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Fontana's Follies and the Downfall of the Student Loan Industry

Stephen Burd - 
November 3, 2009 - 7:30pm

The news that Matteo Fontana, a former high-ranking official at the U.S. Department of Education, has pleaded guilty to charges that he lied to the government about his ownership of stock in a student loan company he was in charge of overseeing provides a timely reminder of why the student loan industry is in such hot water now.

During the Bush administration, the loan industry went virtually unregulated. Top officials at the Education Department did not just look the other way while widespread abuses occurred in the Federal Family Education Loan (FFEL) and private student loan programs. They actually helped lenders skirt federal laws and regulations so the companies could maximize their profits -- often at the expense of students and taxpayers.

The government's case against Fontana provides the most glaring example of the type of conflicts of interest that were rife within a Department heavily staffed by former student loan industry officials. As Higher Ed Watch first revealed in April 2007, Fontana, the general manager of the Financial Partners Division of the agency's Federal Student Aid office, held 10,500 cut-rate insider shares of stock, worth over $100,000 in the parent company of Student Loan Xpress for nearly a year after he joined the Education Department in the fall of 2002. At the time, we did not know whether Fontana had fully disclosed his stock holdings to his superiors at the agency.

According to federal prosecutors, Fontana repeatedly lied about his stock holdings on financial disclosure forms -- falsely claiming, for instance, that he had sold his Student Loan Xpress stock in December 2002. In fact, he didn't sell his stock -- including an additional 1,400 shares he purchased while at the Department -- until 2004 and 2005, for a total of around $219,000.

Federal employees are allowed to own stock in a company but are prohibited from working on issues affecting that company if their holdings exceed $15,000. But that didn't stop Fontana, the prosecutors say. In September 2004, Fontana overruled a decision by a lower-level Education Department employee that would have prevented Student Loan Xpress from expanding its business. Company officials had asked Fontana to intervene, saying in an e-mail that the employee's decision not to bless an arrangement they had forged with the Pennsylvania Higher Education Assistance Authority had left them "at a stand still and losing business by the day." By reversing that decision, Fontana, the prosecutors charged, "did participate personally and substantially as a Government officer and employee" in "a particular matter in which [he] knew he had a financial interest."

While the charges against Fontana are serious, at Higher Ed Watch we know that they are just the tip of the iceberg. Over the last two years, we have learned that under Fontana's leadership, officials in the Financial Partners Division:

  • Turned a blind eye while student loan providers routinely violated a federal law forbidding lenders from providing "illegal inducements" to colleges and financial aid administrators in exchange for getting the schools to steer borrowers their way. Department officials ignored concerns about these "pay for play" practices, even from the agency's own Inspector General and lenders who complained about their competitors' activities.
  • Looked the other way and, in some cases, actually provided assistance and encouragement to lenders as they systematically overcharged the federal government hundreds of millions of dollars in improper 9.5 percent loan subsidy payments. As we have previously reported, officials within the division wrote a series of program review reports from 2005 to 2006 in which they signed off on some non-profit lenders' 9.5 billion practices and, in at least several cases, showed the loan agencies how they could take greater advantage of these inflated subsidies.

Meanwhile, Student Loan Xpress was not the only loan company that directly benefited from its ties to the general manager of the Financial Partners division. Prior to joining the Education Department, Fontana worked at Sallie Mae for 11 years. In 2004, that connection paid huge dividends to the student loan giant and its shareholders.

At the time, Sallie Mae's long-sought goal of becoming a fully-privatized corporation was effectively being held up the Department's Inspector General, who had determined that a lucrative arrangement between the company and USA Funds, the country's largest guaranty agency, violated the law and needed to be severed in order to protect borrowers. The IG argued that the arrangement effectively put the guarantor under Sallie Mae's control, creating twisted incentives that allowed the lender to reap huge profits by growing its borrowers' debt to unmanageable levels. Fontana ultimately overruled the IG -- offering the nonsensical opinion that because the Sallie Mae subsidiaries that helped manage USA Funds had separate tax identification numbers from other parts of the company, they were officially separate entities. Why the former Sallie Mae official was allowed to make ruling of such critical importance to the company has never been clear to us.

The revolving door that existed between the student loan industry and the Department of Education under the Bush administration provided license to lenders to pursue their own self interest with little regard for students or taxpayers. The level of corruption that has since been uncovered makes it abundantly clear that a fundamental overhaul of the federal student loan programs is needed. President Obama and Democratic Congressional leaders clearly recognize that a shift to 100 percent Direct Lending would make the federal loan program much less susceptible to the types of abuses that have plagued it in recent years.

So if loan industry officials are looking for someone to blame for their predicament, they need only to look to themselves and their former cronies at the Department of Education, such as Matteo Fontana, who failed to rein them in and, in fact, enabled them.

