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A Failure of Leadership
By now it's hardly news that the U.S Department of Education has failed, over the last eight years, to provide adequate oversight over the lenders and guaranty agencies that participate in the Federal Family Education Loan (FFEL) program. Perhaps that explains why a new report on this subject from the Department's Inspector General (IG) received little attention, getting only the briefest of mentions in the trade publications that follow the agency's every move. 
But that's unfortunate because the report provides the most vivid picture to date of how little the previous leaders of the agency's Federal Student Aid (FSA) office cared about oversight, and how they put their allegiances to the student loan industry over their responsibility to safeguard the integrity of the federal student loan programs.
The report provides numerous examples of how the Financial Partners division of FSA, which is in charge of monitoring lenders and guarantors, fell down on the job. Take, for example, the fact that the division's leaders:
- Assigned only one person to review the hundreds of compliance audit reports that lenders and guarantors submit to the Department each year.
- Regularly allowed program participants that were subject to review "to determine the liability" they owed the Department, and had "no formal procedure" to verify the results of the loan companies' calculations.
- Did not consult with the Department's Office of Postsecondary Education or Office of General Counsel before issuing program review reports that dealt with "sensitive" and "political" issues to ensure that the findings in these reports were consistent with the Higher Education Act and the Department's regulations.
The IG particularly takes issue with FSA's failure to target its program reviews on those lenders and guarantors that posed the greatest risk to the FFEL program. While FSA conducted risk assessments on lenders and guarantors, it did not use the results to decide which FFEL participants to investigate, the report states. Several program reviewers told the IG that these decisions were "political not programmatic." [According to the "review specialists," these determinations were made at the highest levels of FSA without their input. Over the last few years, they said they have been shut out of the decision-making process.]
In fact, the IG found that the Financial Partners division has focused its program reviews "on small lenders that pose limited risks" to the government instead of the biggest players that dominate the program. Noting that the top 10 lenders hold 72 percent of the outstanding guaranteed loan volume, the IG questions why these loan providers do not "merit more focus," considering "their overall financial impact on the FFEL program."
Perhaps the most damning part of the report deals with an exchange that the IG had with a program reviewer:
"The review specialist questioned why there are not more frequent program reviews of a particular large lender. According to the review specialist, "they (FSA managers) do not want us to do the work. All our bosses are from [the lender] and that is why we do not go to [the lender] very often."
At Higher Ed Watch, we're pretty sure we know which giant loan company they're talking about.
The report also includes several examples in which FSA leaders overrode decisions made by review specialists or limited their ability to effectively carry out their investigations. In one such case, a reviewer wrote a draft program review report about how a loan servicing company was "taking adverse actions against borrowers without issuing a final determination letter and/or allowing borrowers to respond to the determination letter," as required by law. While that specialist was on vacation, the report was released in his name, but "all of the findings and observations in the draft report had been removed."
In another case, FSA managers refused to allow a review team to seek additional documents -- primarily marketing materials -- from a lender even though it felt they were vital to determining whether the company had violated the law by offering illegal inducements to colleges to win their student loan business.
These cases are similar to ones that the IG exposed in a 2006 publication that blasted the Financial Partners division for taking its "partnership approach" with lenders and guarantors too far. For example, in that report, the IG found that a program reviewer had suggested to a guaranty agency different accounting methods it could use to reduce its liability to the government. It was also revealed that a Financial Partners Regional Director had leaked "internal pre-decisional documents" to a non-profit lender (the New Mexico Educational Assistance Foundation). That lender then tried to use the documents "in an unsuccessful attempt to obtain a federal court order to block the issuance of" an Inspector General's audit report on the agency.
The IG's latest report also includes a glaring example of how FSA has allowed its close ties to the loan industry to put the FFEL program at risk. According to the report, guaranty agencies were upset about the methodology the Department was using to assess their financial strength. These calculations showed that many guarantors had allowed their reserve funds (the federal money they use to reimburse lenders for defaulted loans and to prevent borrowers from going into default) to drop to dangerously low levels, putting them in danger of collapse. The agencies were apparently particularly unhappy that this information was available to the public.
Officials at FSA caved to these concerns. Instead of requiring the struggling guarantors to take steps to improve their financial viability as one would expect, Department officials agreed to change the methodology to one that put the guarantors in a more positive light. As a result, the IG states, "the financial conditions of guaranty agencies" are now "overstated" and those that may be in danger of becoming insolvent are not being monitored closely enough.
As the report illustrates, the revolving door between the Department of Education and the student loan industry has allowed widespread abuses to occur in the FFEL program. At Higher Ed Watch, we have called on the Obama administration to close that door once and for all. To date, some of the same former loan industry officials who made the decisions that the IG faults appear to still be in place.
If the Obama administration really wants to bring change the culture at the Department of Education, FSA is certainly a good place to start.
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Surprised?
There's nothing in this report that is surprising. This is a corrupt system that must go.
Sallie, Nelnet, all of them are not needed. They bring no value to the process. What they do is bring value to the Financial Aid Directors/Administrators - the membership of the NASFAA. Theresa Shaw was a clown of a COO for the DOE. Her lackies were taking money - that's not a surprise. Margaret Spellings put the foxes in charge of the hen house, the outcome is not a surprise.
The positive of all this being that public sentiment is so against the Sallie Mae's and Nelnets of the world, we actually have a chance at reform. We can thank Albert Lord for providing such incredibly bad optics as well as former NASFAA members Frishberg, Thomas, Charlow, Burt, Cathie, Lehmann and Pinch. If you don't know them, simply google the name and add alongside the words "student loan" and "scandal" into the search field.
