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Don't Put Non-Profit Lenders on a Pedestal
With Congress on the verge of considering legislation to eliminate the Federal Family Education Loan (FFEL) program, it is becoming increasingly clear that lawmakers don't want to go quite as far as the Obama administration proposed. Members of both parties are pushing Congressional leaders to preserve a role for nonprofit lenders in the federal student loan program.
In their battle for survival, non-profit loan agencies have benefited from lawmakers' perception that they are more upstanding than their for-profit peers. At a hearing before the House of Representatives Committee on Education and Labor in May, Rep. Carol Shea-Porter (D-NH) expressed this view when she touted the "well-respected and appreciated status" of the New Hampshire Higher Education Assistance Foundation (NHHEAF). "Doesn't NHHEAF represent exactly the type of services that you would like to retain?" she asked Bob Shireman, the Obama administration's point person on this proposal.
Lobbyists for non-profit lenders have sought to capitalize on the lawmakers' goodwill. As we recently reported, the Education Finance Council, the main advocacy group for these agencies, has floated a proposal that would essentially give each and every one of its members a no-bid contract to service the loans of up to at least 100,000 student loan borrowers in their home states.
But to put non-profit loan providers on a pedestal is to ignore recent history. Regular readers of Higher Ed Watch know that these agencies are no stranger to scandal.
Don't forget that it was a small group of non-profit student loan companies that helped devise the 9.5 student loan scandal -- a scheme to bilk taxpayers of hundreds of millions of dollars by overcharging the government on the subsidy payments they receive for making student loans. These lenders carried out this strategy by improperly growing the volume of loans they claimed eligible for the 9.5 percent guarantee available on federal student loans financed through tax-exempt bonds issued before 1993. This was a goldmine for these agencies in the existing low interest rate environment, with borrower interest rates hovering around 3.5 percent at the time.
When the 9.5 student loan scandal first broke in 2004, the news media and policymakers focused mostly on Nelnet, which was created when Nebraska's nonprofit student loan agency converted to for-profit status. The attention Nelnet received was hardly surprising given that it was the most aggressive participant in the scheme -- increasing the amount of loans for which it sought the 9.5 rate from about $380-million in 2002 to $3.3-billion in 2004. But the Nebraska-based lender came late to the game. Some nonprofit loan agencies, like the Pennsylvania Higher Education Assistance Authority (PHEAA), started growing their 9.5 loan volume as early as 2002.
Between 2001 and the end of 2004, the following agencies were among the most active in growing their 9.5 loan holdings, according to the U.S Department of Education:
- The Kentucky Higher Education Student Loan Corporation (KHESLC): increased its 9.5 volume by 559 percent to $1.1 billion during that period of time.
- The Panhandle Plains Student Loan Center (PPSLC) in Texas: increased its 9.5 volume by 202 percent to $548 million.
- PHEAA: increased its 9.5 volume by 162 percent to $2.3 billion.
- The Iowa Student Loan Liquidity Corporation (ISL), increased its 9.5 volume by 81 percent to $684 million.
Congress began putting more effective restrictions on lenders' 9.5 practices at the end of 2004. But the scandal didn't come to a stop until January 2007 when Education Secretary Margaret Spellings barred lenders from receiving any further 9.5 payments unless they agreed to submit to an independent financial audit. Fourteen nonprofit loan agencies agreed to be audited. The auditors found that the vast majority of the 9.5 claims these lenders submitted in 2006 were improper. While these lenders claimed to collectively hold $4.3 billion in loans eligible for the 9.5 payments, only $1.2 billion of that total were deemed eligible.
Those totals, however, are incomplete as about a half a dozen loan companies that had benefited from the 9.5 program, like the Kentucky agency, chose not to be audited. A recent report from the U.S. Department of Education's Inspector General estimates that KHESLC had overcharged the government more than $80 million in subsidy payments between 2004 and the end of 2006. [Officials with the Kentucky loan agency continue to insist that they did nothing wrong, saying that they complied with all of the Education Department's rules and guidance that were available on 9.5 percent funding at the time.]
Clearly, some non-profit loan companies set out to enrich themselves at the expense of taxpayers and the government. We'll take a closer look at scandals at individual loan agencies later this week. Stay tuned.
