Non-Profit Lenders

The Student Loan Industry’s Messaging Machine at Work

Stephen Burd — Thu, 22 Oct 2009 17:45:00 -0400

As we reported on Tuesday, Qorvis Communications, a top public relations firm in Washington, has taken the lead in the student loan industry's efforts to manufacture grassroots student opposition to legislation that would eliminate the Federal Family Education Loan (FFEL) program. But getting students to rally behind an unpopular industry that profits from their indebtedness has not proven to be an easy task. The firm's desperation has become all too evident in recent weeks.

Take, for instance, the case of Patrick McBride. In a press release announcing the launch of its "Protect Student Choice" public relations effort, Qorvis officials listed McBride, a student at Vanderbilt University, as one of four "local campaign members" -- with the others being leaders of non-profit student loan agencies.

But who is McBride? A former colleague of ours, the enterprising Ben Miller of Education Sector, sought to find out. In an interview he conducted with McBride, Miller learned that he was a first-semester freshman who got interested in the issue while doing research on the Internet. McBride, who would not say whether or not he had taken out student loans (although he added that he "did not have a stake" in the issue), was initially "ambivalent" about the student loan reform legislation. But after talking to David Mohning, the university's financial aid director and a longtime supporter of the FFEL program, he was convinced that the bill was a bad idea.

McBride then wrote a column for the school's conservative publication the Vanderbilt Torch, decrying the measure as a "government intrusion into private markets" [despite the fact that FFEL is already a government program]. Soon after, Qorvis contacted him, asking whether he would be interested in participating in its campaign.

To be absolutely clear, we do not have any beef with McBride. Individuals are entitled to their own opinions, and far be it for us to object to them expressing their views in writing. But isn't it telling that after working for months to manufacture grassroots opposition among students, this is the best they could come up with? A first semester freshman, who may not have even borrowed student loans, writes a column in a college publication and suddenly becomes one of the campaign's chief spokesmen???

But contrary to reports, McBride is not the only student that Qorvis has recruited for this effort. The firm has actively courted the College Republican National Committee to mobilize its members to speak out against the legislation. Uncharacteristically, the group, which typically focuses on helping elect Republican candidates and training future Party leaders rather than taking positions on specific legislation, recently agreed to take part in the campaign.

Zach Howell, the national chairman of the College Republicans, made the announcement during a faux television interview conducted by Karen Hanretty, a managing director at Qorvis who previously served as the communications director for the National Republican Congressional Committee. "We're engaging our membership in any way we can on this issue," Howell said. "It certainly is important to them and to the future of higher education in this country."

During the interview, Howell acknowledged that he had not done a lot of research on the issue and demonstrated that he didn't fully understand how the federal student loan programs work. For instance, he warned that a shift to 100 percent direct lending would result in having "rates set in Washington," when of course they already are. He raised the specter of "long lines" at the financial aid office and "poor service," and said that "all sorts of burdensome regulations and difficulties will be placed on students and schools." The one example he gave was of California Polytechnic State University, whose "depleted Financial Aid office" (as described by the student newspaper) appears to have perennial problems administering federal financial aid (see here and here). Howell neglected to mention that the vast majority of schools that have made the transition to the Direct Loan program so far have found the process to be easier than they thought.

But, of course, it makes little difference to Qorvis officials whether the students it recruits have a firm grasp of what they are talking about (those who do probably wouldn't want to shill for the loan industry). They are simply looking for warm bodies to make it appear that there is a genuine grass roots movement against the legislation. Focusing on the College Republicans seems like an odd choice, considering that the bill's fate rests in the hands of moderate Democrats. The group does, however, boast of having more than 200,000 members and if the individual students are not upfront about their affiliation when they contact their lawmakers, they could provide the illusion that there is genuine student angst over the bill.

As we said on Tuesday, this is a truly cynical effort. It is indeed a prime example of special interest lobbying at its worst.