In a recent letter encouraging support to keep the corrupt status quo, Sallie Mae addressed their "customers." They believe their customers are the Financial Aid departments as this is to whom their "customer" letters were addressed. As we saw from the scandals of 2007, the cozy relationship between financial aid departments and the private lenders was far, far, more extensive than we believed.
We, the students, parents, and graduates are the customers. We are the ones with the loans and payments. What the Financial Aid community thinks is irrelevant and rooted in self interest.
Get rid of the FFELP!
ED is incapable of managing a 100% DL system
I'm rather surprised that this issue has not garnered more attention (and I'm not talking about the revolving door, which completely misses the broader point). Not only has FSA been on GAO's high risk list in the past but a look at OMB's PART assessments of FSA and the Department of Education in general show that these guys have historically over-promised and under-delivered. Why should anyone believe that claims about potential cost savings from shifting to 100% direct lending would ever really come to pass? Why should anyone believe that the oversight and management problems that federal watchdogs have repeatedly identified (ED OIG, GAO and OMB) will suddenly just go away?
I have not seen anything to suggest that structural changes within the Department are underway. If ED can't effectively manage the system currently in place (and again, there is lots of government-issued evidence to support this), then why should we believe that they'll be able to manage a system that's three times as large?
By ditching the FFEL
By ditching the FFEL program, the Obama administration will "reform and simplify the programs so that the Department isn't beholden to former loan industry staff for key oversight and policy decisions", as Ben Miller has previously suggested in "Advice for Obama: Stop the Revolving Door" http://www.newamerica.net/blog/higher-ed-watch/2008/advice-obama-stop-re...
Kill FFEL, then put a stick in the revolving door by making a clean sweep of the remaining crooks at FSA. With honest, dedicated government employees in place, why wouldn't FSA do a good job administering the 100% DL program? They won't have anything else to keep them busy once the cozy lender relationships are a non-issue.
Think of it this way
If somebody doesn't know how to drive a car then giving them an automatic transmission rather than a manual one will simplify things but it won't change the fact that the person behind the wheel doesn't know how to drive and shouldn't be trusted to run the machinery.
One can make the student loan "car" simpler to operate; there's no denying that. All I'm saying is that if you let FSA/ED drive the car, the risk of an accident remains extremely high. And at the end of the day, an accident is what everyone related to the student lending industry, be it students, schools or lenders, is trying to avoid.
Frankly I'm just not comfortable believing that managing $60 billion plus in new originations every year is something that ED can do; their track record, as measured by GAO, OMB and ED OIG says otherwise.
Ditching
Commentator Ditching's paranoid and extreme rules against the department's hiring experienced individuals from the financial services industry to run direct lending is a recipe for disaster.
Maybe Michael Brown should run direct lending? No conficts, there. (No competence either.)
I feel all good inside.
I'm Living Proof
FSA isn't just about protecting the student loan companies. It's also about protecting the collection agencies working for ED.
I have been embroiled for the past six months in a mess with ED/FSA in regard to misbehavior on the part of one of their beggar-bounty hunter collection agencies, Premiere Credit, which in turn is owned by our friends at Nelnet.
For over ten years, my friends, family, coworkers, neighbors, and I have been harassed by an endless procession of bounty hunters (NCO, Van Ru, GRC, Pioneer, Allied Interstate, et al), all of whom are ready to insult me and my character but unwilling to provide any documentation of my alleged student loan "debt."
Most recently, I sent to ED procurement in Atlanta a self-addressed, stamped envelope with enough postage for certified mail, return receipt requested so that I would finally receive copies of promissory notes from my alleged student debt. I was told that I had already received them "numerous times."
The NSLDS, the database of all federal student loans, was built in 1995 by the eSystems division of the Raytheon Corporation. To this day, records remain a mess, especially for those of us who graduated college decades ago. Nevertheless, ED, FSA, OPSE, and the beggar-bounty hunters who "qualify" people for administrative wage garnishment, tax refund intercept, and Social Security garnishment all rely on this system.
The venom, bile, and viciousness with which these often-unsubstantiated debts are pursued will, in the final analysis, some day be seen in the same light as the communist witch hunts of the 1950's. It isn't just about the money. THere is a deep-seated hatred of an educated middle class that has been fostered over the past 20 years that essentially leads to permanent indentured servitude for anyone who has a delinquent or defaulted student debt.
In the midst of a national healthcare crisis, whereby 50 million people have no health coverage, the US Department of Health and Human Services sees fit to squander money on a special website (defaulteddocs.dhhs.gov) that publicly shames doctors and other healthcare providers who have defaulted on their student loans.
And so it goes
What happened to all the Sallie Mae people who ran Federal Student Aid? Terri Shaw, Matteo Fontano, Marianna OBrian and others hopped over to ECMC (Education Credit Management Corp) and are doing business with Federal Student Aid. Stock scandals, taking taxpayer salaries and giving themselves bonus payments off the federal payroll at 50, 60 or 70 thousand a year they are still in business. Are there other Salle Mae and FFEL people at Federal Student Aid or are they gone? Michael Sutphin, Linda Holland, Brian Shaw, Deborah Bairdain, Gerold Schubert, Kristy Hansen, Molly Wyatt, Neil Sattler, Harry Feely.
Leadership
Bill Taggart was hired to head up Federal Student Aid. Let's hope he starts by cleaning house. The agency is still being run by Salle Mae. John Fare from Salle Mae is the CIO and Terri Shaw's closest colleague. New faces are long overdue. Or just shut the place down.