Here are a few more
Here are a few more suggested topics for your series on "non-profit" lenders:
* Gross levels of executive compensation among non-profit lenders. (cough, New Hampshire)
* Kickbacks from "non-profit" lenders to various college aid offices. (cough, Pennsylvania)
* Predatory lending by "non-profit" lenders. (cough, Iowa)
Question: How exactly are these guys different from Sallie Mae? I mean other than not having to pay taxes AND getting a higher special allowance payment (i.e. taxpayer subsidy) from the federal government for making the same exact federal loans as Sallie Mae. I guess there's also their access to tax-exempt bond financing. Any other differences?
Correction
We have made a correction to this post as the result of a complaint we received from the Education Finance Council and our own independent research. The original post said that the proposal EFC has offered for reforming the federal student loan program would make its members the predominant servicer in their home states. In reality, the plan would give a little more than one third of the group's members a monopoly over servicing rights in their home states.
THROWING MUD RATHER THAN ADDRESSING THE ISSUE
This blog entry is yet another disservice to anyone seeking objective or even disciplined discussion of student loan issues here. The writer dredges up the old issue of 9.5% loans in a none-too-subtle attempt to discredit the concept that non-profit loan providers might actually have something to contribute to students as they navigate the challenges of financing their education.
Why should private sector entities (beyond the entities recently selected as Direct Loan servicers) remain involved in federal student loans? Rather than answer this myself, I quote from the July 6 letter of 31 House Democrats in a letter to Chairman Miller:
"We are concerned that the abrupt termination of the FFEL program could present several problems to the federal student loan system. The assumption of all responsibility for providing all federally-backed loans to students by the Department of Education Direct Loan (DL) program will present risks of job losses and end the reliable administration and servicing of student loans at the more than 4,000 schools that are not enrolled in the DL program.
"In reviewing various ideas that have been put forward, we believe the President's proposal can be improved and still produce significant budget savings for use in expanding grant aid. We support an approach that maintains aspects of the current student lending program infrastructure that have served students and schools well for decades.
"Incorporating aspects of the existing infrastructure into the revised student loan program will minimize risks of a disruption in the availability of loans to students, minimize the costs borne by schools that would be required to transition from the current private sector-based program to Direct Loans, and maintain retail market competition as a means of promoting innovation and customer service excellence. . . . "
We think these Members of Congress know what they are talking about. They are addressing the real issues rather than attempting to obscure them through mud-slinging.
A copy of the Congressional letter is available through the office of Rep. Stephanie Herseth Sandlin (D-SD) for anyone who would like to read it for themselves.
Rep. Sandlin & Sallie Mae
Hmmmmm....would that be the same Stephanie Herseth Sandlin listed as #38 on this Sallie Mae contribution list?
http://disclosures.house.gov/lc/lcxmlrelease/2008/MM/700072215.xml
Perhaps you could post the names of ALL of the 31 Democrats who signed the letter to Chairman Miller so we can also see how indebted THEY are to Sallie Mae.
I did have a look at Rep. Sandlin's website hoping to find a copy of that letter you mentioned. Not only is the letter not there, there is also no indication that Education is among Rep. Sandlin's list of priorities.
Between the two, direct lending is the private sector option
Funny how people refer to FFELP as "the current private sector-based program" and, in the same breath, are admitting that FFELP is chock-full of state government agencies (which are far less modernized and efficient than federal government on average). In addition, even those not-for-profit entities which are not technically part of a state government agency are not, at least except for student lending discussions, considered to be raging hotbeds of free-market innovation. Regardless of 9.5 subsidies and the new, additional subsidies that not-for-profits have been getting since 2007, they are subsidized by state and federal taxpayers through their exemption from taxes. In addition, they have a lower cost of funds than banks and other for-profit lenders. If anything they should be cross-subsidizing the banks rather than vice versa.
In addition to the lenders, loan holders and secondary market loan entities that are state agencies and non-profits, the guaranty agencies are state agencies and non-profits. More "private sector-based" action going on there? Not at all. Yet, for 15 years direct lending has been using private-sector contractors that have no ties to state government, nor the non-profit sector. Sounds far more private-sector-based than FFELP . . .
People seem almost embarrassed to concede that FFELP is a Lyndon-Johnson-era social welfare program from the "Great Society" package of government programs. The goal of direct lending was to provide the same program features from the standpoint of borrowers and schools but finance it differently. It is strange that people are actually talking about which social welfare program is more "private-sector-oriented."