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

Stephen Burd — Wed, 14 Oct 2009 21:00:00 -0400

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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

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

Sweeping the Student Loan Scandal Under the Rug

Stephen Burd — Tue, 13 Oct 2009 15:45:00 -0400

The student loan industry must think we all have very short memories. As part of their effort to derail legislation that would eliminate the Federal Family Education Loan (FFEL) program, lenders have been sharing talking points with Senators and staff arguing that the “pay for play” scandals that engulfed the student loan industry in 2007 were much ado about nothing.

“After thorough investigations by Congress and various state Attorneys General, there were no findings that any employee or a lending institution or school broke any laws, nor were there any criminal penalties levied,” lenders wrote in talking points -- which Higher Ed Watch has obtained -- that were distributed to Senate staff.

While that statement may have been technically true at the time it was first made, it’s a brazen sweeping under the rug of a scandal that outraged the American public, particularly college students and their parents. New York Attorney General Andrew Cuomo did charge about a dozen colleges and lenders, such as loan giants Sallie Mae and Nelnet, with violating federal and state laws, and filed lawsuits against them. But instead of fighting Cuomo, the student loan companies and schools quickly reached settlement agreements with his office that required them to change their conduct. In other words, they were not confident enough about the legality of their practices to defend them in court.

The lenders’ claim is particularly cavalier given that they were only able to avoid being penalized because of who was guarding the henhouse. Bush Administration appointees at the U.S. Department of Education with strong ties to the student loan industry simply looked the other way while lenders and college financial aid offices engaged in kickback schemes.

Despite all the evidence that lenders were routinely violating federal law by providing illegal inducements to colleges to win student loan business, the Education Department refused to discipline even a single one of these companies. The Department did not even consider penalizing Student Loan Xpress, which, as we discovered, gave insider stock to leading college officials, not to mention a senior Education Department employee, in order to curry favor.

However, with new leadership at the Education Department, the loan industry can no longer rely on the lax enforcement that allowed it to deny the significance of the “pay for play” scandal in its talking points. Case in point: late last month, the Department ordered the Iowa Student Loan Liquidity Corporation (ISL) to repay the federal government nearly $16 million after finding that officials with the non-profit student loan agency paid off the alumni association at one of the state’s flagship universities to steer borrowers their way.

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

The loan agency and the alumni association terminated the deal in May 2007, about two weeks after The Des Moines Register first reported on it. At the time, media attention on the student loan scandal was at its height, with revelations about sweetheart deals between lenders and schools coming out on almost a daily basis.

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

ISL is not the only loan company that is coming under scrutiny. In August, Nelnet revealed that the Education Department was investigating its past loan practices, and had, in an early draft program review report, found the Nebraska-based lender out of compliance “with the Higher Education Act’s prohibited inducement provisions.” It’s unclear when a final report will be released.

Nelnet was particularly aggressive in making exclusive deals with university alumni associations to recommend its consolidation loans to their members. In 2007, the Nebraska-based lender canceled the “affinity” arrangements it had with 120 alumni associations, as part of a settlement agreement with Attorney General Cuomo’s office. So it would not come as much of a surprise if this is one of the areas of “noncompliance” on which the Education Department is focused.

Given the Department’s recent actions and renewed interest in enforcement, the student loan industry would be well advised to drop this particular talking point if it wants to maintain any credibility on Capitol Hill.

On to the Senate...

Stephen Burd — Tue, 22 Sep 2009 19:40:00 -0400

Legislation that the U.S. House of Representatives approved last week would make landmark changes to the federal student loan programs -- changes that we have advocated at Higher Ed Watch for the last three years.

We can not overstate the significance of this achievement. Despite fierce opposition from the deep-pocketed student loan industry and their allies on Capitol Hill, the House moved forward with a bill that would eliminate unnecessary middlemen from the process of originating and guaranteeing federal student loans, and would have the government make all federal student loans directly. If this change is enacted into law, it will overwhelmingly simplify the federal student loan program and redirect a massive amount of federal funds out of the pockets of lenders and into the hands of the students who need the help the most.

Having said that, the House bill is far from perfect. The measure contains one provision that we believe is extremely misguided and will, if enacted, harm the cause of student loan reform, and another that would gut a key consumer protection provision in federal law that aims to safeguard students from unscrupulous trade schools. It also has other provisions that are well-intentioned but, as written, are unlikely to achieve the lofty goals the bill's authors have set for them.