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Comments

Fontana

Submitted by Chadman (not verified) on November 4, 2009 - 5:26pm.

I agree that this is the tip of the iceberg, but why leave us hanging? Who knew what during this era and how far up the ladder did it go?

Can you see yet....

Submitted by WI Will (not verified) on November 6, 2009 - 11:46am.

Clearly, the student loan industry had no problem embracing such blatantly self interested, potentially illegal, clearly unethical conduct with only enrichment as their goal. Thus, would it be surprising that student loan interests would hire lobbyists to tell congress that had to take away consumer protections from students because of an alleged (and I submit totally bogus) massive abuse in which there were people allegedly misusing bankruptcy protections to get a free education. Now there are thousands upon thousands of us, living with completely unmanageable debt levels, some having there social security garnished, all in the name of creating a secondary market collecting on defaulted bad student loan debt. So I ask you, I know of thousands of people drowning obscene unconscionable contract situation, yet I have never seen one person identified as this supposedly scamming student who used bankruptcy to finance their education. Wake up. There are people committing suicide over this debt. There are people giving up and diving under the radar, wasting their educations in underemployment because they see no way out of the debt anyway if they see no point to obtaining better employment, taking on more risk or responsibility because it simply is not going to pay. There are thousands and thousands of people forced to live with their parents, forced to forgo families, forced into a former of indentured servitude that is as severe and life limiting as the indentured servitude of the 1700’s. Returning bankruptcy protections really is not going to cost anything new to the economy, the debts that will be discharged are sunk funds, most of it is just interest upon interest, a form of fake money that really does not exist and will never be paid. Yet it is commercial paper that can be bought and sold so wall streeter’s can make their bonuses.

student loans

Submitted by nancy reike (not verified) on November 6, 2009 - 1:52pm.

Regarding the Student Loan Industry.......it is a BUSINESS, and not nor has it been since laws were unconstitutionally changed to suit not only private lenders, but the federal government as well, when George bush Junior took office.
Lobbyists lobbied, politicians got their palms greased and pockets filled........Everyone made out like bandits at our expense........
What they did not have the right to do, and what they did do was change the laws to remove statute of limitations, and bankruptcy rights for students.
Every other loan business in America has retained these rights.
Students were clearly targeted, and now still being taken advantage of
in every way.
Punished as if we are all debtors in medieval English prisons for the rest of our born days.......until we die.......We have no rights.
All the nonsense with income based repayment is....well.......nonsense! They can re-word, re juggle, re-calculate re-design all they want........THEY DID NOT change anything for anyone. Still instead of just being released people are made to pay for 25 years and only if they are working.......an will still pay 3 times what the an amount of the loan is that they took out in origin.
Furthermore if this were truly income based they would not only have let people who work participate........they didn't allow that oh well because for the people who are out of work and have been for years.....and have no income......The agencies and government would have to dismiss......
And well they just can't have that.......can they?
Imagine giving distressed people back their rights.......what a concept.
Rights that were unconstitutionally and therefore illegally taken by laws that were unconstitutionally and therefore illegally changed and enacted for corporate gains......
UNDER THE UNITED STATES CONSTITUTION, WE ARE ALL TO HAVE OUR RIGHTS EQUALLY PROTECTED. Because they removed statute of limitations and bankruptcy rights from student loans, the government clearly and willfully allowed the constitution to be violated........
This is indisputable in any court of law, and yet........it exists!

Return Full Consumer Protections to ALL Student Loan Types

Submitted by Belinda (not verified) on November 6, 2009 - 5:37pm.

WI Will (posted above) has it right. The taxpayer got bamboozled by these crooks while the Department of Education turned a blind eye to the theft. I've experienced the brick wall that goes up as soon as the Department of Education discovers illegal activity that goes on with their lenders and guarantors. They turn a blind eye, shut off communication, and do no investigation. And they hush up the Ombudsman. So, all you see is the tip that the Department of Education lets you see.

In the meantime, the Department of Education lets educated people become enslaved by a broken system FOR LIFE. How can the economy EVER recover when people are paying more and more for higher education for themselves and their children every year? That means they have to go into debt for everything else--their small and startup businesses, cars, homes, clothes, food, insurance, health care, etc. Only bankers could love that. And they reward you for playing the game quietly by giving you access to even more debt. Then they raise the rates on that debt when they know you can't get out of it or handle it.

Saying the taxpayer paid for the borrower's education and therefore the borrower must spend the rest of his or her life to repay the taxpayer is the exact same thing as saying that because we spent $1MM on training the Fort Hood psychiatrist/shooter he has to do what the army tells him. He has to go and kill his own people even though such a mission is based on an admitted lie that got us into war against his people in the first place. Student loan slavery is another bubble about to burst. Borrowers are being patient right now because health care is a matter of life and death and something has to get passed now so we can move on. But this is the last year for patience.