To take advantage of the best aspects of each program, it was long-thought that the federal government -- due to its lowest cost of capital -- would originate all the loans and then sell them to the private sector which would then take it from there. Yet now it sounds like several lobby groups are requesting just the opposite approach, in other words that the federal education dept continue indefinitely, as it has been authorized to do for over a year, to buy loans where banks, state agencies and non-profits are unable to front-fund or back-fund their student loans.
MORE MUD
Anon attempts to toss more mud into the debate but here is the complete text of the letter to Chairman George Miller of the Education and Labor Committee.
The Honorable George Miller, Chairman
House Committee on Education and Labor
U.S. House of Representatives
2181 Rayburn House Office Building
Washington, D.C. 20515
Dear Chairman Miller:
As Congress considers the future of current federal student loan programs, we are writing to urge you to consider alternatives to ending the Federal Family Education Loan (FFEL) program. Thoughtful proposals have been made to modify the FFEL program in ways that will still allow significant increases in funding for the Pell Grant program.
We are concerned that the abrupt termination of the FFEL program could present several problems to the federal student loan system. The assumption of all responsibility for providing all federally-backed loans to students by the Department of Education Direct Loan (DL) program will present risks of job losses and end the reliable administration and servicing of student loans at more than 4,000 schools that are not enrolled in the DL program.
In reviewing various ideas that have been put forward, we believe the President's proposal can be improved and still produce significant budget savings for use in expanding grant aid. We support an approach that maintains aspects of the current student lending program infrastructure that have served students and schools well for decades.
Incorporating aspects of the existing infrastructure into the revised student loan program will minimize risks of a disruption in the availability of loans to students, minimize the costs borne by schools that would be required to transition from the current private sector-based program to Direct Loans, and maintain retail market competition as a means of promoting innovation and customer service excellence. These suggestions could also significantly reduce the levels of new Treasury borrowing by supporting creation of a private sector-based loan financing facility.
A modified loan program could be modeled on the highly successful Ensuring Continued Access to Student Loans Act approved by Congress twice last year on a fully bipartisan basis. This legislation resulted in all students needing loans last year receiving them despite the economic crisis, and it produced signiicant budget saving for the federal government at the same time.
We hope you will consider our recommendations as the work of your committee on this legislation gets underway. Thank you for leadership on this important issue, and we look forward to working with you.
Sincerely,
Stephanie Herseth Sandlin
Allen Boyd
Michael McMahon
Travis Childers
Chet Edwards
Paul Hodes
Bart Gordon
Collin Peterson
Bob Ethridge
Sanford Bishop
Mike Ross
John Adler
Robert Wexler
Joe Baca
Tim Holden
Bobby Bright
William Lacy Clay
Grace Napolitano
Martin Heinrich
Corrine Brown
Paul Kanjorski
Marion Berry
Dan Boren
Ben Chandler
Gabrielle Giffords
John Salazar
Geregory Meeks
Eric Massa
Al Green
Walt Minnick
Christopher Carney
Also, please note that I suggested interested parties contact Rep. Sandlin's office. I did not indicate it was posted on her website and I apologize to anyone who was confused.
Let me close by suggesting that if you find that any or all of these 31 Democratic House members were bribed into signing this letter, please bring the matter to the attention of the FBI or Justice Department. If you don't find evidence of criminality, I hope you might entertain the possibility that these legislators are raising legitimate concerns.
Lets have less mud-throwing and more examination of the issues.
Thanks for publishing this.
Thanks for posting this. It provides citizens with a handy list of the democrats who are listening to the banks rather than their constitutents, and are likely to vote against the interests of the voters on matters regarding consumer protections for student loans.
Reply to Relevant Critic
"Relevant Critic" suggests following the lead of Congresswoman Herseth Sandlin, but let's look frankly at why her efforts are not likely to restore FFEL to its once-mighty throne.
Stephanie Herseth Sandlin does not have a great deal of credibility in student financial aid matters. The handiwork of the subcommittee she chairs on veterans' education, the Post 9/11 GI Bill, is so poorly written that it will have to be extensively re-worked. Thousands of veterans, in the meantime, will be out the benefits they earned.
The district she represents, South Dakota at-large, also has a dubious record in student financial aid and is no model for the rest of the country. It is the home of Wells Fargo Financial, which took over Educap/Servus from Catherine B. Reynolds. With part of the fortune she made from the sale, Reynolds went on to create Loan-to-Learn in the image of Educap, which the United States Student Association (USSA) accused of being a predatory lender in a complaint filed with the Federal Trade Commission. Loan-to-Learn became a target of NY Attorney General Andrew Cuomo, as did Wells Fargo itself. Wells Fargo, under pressure from Cuomo, agreed to end the practice of operating telephone call-centers posing as employees of a college.
