Higher Ed Watch

Happy Thanksgiving

Ed Policy — Tue, 24 Nov 2009 15:33:00 -0500

At Higher Ed Watch, we are off this week to celebrate Thanksgiving, and help ourselves to plenty of turkey, cranberry sauce, stuffing, and pumpkin pie. There's plenty to be thankful for this year, but mostly we're thankful for our loyal and spirited readership. Have a great holiday!

Greetings from the Financial Aid Office!

Ed Policy — Thu, 19 Nov 2009 16:30:00 -0500

[Last week, we reported (see here and here) on the fact that some of the student loan industry's most fervent supporters in the financial aid world are potentially putting their schools and students at risk by refusing to take even the initial steps to prepare for a possible shift to direct lending next fall. Since then, we've been wondering how these aid directors would explain their inaction to students. So, after hearing the comments that financial aid administrators and lenders made at last week's Lexington Institute event and on the Finaid-L listserv, we decided to write up a fictional account of how these aid officials might explain themselves. We hope you enjoy it.]

Dear Students,

As you may have heard, we have recently taken action that could potentially disrupt your ability to obtain federal student loans next fall. But we want to assure you that there is absolutely nothing to worry about. Our good friends in the student loan industry have a sure-fire strategy in place to stop any efforts in Washington that would force us to change the way we do business. And for that we're very grateful because we can't imagine doing things any other way.

Here's some background. Last month, we received a letter from U.S Secretary of Education Arne Duncan urging us to take at least the initial steps to become "Direct Loan-ready" for the 2010-11 academic year. As you may know, the Obama administration has proposed ending the Federal Family Education Loan (FFEL) program in favor of 100 percent direct lending. Under the plan, tens of billions of dollars in savings from making the switch, and eliminating lender subsidies, would be used to provide a substantial boost in spending on Pell Grants, which go to the most financially needy students. This may sound good but it won't help us much because we don't enroll many of those students. In other words, the upper middle income students we predominantly serve will be left out in the cold!

Now it's not exactly clear where this legislation is headed. As of now the measure appears to be stalled in the Senate, where the never-ending health care debate drags on. But even if this bill doesn't go anywhere, we won't be out of the woods. That's because a federal law that has been propping up the FFEL program over the last year and half -- known as ECASLA -- is set to expire in July and neither the Obama administration nor Congressional Democrats want to extend it. If lenders can't get access to government financing to make federal student loans, the FFEL program will be sunk. At least that's the excuse Secretary Duncan is giving us for why we need to be prepared to flip the switch. But we told him to take a hike. That's a lot of nerve, telling us how to run a federal program that benefits students.

You see we used to be in the Direct Loan program more than a dozen years ago, and the program ran into some administrative difficulties. At the same time, Republican Congressional leaders tried to kill direct lending, and when that failed, they did everything they could to put it at a competitive disadvantage to FFEL, including preventing the U.S Department of Education from being able to market the program to schools and preserving generous subsidies for lenders that they used to woo financial aid offices like ours. So it is not surprising that we had lenders literally banging down our doors each week trying to convince us to switch back to FFEL. Some of the offers they made were just too good to pass up, and they are worth holding out for despite what the Obama administration says! [Enough said about that. We don't want to get into any details just in case that jerk Cuomo gets hold of this letter -- no offense intended, of course, Mr. Attorney General.]

Yes, we know that some of our colleagues in the financial aid world have made the switch to direct lending and say that it went much more smoothly than they had imagined. The problems we experienced a dozen years ago have long since been fixed, they say, and in fact are ancient history. But do we really want to take that risk? Our lender friends -- at least those that in the student loan business because of the help they received as a result of ECASLA -- say we shouldn't. Because after all, what has the government ever done right?

So please don't be worried about your loans because there's really no need for concern. Our friends in the loan industry assure us that they can spread enough fear and confusion on Capitol Hill to convince Congress that a switch to 100 percent direct lending would lead to a catastrophic breakdown. But in order to help them, we must do our part. If enough colleges like us dig in their heels, and refuse to take even the most rudimentary steps to prepare, we may be able to help lenders scare lawmakers away from enacting any real student loan reform and maybe even get them to extend ECASLA for another year.