Attention will soon shift to the Senate, where the leaders of the Health, Education, Labor and Pensions (HELP) Committee are expected to release their own version of the student loan reform legislation shortly. While the Senate committee will likely stick to the same broad outlines as the House, it could make a few key changes that would significantly strengthen the measure.

Here are some changes that we would like to see:

Make non-profit lenders compete for servicing contracts:

As we have previously reported, the House bill includes a set-aside for nonprofit student loan agencies to service federal student loans that is nearly identical to a proposal that the Education Finance Council (EFC), which represents these lenders, quietly shopped around Capitol Hill this summer. The legislation would essentially give each and every one of EFC's members a no-bid contract to service the loans of up to 100,000 student loan borrowers in their home states.

What's more, when the bill was on the floor last week, the House agreed to an amendment, sponsored by Rep. George Miller, the Democratic chairman of the Committee on Education and Labor, that would sweeten the pot for these non-profit student loan companies even further. Under the original version of the legislation, these non-profit agencies would have been paid "a competitive market rate as determined by the [Education] Secretary" to service these loans. The measure allowed -- but did not require -- the Secretary to take into account the volume of loans an agency services when making that determination, presumably to help even the smallest entities survive. Under the amended legislation, the Secretary would now be required to set the payment rate at a level that is "commercially reasonable in relation to the volume of loans being serviced" and is high enough so that "the eligible not-for-profit servicer can reasonably provide any additional services, such as default aversion or outreach, provided for in the contracts awarded."

Speaking to education bloggers last week, Representative Miller said that including these provisions in bill was "absolutely" essential to the bill's passage. "You have members of Congress who are very familiar with their nonprofit and state agencies, and they like the attention they give to their students and schools." At the very least, it's unlikely that the bill would have passed by such a wide margin (253 to 171) without making these types of concessions. Miller won the support of all but four of his Democratic colleagues.

At Higher Ed Watch, we understand that there are political tradeoffs that have to be made to win support for the type of landmark legislation. However, we find the provisions particularly troubling because the history of the FFEL program is replete with these types of political tradeoffs and set asides, which have made the program administratively cumbersome, inefficient, and vulnerable to waste and abuse.

To be absolutely clear, we have no problem with allowing non-profit lenders to compete for a servicing contract from the Education Department. But they should not be treated more favorably -- or compensated more generously -- than their competitors.

Do not weaken key consumer protection provisions

The House bill would continue recent efforts by lawmakers to gut the "90-10 rule," which aims to protect financially needy students from unscrupulous proprietary institutions. The rule requires for-profit colleges to receive at least 10 percent of their revenue from sources other than federal student aid to continue to participate in the government's financial aid programs.

Congress introduced the requirement in 1992 (at that time it was the "85-15 rule") as part of a broader effort to crack down on trade schools set up to reap profits from the federal student aid programs. At the time, lawmakers felt that the provision was important because it required proprietary institutions to prove that the training they offered was valuable. They figured that schools that offered worthwhile training would be able to derive at least a small portion of their revenue from students willing to spend their own money on it.

Proprietary school lobbyists have spent years and lots of campaign cash trying to get lawmakers to eliminate the requirement or at least weaken it so much that their institutions could easily evade it. And they have largely succeeded in this pursuit.

The bill the House approved last week would extend by an extra year (from two to three) the amount of time that schools can be out of compliance with the law before being penalized. It also would temporarily exempt from the 90-10 calculations any new money the colleges receive from the legislation's expansion of the Perkins Loan program, and extend an existing exemption for federal student loan limit increases that were approved as part of the Ensuring Continued Access to Loans Act last year.

At a time when the Obama administration is looking to rewrite federal student aid rules to improve the integrity of the programs, it doesn't make sense for Democratic Congressional leaders to weaken one of the few consumer protection provisions we still have.

Revamp the proposed Perkins Loans funding formula changes

At the behest of the Obama administration, the legislation the House approved would significantly overhaul and expand the Perkins Loan program to help financially needy students avoid having to take out expensive private loans. We agree that this is a vital goal. But as our former colleague Ben Miller of Education Sector has pointed out, the proposed changes in the loan program's funding formula try to do too much and will likely "result in a bunch of challenges being tackled in a mediocre manner."