This year, former South Dakota Senator Tom Daschle, Herseth Sandlin's political mentor, withdrew from consideration to be Secretary of Health and Human Services only hours before the Senate Finance Committee was to release a report on Reynolds. Daschle was implicated for not reporting benefits he received from Reynolds, whose wealth came from Wells Fargo in South Dakota. Wells Fargo is a substantial contributor to Congresswoman Herseth Sandlin's political campaigns.
That's not all that's amiss in South Dakota. The South Dakota student loan secondary market made improper claims against federal taxpayers in the 9.5% guaranteed loan scandal. It chose not to get an independent audit to verify if any of the claims were legal.
Relevant Critic asks readers, if they have evidence of bribery among any of the signatories to the letter in question, to report it to the FBI. This is silly, as is his attempt to accuse those who identify wrongdoing as mudslingers. There is plenty of evidence of wrongdoing and numerous state and federal agencies have been trying to clean it up. That is what Congress must do as well.
To Bob, Arne, Barack: Drain the Higher Education Swamp- PLEASE
Hear, Hear!
Everything mentioned above cries out for investigation...PLUS:
Consider that under Bush, most of the people running FSA were (and are) former executives from Sallie Mae, NCHELP, or other lending entities.
Consider FSA's repeated disregard of IG warnings about potential for conflicts of interest. Only through the intrepid research of certain, outside, "good guys" :) did the fact that the manager of the oversight office (Fiancial Partners) was HOLDING STOCK in one of the very companies he was charged with overseeing become known. Even then, FSA kept this individual (a former Sallie Mae exec) on the payroll, sucking $10,000 (or larger) paychecks from ED every month from home for OVER A YEAR before he quietly left with an UNDISCLOSED severance package!
Consider any number of Scandals that broke in 2007... problems that occured under the "watchful eye" of the student loan executives-turned-FSA Directors.
Consider the recent discovery that the people running the Ombudsman office, and the people collecting defaulted student loan debt for ACS were THE SAME COMPANY, ( http://www.insidehighered.com/news/2009/07/07/ombuds )
Consider generally the culture of arrogance, laziness, disregard for borrowers, "partnerships" with banks, guarantors, etc., AND OTHER traits anathema to the student's (and taxpayers) interests that came to define FSA in recent years.
Finally, consider that many, if not most of these student lending exzecs are STILL THERE, calling the shots.
The citizens didn't vote for more of the same last fall.
I, and millions of other citizens trapped by the uniquely predatory lending system, voted for sweeping change within FSA- for head to toe HOUSE CLEANING, and above all, for transparency, accountability, and properly motivated (I.e., not corrupt) staff. Given the recent "blow off" response to the Ombudsman conflict, it is clear that CYA is still the principle guiding FSA, and that this will trump all others as long as the old guard is hanging around.
There are a lot of talented, well educated people who would jump at the chance to work at FSA- people who would fight for the borrowers, not the banks. They deserve a chance to do exactly that.
"millions of other
"millions of other citizens"
Really? millions? The problem with alan collinge as a student-borrower advocate is that every valid point he raises gets grossly undermined by wildly unsubstantiated claims. Yes, student loan debt is burdensome (gee, couldn't live on the Upper East side when I graduated) but for families that did not save anything for college, or students that opt for expensive private versus low-cost public education, student loans provide the needed financing. And for the true millions that borrowed responsibly and then honored their promissory commitments, student loans served the purpose appropriately. For Alan and a few thousand of his minions, they obviously did not.
To Huckster
Yes. Really. Millions.
I say "Millions" because there are upwards of 5 million defaulted loans on record at the Department of Education.
Name one "wildly unsubstantiated claim" that I have made, Huckster. Just one.
...Where did he go?
Alan, you're spinning tall tales..
The vast majority of those "5 million" defaulted loans were rehabilitaed and then resumed normal repayment patterns, or some type of alternative payment plan. That is different from you, you NEVER REPAID YOUR LOAN. You and your 2,000 minions (per the spreadsheet on your website) think by crying out loud you can evade your promissory responsibilities. The other 4.99 million borrowers that defaulted re-adjusted their household budget, and honored their commitment.
No matter how many times, or in whatever different forum you say it, YOU ARE NOT THE RULE. YOU ARE THE EXCEPTION.
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