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Attention Congress: Don’t Reward Non-Profit Student Loan Wrongdoing

At Higher Ed Watch, we have made clear our opposition to a provision in the pending student loan reform legislation that would provide a set aside for all existing non-profit student loan agencies to service up to 100,000 borrowers in their home states. But we have also said that if Democratic Congressional leaders insist on keeping the provision in the bill -- because they believe that they can't pass a bill without it -- they should at least bar from participation non-profit lenders that have broken the law or acted in ways that are harmful to students.

Case in point: the Iowa Student Loan Liquidity Corporation (ISL), the state-affiliated non-profit student loan provider. As both federal and state investigations have shown, ISL's aggressive pursuit of market share and financial rewards over the last decade has been damaging to students and taxpayers alike. According to these investigations, the loan agency has done the following:

Pursued a Concerted Strategy to Steer Borrowers to its Most Expensive Private Loan Products

In a report released a year ago, Iowa Attorney General Thomas Miller found that the agency's aggressive marketing practices and its cozy relationships with area colleges pushed students to take on unnecessarily high levels of expensive private student loan debt. According to the report, ISL provided kickbacks to colleges that recommended its private "Iowa Partnership Loans" to their students. The agency said that the payments, which totaled about $1.5 million to 50 colleges over five years, were meant to reimburse schools for the cost of administering the private loan program. But as the report points out, the types of activities for which the colleges were reimbursed -- such as "counseling borrowers, certifying loan applications, disbursing loans" -- are "all functions that are "normally considered part of a college's administrative capabilities."

The report also found that the loan agency gave financial rewards to their employees based on the number of private loan borrowers they secured; paid bonuses to staff members at the college access centers they managed based on the number of borrowers they brought in; falsely advertised its private loan products as the "lowest cost" options available; and routinely failed to advise students and their families to exhaust their federal student loan eligibility before taking out private loans.

The attorney general said that his findings were particularly disturbing because Iowa college students graduate with the highest level of debt in the nation. "The future of many Iowa students is burdened by a mountain of student loan debt," Miller wrote. "It appears that ISL unduly elevated the goals of increasing its competitive advantage, market share, and loan portfolio size over its mission of always striving to do the best for its student borrowers.

Provided Cash Inducements to Colleges to Win Federal Student Loan Consolidation Business

As we wrote yesterday, the Department of Education recently ordered ISL to repay the federal government nearly $16 million after finding that it had violated a federal law that prohibits lenders from providing "illegal inducements" to colleges to win federal student loan business on the campuses.

At issue is an "affinity agreement" that ISL officials forged with Iowa State University's alumni association in June 2006 in order to get it to exclusively market their federal consolidation loan product to its members. Under the deal, ISL agreed to pay the association $35,000 a year, and to make additional payments based on the number of completed consolidation loan applications generated through the group's promotional efforts. For example, if the association was able to bring in 300 and 399 completed applications a year, it would be paid $25 per application. But if it was able to bring in 600 or more, it would get $75 per application.

ISL officials have denied any wrongdoing. They say that federal regulations that were in place at the time allowed them to pay colleges a reasonable fee for administering their loans. But in its program review report on the case, the Education Department rejected that argument out of hand. "Based on the documentation reviewed, ISL's payments exceeded reasonable compensation for costs and were based on loan volume in violation" of federal law, the Department's investigators wrote. Because the violations were so "serious," the report says, further penalties to the loan agency are being considered, including its possible termination from the student loan program.

Engaged in a Scheme to Bilk Taxpayers by Overcharging the Federal Government

ISL was one of a small group of nonprofit lenders (and some for-profit ones too) that took part in a strategy to improperly grow the volume of federal student loans that they claimed were eligible for the 9.5 percent subsidy rate available from the government on loans financed through tax-exempt bonds issued before 1993. This was a goldmine for lenders in the existing low interest rate environment (at the time, the borrower interest rate on regular loans hovered around 3.5 percent). They accomplished this scheme by transferring loans that qualified for the 9.5 subsidy payment to other financing vehicles and recycling the proceeds into new loans that they claimed were then eligible for the subsidy. These lenders then repeated this process over and over again.

Between 2001 and 2004, the Iowa student loan agency grew its 9.5 student loan holdings by 81 percent to $684 million. A 2007 audit of the agency, conducted on behalf of the U.S. Department of Education, revealed that in 2006 ISL claimed the 9.5 rate on over $300 million of loans not eligible for the subsidies.

What's more, ISL officials continued to pursue this scheme of growing its 9.5 loan holdings even after Congress in 2004 expressly prohibited loan companies from doing so. The cavalier efforts earned an unusually strong rebuke in January 2008 from Bush Administration appointees at the U.S. Department of Education, who rejected the agency's arguments that they had acted legally because the new law was not clear enough. "By failing to seek and obtain clarification, [ISL] abdicated its responsibilities and cannot now be excused from the consequences," David Dunn, the education secretary's chief of staff at the time, wrote to the agency in January 2008.

ISL officials continued to fight the matter until last month, when the Department of Education ordered the agency to return $2.4 million in overpayments it received on 9.5 loans between 2004 and 2006. According to The Des Moines Register, officials with the Iowa loan agency have agreed to repay the money.

Conclusion

In an internal agency e-mail obtained by the Des Moines newspaper in 2007, Steve McCullough, ISL's chief executive officer, wrote that his aim was to achieve "hypergrowth" by pursuing "an aggressive, offensive strategy to bring in new loan volume." In carrying out that mission, the agency lost track of its tax exempt public purpose mission, and instead put students and taxpayers in harm's way.

Does an agency that has operated in this manner deserve a no-bid servicing contract? We certainly don't think so.