So have no fear. This is definitely a gamble worth taking. Because if there's anything the loan industry does well, it's spreading fear and confusion. What else do you think they hire those high-priced lobbying and communication firms to do?

Sincerely,

Your trusty financial aid director

Demand Value in Higher Education

Michael Dannenberg — Tue, 17 Nov 2009 16:00:00 -0500

[Editor's Note: A version of this post ran yesterday in the Albany Times Union]

The College Board reports tuition is up nine percent this year in inflation-adjusted terms, despite declining prices throughout the economy and stagnant median family income. Parents want to know why the sharp increase and why college costs so much in the first place.

The answer, in a word, is demand. Until we channel higher education demand in a more rational direction, tuition will continue to outpace inflation, grant aid, and family income.

Higher Ed Watch readers know that demand isn't the only factor driving tuition. College supply is relatively limited. Higher education is slow to embrace productivity gains seen elsewhere in the economy. Most important, states cut higher education funding to balance budgets, and colleges backfill those cuts by hiking tuition. Banks act as enablers, supplying big student loans to anyone willing to borrow.

But at its base, tuition rises because suppliers, including those who finance them, take advantage of high, under-informed, and often irrational consumer demand. As families shop colleges this fall, they would be well served to focus on value. The Department of Education can help by protecting consumers from the worst deals. We need a lemon law for colleges that cost too much and deliver too little.

Families are limited in their ability to assess the value of most colleges. Popular guides like US News & World Report rank only the top 10 percent of schools and focus on inputs like class size instead of outcomes like how much students learn. Families therefore rely on proxies, including the newness of non-academic facilities like residence halls and athletic fields, advertising, and price. It's the Neiman Marcus phenomenon. If it costs more, it must be better. Wrong.

It's not easy to compare colleges in terms of student learning because there isn't comparative testing at the post-secondary education level. But we can compare schools according to what consumers most want out of higher education: good jobs and financial security.

Congress recently required colleges to report average net price after financial aid. A private web site, www.payscale.com, lists average starting and mid-career salaries for graduates of more than 300 institutions of higher education. And the Education Department knows the percentage of students leaving each college who default on their student loans. With that information and more like it, Secretary Duncan can construct a "higher education p/e ratio," price of college to expected future earnings, for each school.

Consider SUNY Binghamton and Niagara University, for example, both in upstate New York. From a purely financial standpoint, Binghamton is a great deal. Its sticker price is approximately $17,000 a year, and graduates earn a median income of $52,000 within five years of separation, according to Payscale.com.

In contrast, Niagara's sticker price is $35,000 a year, and graduates earn a median starting income of less than $38,000 within five years of separation.

The lemons tend to be in the for-profit trade school sector. Not all trade schools are poor options, but we should make the really risky ones warn consumers in all marketing materials, just like politicians have to say they approve campaign commercials.

"Warning: One in three Acme College borrowers defaults on a student loan within three years of separation from Acme College. Acme graduates earn an average starting salary of $22,000 a year. Be careful before assuming substantial student loan debt to attend Acme College.''

True, higher education is about more than future income. Most music and art schools will have a worse higher education p/e ratio than science and engineering schools. That's fine. Students can and should still study music and art, and they should consider more than financial returns in choosing a college. But a well-publicized higher education p/e ratio will empower students who want to study music, art, or anything else to choose programs and institutions with a more informed eye.

Schools will want to be identified as good-value options and shudder at the prospect of being on a lemon list. To avoid it, they'll be less quick to raise tuition and more interested in making sure their students get good-paying jobs.

Until we nudge students toward good value options, tuition everywhere will march upward, unabated. We can slow that march though by helping families become better consumers in the higher education marketplace.

Michael Dannenberg, the founding Director of New America's Education Policy Program and Higher Ed Watch, is currently a Senior Fellow with the foundation.

The Loan Industry’s Friends in Congress Go on the Attack

Stephen Burd — Fri, 13 Nov 2009 13:45:00 -0500

Earlier this week, we called attention to the fact that some of the student loan industry's most fervent supporters in the financial aid world are potentially putting their schools and students at risk by refusing to take even the initial steps to prepare for the possible shift to direct lending next fall.

