. The Federal Deposit Insurance Corporation’s Quarterly Banking Profile: Fourth Quarter 2024 reported that FDIC-insured banks and savings institutions reported full-year 2024 net income of $268.2 billion, a 5.6 percent increase from 2023’s $256.9 billion. The industry’s return on assets increased to 1.12 percent for 2024, up three basis points from 2023. The American Bankers Association Banking Journal’s “Quarterly Banking Profile: Banking net income nearly $257B in 2023,” published on March 7, 2024, highlights the gains: Net operating revenue for the banking sector exceeded $1 trillion for the first time on record in 2023.

Philanthropic giving by corporations like JPMorgan Chase, Bank of America, Wells Fargo and Citigroup’s foundations typically supports program enhancements, event sponsorships, capital projects, research initiatives and some scholarships. Although valuable, these arguably transactional gifts (corporations receive material benefits, such as recognition, naming rights and research results that can be monetized) may not materially affect college and university operating budgets. First, the gift is often restricted to a single purpose. Second, gifts can add to the operating budget because they may be one-time, while the cost to sustain a program or facility long term is borne by the institution.

In service of the public good, higher education and its advocates must combat industry practices that are not in the best interest of affordable and accessible education. The effects of the industries feeding on the blood of higher education and its students are not always as visible as those that overgraze (fixed costs related like utilities, food and insurance), take over like kudzu (workforce development), or eat away at the budget like termites (unfunded mandates) but they represent a part of the funding problems higher education faces. Until everyone understands what’s really killing higher education, there is no hope of saving it.