This is particularly worrisome, because as we wrote, no matter what happens with the student loan reform legislation that Congress is considering, the end of the Federal Family Education Loan (FFEL) program is coming. That's because an emergency law that is currently propping up FFEL, the Ensuring Continued Access to Student Loans Act (ECASLA), is set to expire this summer and neither the Obama administration nor Democratic Congressional leaders are interested in extending it. So unless the financial markets improve enough so that lenders do not have to depend on federal financing to make government-backed loans to students, colleges will likely have to shift to direct lending.

Department of Education officials have been trying to get that message out. Late last month, Secretary of Education Arne Duncan sent a letter to colleges that have not taken any steps yet to start preparing for a possible conversion. "While there are encouraging signs that financial markets are rebounding, the most prudent course of action is for you to ensure that your institution is Direct Loan-ready for the 2010-2011 academic year," he wrote. "That way, loan access to your students will be assured."

The Education Secretary's letter set off a firestorm of controversy on Capitol Hill, with the student loan industry's closest allies in Congress falling all over themselves to be the first to condemn the Obama administration of strong-arming colleges. Both the Democrat Ben Nelson and the Republican Mike Johanns from the great State of Nelnet (whoops, we mean Nebraska) sent letters to Duncan (see here and here) last week expressing their outrage.

"The Obama Administration seems intent on denying competition and ramming through a federally-run student loan system," Johanns said in a news release. "By encouraging institutions of higher learning to move quickly to a government-run system, it appears the White House is trying to end run Congress and strong-arm its way toward nationalizing the student loan industry." [Note to Johanns, the FFEL program is a government program too.]

Rep. John Kline (pictured top left), the lead Republican on the House of Representatives Committee on Education and Labor, went even further. In his own letter to Duncan, he accused the Education Department of violating a federal law that prohibits government agencies from distributing "literature that promotes public support for or opposition to any legislative proposal on which Congressional action is not complete."

"While this debate proceeds in Congress, the U.S. Department of Education must act as an impartial agent to assist colleges and universities, not as an advocate for its preferred legislative changes to the federal student loan program," Kline wrote.

At Higher Ed Watch, we believe these allegations are outrageous. Duncan is not asking colleges to flip the switch and make the shift to the Direct Loan program right away. He is simply urging colleges to prepare for the possibility that they will have to transition to direct lending when ECASLA ends. This is indeed the prudent course to take.

After all, Obama adminstration officials know that if there are any disruptions in student loan delivery next year, Johanns, Kline, and Nelson will be among the first to go on the attack, accusing the Education Department of being inadequately prepared. In fact, these lawmakers want to have it both ways. They want to impede the Department's efforts to get colleges ready for a possible conversion but then also be able to blame the administration if any mishaps occur.

These lawmakers' constituents -- the students and families in their states that rely on student loans to pay for college -- deserve better. They need to know that the colleges that serve them are adequately prepared no matter what happens next fall.

Lexington Institute Hosts Student Loan Discussion

Ed Policy — Wed, 11 Nov 2009 21:50:00 -0500

Yesterday the Lexington Institute held a policy forum in Washington, D.C. on the future of the federal student loan programs. Jason Delisle of the New America Foundation was a featured speaker along with representatives from Sallie Mae, the financial aid industry, and a student organization. A webcast of the entire event is available here.

Readers may wish to pay particular attention to a discussion between Sallie Mae Vice Chairman Jack Remondi and Jason Delisle regarding federal student loan program costs and market based cost estimates. The discussion begins 1 hour and 19 minutes into the forum.

Delay or No Delay, Change is on the Way

Stephen Burd — Wed, 11 Nov 2009 02:00:00 -0500

Back in September, we predicted that we'd all be in for "a wild ride" as legislation to overhaul the federal student loan programs makes its way through Congress. Boy, were we wrong.

Instead, progress on the legislation, which would eliminate the Federal Family Education Loan (FFEL) program in favor of 100 percent direct lending, has come to a grinding halt. Senate Democratic leaders have put the student loan bill on hold until they come to a resolution on the sweeping health care reform legislation that has deeply divided the chamber. Senate Majority Leader Harry Reid's recent admission that he may not be able to get a vote on the President's top domestic priority by year's end means that the student loan measure may not make it to the Senate floor until next January or February at the earliest.

The fate of the student loan and health care measures are intertwined because Senate leaders continue to hold out the possibility of using the budget reconciliation process (the vehicle through which the student loan bill will ultimately be moved) to push through the health care overhaul. While it seems unlikely that they will go down this route (as many of the reforms they are proposing would not survive this type of parliamentary maneuver), they may not have any other choice if they can't get the votes they need to defeat a Republican-led filibuster of the measure.

For the moment, the seemingly interminable delay appears to be playing into the hands of the student loan industry and their allies in the financial aid world. It has given industry officials (and their friends at Qorvis Communications) time to launch a large-scale effort to try and manufacture "grassroots" opposition to the legislation. It has also helped them stoke fears in Congress that colleges will not be ready to switch to direct lending before the peak student aid processing season begins.

But student loan industry officials can not take comfort in this delay. As we wrote in April, no matter what happens with this legislation, the end of the FFEL program is coming. That's because an emergency law that is currently propping up FFEL -- the Ensuring Continued Access to Student Loans Act (ECASLA) -- is set to expire next July and neither the Obama administration nor Democratic Congressional leaders are interested in extending it. So unless a miracle occurs, and the financial markets improve enough so that lenders do not have to depend on federal financing to make government-backed loans to students, colleges will have no choice but to shift to direct lending anyway.

Most loan industry officials recognize that reform is inevitable. That's why they have been pushing Congress so aggressively to adopt an alternative student loan proposal that would achieve some of the President's objectives but would preserve as much of the status quo as possible -- through carve outs and set asides for different student loan players.

Unfortunately, some of the industry's most fervent supporters in the financial aid world have not gotten the message. Instead they have buried their heads in the sand, and declined to take even the initial steps needed to prepare for the possibility that their schools will have to shift to direct lending. These school officials are the first to rail at Congress about the risk of transitioning so many schools to direct lending in such a short period of time. Yet, because of their ties to lenders, they are leaving their schools and students dangerously unprepared for such a change. If there are disruptions in loan delivery on their campuses, they will have only themselves to blame.

At Higher Ed Watch, we remain confident that Congress will eventually get the student loan reform bill back on track and pass it. But to use the delay for an excuse for inaction is simply irresponsible -- because no matter what lawmakers do, change is on the way.

Reality Check: The Privatization of Public Higher Education

Ed Policy — Thu, 05 Nov 2009 16:45:00 -0500

By Travis Reindl

For the better part of the last decade, the higher education community has debated the question of whether public colleges and universities are on the path to privatization. Will state support for public institutions sag to the point where they are not really public? Should these institutions be given greater autonomy to do things like build buildings and raise tuition? This conversation usually follows the ebb and flow of the state budget cycle, intensifying understandably during downturns.

The current state fiscal meltdown, which has prompted steep funding cuts and tuition hikes for higher education, has breathed new life into the issue of privatization. College presidents, researchers, and even campus newspapers are pondering whether the current fiscal slump is severe enough to force a revisiting of the state-campus relationship. The old joke among college presidents about their institutions moving from state supported to state molested is enjoying a comeback on the conference circuit.

Having watched this conversation for the better part of a decade, I've come to realize that a reality check is in order. To evaluate these claims, I believe that there are several important questions that need to be answered:

Are we really that close to losing the "public" in public higher education?

Is there some threshold below which a public university can or should be relieved of its public mission?

Does it matter if major public universities become quasi-public enterprises? Will they operate any differently than they do now?

The answer to the first question is "Not as close as some might think." Leaders of major public research universities frequently talk about the trend of state disinvestment in higher education and cite statistics showing that the state supplies less than 10 percent of their revenue. True enough; higher education's share of the state budget has declined in recent years, as has the state's share of institutional revenues.

But what they fail to note is that these figures include income colleges earn from hospitals and enterprises such as bookstores, which have little if anything to do with their core teaching and research functions. Subtract those revenue sources from the picture, and the state's contribution doubles. According to the Delta Cost Project , state appropriations are the second-largest source of revenue per full-time student at public research universities, and on average comprise one-third of revenues (net of auxiliary enterprises). The bottom line: there is still a lot of state money in the basic functions of public universities.

The answer to the second question is "No." As noted higher education researchers Dennis Jones and Jane Wellman point out in their recent essay on top myths in higher education finance, shareholders in publicly traded corporations have exerted considerable influence over management performance with as little as three percent of voting stock. Moreover, there is the question of which should count more in determining the degree to which universities' bonds with the state should be loosened -- percentage of total revenue or dollars received. For example, the University of Michigan receives nearly twice as much per full-time student in state appropriations as Eastern Michigan University, so why should it be subject to less regulation? The point is that governors and legislators should be wary of deregulation discussions that are based on the "minority shareholder" argument.

The answer to the third question is "Absolutely yes." The conversation about privatization in public higher education matters because it is really not about autonomy, regulation, or accountability -- it is about revenue maximization. It is about whether some of the nation's wealthiest public universities will be allowed to have their cake and eat it, too, staying public enough to receive annual appropriations from the state and private enough to charge whatever the market will bear in terms of tuition. That scenario works out well for the institutions, but what does that mean for providing an affordable university education for state residents or meeting state needs?

At a time when President Obama has challenged the nation to regain world leadership in college attainment and more Americans than ever believe that qualified students are being denied college opportunity, we need affordable and accessible higher education at all levels. Talking about how much of the public's money is needed to call a university public is simply the wrong conversation at this critical juncture. Instead, we need to be focusing on what the public's investment in higher education is -- and should -- be buying.

Travis Reindl is the state policy and campaigns director at CommunicationWorks, a public affairs firm that specializes in educational improvement. Prior to joining the firm, he had 15 years of experience in higher education policy and advocacy. Most recently, he served as program director at Jobs for the Future, where he led a national initiative focused on increasing productivity in higher education. Before that, he headed the state policy analysis unit at the American Association of State Colleges and Universities. He has written extensively on issues of college affordability, accountability, and governance. His views are his own and do not necessarily reflect those of the New America Foundation.

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

Stephen Burd — Wed, 04 Nov 2009 00:30:00 -0500

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.

Allowed lenders specializing in offering consolidation loans to mine the National Student Loan Data System (NSLDS) to collect personal information about borrowers for marketing purposes. While civil service employees at the Department had loudly complained about these practices, the agency's leaders didn't do anything about it until Higher Ed Watch broke the story and the national news media picked up on our coverage.

Emphasized partnerships over compliance in overseeing lenders and guaranty agencies. As a result, the division frequently overrode decisions made by program review specialists that were critical of student loan companies and limited their ability to effectively carry out investigations of these companies' practices.

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.

Breaking News: Criminal Charges Filed Against Matteo Fontana

Ed Policy — Mon, 02 Nov 2009 19:45:00 -0500

In April 2007, Higher Ed Watch revealed that Matteo Fontana, a former high-ranking official in the U.S. Department of Education's Federal Student Aid office, had held at least $100,000 of stock in a student loan company he was in charge of overseeing. Last week, the Justice Department filed criminal charges against Fontana on two counts: lying to federal officials about his ownership of stock in the company Student Loan Xpress and illegally using his position to help the corporation expand its business.

According to the Washington Examiner, which first reported on the Justice Department's action, the charges against Fontana are misdemeanors that each carry a maximum penalty of imprisonment for up to a year. However, The Chronicle of Higher Education reported this afternoon that Fontana has agreed to plead guilty to the charges and to pay a fine of up to $115,000. If the federal judge hearing the case accepts the plea agreement, Fontana will not have to serve any prison time, the Chronicle states.

We will have more details and commentary on this case tomorrow. Stay tuned...

Below is the text of the original April 5, 2007 Higher Ed Watch post:

EXCLUSIVE: Education Department Official Implicated in Widening Student Loan Scandal

Stephen Burd | April 5, 2007

Higher Ed Watch has learned that a top Education Department official held at least $100,000 worth of stock in a student loan company that may have substantially benefited from its ties to him.

According to a Securities and Exchange Commission (SEC) filing by Education Lending Group (see chart on page 18), the Education Department official, Matteo Fontana, held at least 10,500 shares in Student Loan Xpress as of September 2003. Fontana is currently in charge of overseeing lenders and guarantee agencies that participate in the Federal Family Education Loan Program (FFELP). Mr. Fontana's shares were offered for sale at just under $10 per share in September 2003, according to SEC filings. The extent of his total holdings in September 2003 and today is unknown.

Mr. Fontana, who is a good friend of Student Loan Xpress's president Fabrizio "Breeze" Balestri, joined the Education Department in November 2002 and was put in charge of the National Student Loan Data System (NSLDS), a gigantic computer database that keeps track of the student aid awards of tens of millions of students who have received federal financial aid.

It's unclear whether Mr. Fontana disclosed his stock holdings -- which he held for almost a year while at the Department -- to his superiors at the agency. Mr. Fontana didn't return Higher Ed Watch's calls.

Meanwhile, the Education Department released a statement late on Thursday that didn't address whether Mr. Fontana had made the disclosures. "The Department takes this matter very seriously and our Office of the General Counsel is actively reviewing it," Samara Yudof, a spokesperson for the agency stated.

What is clear is Student Loan Xpress, which started in 2001 primarily as a student loan consolidation company, stood to benefit significantly from having such a close colleague in charge of NSLDS, which includes detailed personal data on individual federal student-loan borrowers.

According to several key sources, civil service employees at the Education Department have long complained that officials in charge of the Federal Student Aid office allowed loan consolidation companies to mine NSLDS records so they could steal away borrowers from the Department's Direct Student Loan Program.

Over the last five years, private lenders have been extremely aggressive in marketing consolidation loans to Direct Loan borrowers, offering them rebates on fees and interest rates that the government does not match, despite the fact Direct Loans are less expensive for taxpayers than the FFELP alternative. According to Education Department data, as reported by The Chronicle of Higher Education, close to 800,000 Direct Loan borrowers, with a total debt of about $17 billion, left the Direct Loan program between 2003 to 2005 to refinance their loans with private loan providers, such as Student Loan Xpress.

The misuse of NSLDS by companies marketing consolidation loans and other entities appears to have been so rampant that the Department's Inspector General sent a memo to Terri Shaw, the Chief Operating Officer of the Federal Student Aid office, in 2005 demanding that the office limit access to the database. As a result of the Inspector General's prodding, Mr. Fontana sent out his own notice to lenders warning them that NSLDS information was not to be used for "the marketing of student loans or other products."

Revelations that Mr. Fontana owned a stake in Student-Loan Xpress come a day after Higher Ed Watch uncovered that financial aid administrators at three major universities had received significant shares of stock from the company. As a result of our investigation, Columbia University placed its aid director, David Charlow, on leave pending a full review by the institution. Columbia also alerted New York Attorney General Andrew Cuomo to our findings. Mr. Cuomo promptly issued a subpoena to Columbia University and sent letters to the other two universities in question -- the University of Southern California and the University of Texas at Austin -- seeking more information about the administrators' stock ownership.

Higher Ed Watch continues to believe that the problem of corruption in America's student loan system stems from excessive taxpayer subsidies going to the student loan banking industry instead of families and needy kids.

This problem has to be addressed at its root.

Michael Dannenberg contributed to this report.

Here are links to other posts we have written about Fontana's management of the Financial Partners Division of the Education Department's Financial Partners Division:

The Revolving Door and the Damage It has Done (April 17, 2007)

Friends in High Places Deliver Big for Sallie Mae Behind the Scenes (May 9, 2007)

Where in the World is Matteo Fontana? (July 8, 2008)

Case Not Closed: Matteo Fontana's Resignation Leaves Unanswered Questions (September 30, 2008)

Exclusive: Some Ed Dept. Officials Encouraged Lenders to Overcharge the Government (May 14, 2009)

Putting an End to the Subprime Student Loan Racket

Ed Policy — Thu, 29 Oct 2009 14:00:00 -0400

[Editor's Note: Yesterday we ran an excerpt from an article that Higher Ed Watch Editor Stephen Burd wrote for The Washington Monthly [cover pictured right] on the subprime student loan crisis at some of the nation's largest chains of for-profit colleges. Today, we're running a second excerpt that provides recommendations for putting an end to predatory lending at these institutions. To read the full article, click here.)

For a while it looked like the meltdown on Wall Street, and the ensuing credit crunch, would put an end to predatory lending at for-profit schools. In 2008 Sallie Mae quit offering subprime private loans to students at for-profit colleges because the astronomical default rates had helped throw its stock price into a nosedive. But the proprietary college industry has found a way around this roadblock, namely making private loans directly to students, much the way used-car lots loan money to buyers rather than going through a third party. For example, in a recent earnings call with investors and analysts, Corinthian said that it plans to dole out roughly $130 million in "institutional loans" this year, while Career Education and ITT Educational Services Inc., another for-profit chain, have reported that they expect to lend a combined total of $125 million.

These loans could prove to be even more toxic than the private ones offered by Sallie Mae. This is because some schools are packaging them as ordinary consumer credit, which has even fewer built-in safeguards than private student loans, especially when it comes to disclosure requirements. This makes it easier for schools to mislead borrowers about the terms of the debt they are taking on. In one class-action lawsuit filed earlier this year, former students of Colorado-based Westwood Colleges allege they were duped into borrowing institutional loans at a staggering 18 percent interest. According to the complaint, the college's corporate bosses advise their admissions officers to sign students up for these loans without revealing how costly they are going to be. Thus borrowers don't learn about the steep interest until after they leave school and receive their first loan bill. Worse, the lawsuit alleges that some students have been signed up for loans without their permission.

Jillian L. Estes, a Florida lawyer who represents the plaintiffs in the case, says she has been approached by two dozen former Westwood admissions representatives who admit that they deliberately avoided telling students about the terms of these loans. "They knew they'd never be able to enroll these students if they were up front with them," Estes explains. (In their written response to the lawsuit, Westwood College officials offered a "categorical rejection" of the allegations brought by Estes and her clients.)

Significantly, many proprietary schools are pushing institutional loans even when they know students won't be able to pay them off; Career Education and Corinthian Colleges only expect to recover roughly half of the money they distribute through their institutional lending programs, according to communications with shareholders. Why would they lend knowing they won't get the money back? Because any loss is more than offset by federal loans and financial aid dollars, which, despite the surge in private educational lending, still fund the bulk of tuition at proprietary schools. Say a student gets a $60,000 federal financial aid package and supplements it with a $20,000 institutional loan. The school comes out $40,000 ahead even if the borrower ultimately defaults. Plus, getting students in the door pumps up enrollment numbers, which makes for happy shareholders.

As the credit crunch eases, traditional lenders may well go back to making private loans to proprietary school students, especially given the changes afoot in the industry. President Obama aims to get rid of the program that allows lending companies to collect lucrative fees and interest for serving as the middleman on federal student loans and instead have the government offer the loans directly. Once forced out of the federal student loan program, traditional lenders will have a powerful incentive to seek profits by wading deeper into the private student loan market, and for-profit schools, with their exponential growth, could once again be an appealing target

The good news is that the Obama administration seems more inclined than its predecessor to stand up against the abuses of proprietary schools. In May, the Department of Education revealed that it was considering reversing changes the Bush administration made to weaken the law that prohibits colleges from compensating recruiters based on the number of students they enroll. It is also thinking about adding teeth to the rules requiring proprietary colleges to show that graduates are finding "gainful employment" in their field and cracking down on schools that willfully mislead prospective students. "Our overall goal at the Department of Education in post-secondary education is to make sure that students ... have the information they need to make good choices," Robert Shireman, the deputy undersecretary of education, told financial analysts and investors during a conference call earlier this year.

These proposals are a good start, but more steps will be needed. For starters, the Department of Education should publish the data that it already collects on the number of students at each school who default over the lifetime of their loans. At the moment, it only releases the number who default during the first two years after leaving college, which is of limited value, not only because this is such a short time span, but also because the rates can be easily manipulated by schools.

Just publishing lifetime default rates would give prospective students a clearer picture of the risks of enrolling in a particular school. But the impact would be far greater if Congress used this data, along with graduation rates, to weed out abusive institutions; ideally, any school that failed to meet a certain threshold should be kicked out of the federal financial aid programs.

At the same time, Congress should require companies that offer private student loans to give the same kinds of flexible repayment options and consumer protections as are available through the federal student loan program, including allowing borrowers to repay their loans as a percentage of their income. Lawmakers also need to revisit changes Congress made to the bankruptcy code in 2005, which make it exceedingly difficult for financially distressed borrowers, including those with private student loans, to discharge their debt in bankruptcy.

These changes would go a long way toward helping people like Martine Leveque escape their mountains of debt and ensuring that future students don't wind up in the same situation. It would also guarantee that taxpayers don't go on bankrolling giant companies that profit by exploiting those who are struggling to build better lives.