The House bill would convert the Perkins loan program from a campus-based revolving loan fund to an extension of the Direct Loan program. It would also substantially increase funding for the program, from $1 billion to $6-billion in new loan volume each year. The Department of Education would disburse half of these funds to colleges based on the financial need of their students. The other half would go to rewarding colleges that keep their tuition and fees low, relative to other institutions in their sectors, and to colleges that graduate a large portion of their Pell Grant recipients.

We agree that these are all important aims, but can they all be achieved through the Perkins Loan program? We would like to see the Senate committee choose an overreaching goal and stick with it. Our vote would be to provide the most generous awards to colleges that enroll the largest proportions of low-income students and are most successful in graduating them. The institutions that would benefit the most would be the top performers in their sectors, or those in each sector that show the most improvement over a period of time. Of course, protections should be added to ensure that schools are not just lowering their academic standards to make it easier for their students to graduate.

Helping low-income students avoid taking out high-cost private student loans -- with variable, uncapped rates and few consumer protections -- should be among our top priorities.

Consider alternatives to the "Access and Completion Grants"

This provision has a worthy goal of providing grants to states and colleges to improve their efforts in increasing the academic preparation and college awareness of low-income students. But unfortunately, the language in the bill is so convoluted that, even after multiple readings, it's difficult to know whether the provision will be effective in achieving its aims. A large share of the blame rests with the Obama administration, which never clearly articulated the purpose of this new program. At times, the administration seemed to suggest that much of the $2.5 billion devoted to this effort should go to student loan guaranty agencies as a pay-off to blunt their opposition to the overall student loan reform legislation. We think this would be a terrible way to spend the money, given that there is little empirical evidence to suggest that guarantors do a particularly good job carrying out college access activities.

While we support providing competitive grants and colleges for coordinating their college outreach efforts and forming partnerships with public school systems to improve the preparation of their students, we would also urge the Senate to consider significantly expanding the existing Gaining Early Awareness and Readiness for Undergraduate Programs, which already aims to accomplish these goals. Under GEAR UP, colleges and states partner with schools to provide counseling, mentoring, academic support, and college outreach services to entire grades of disadvantaged students. The partnerships serve these students for seven years, starting no later than seventh grade and continuing through at least high school graduation.

Funding for GEAR UP, however, has been stagnant for much of the last decade, limiting the program's effectiveness. For example, many partnerships have been serving only one grade level in a school, rather than multiple cohorts, as the program's creators envisioned. The benefit of directing savings from ending FFEL to GEAR UP is that a relatively modest increase -- doubling or tripling the program's budget, which is currently about $313 million -- would go a long way to improving its performance and expanding its reach.

In exchange for the additional money, Congress should require the partnerships to serve multiple cohorts or even whole schools of low-income students, rather than just individual grade levels at the schools.

The Senate HELP committee has a great opportunity to make substantial improvements to the House student loan reform bill. We will soon know whether the panel seizes it.

Getting to the Truth

Stephen Burd — Wed, 02 Sep 2009 21:30:00 -0400

If nothing else, the False Claims lawsuit that Jon Oberg has filed against the main perpetrators of the 9.5 student loan scheme should help resolve at least some of the unanswered questions surrounding the scandal -- a goal we have been pursuing at Higher Ed Watch over the last year.

While the lawsuit seeks the return to the federal government of $1 billion in excess student loan subsidies these lenders improperly obtained, it also sheds more light on the origins of the lenders' strategy to gain windfall profits at the government's and taxpayers' expense, and the unwillingness of the U.S. Department of Education's political leaders at the time to put a stop to it.

Here are some of the most interesting tidbits included in the complaint:

The lawsuit identifies the Pennsylvania Higher Education Assistance Agency (PHEAA) as having been the "first, or among the first, to employ the 9.5 scheme," and estimates that it received approximately $92 million in overpayments.

PHEAA's success employing the strategy had a domino effect, encouraging other loan companies, like Nelnet, to "emulate what it was doing." Nelnet, which was created in 1998 when Nebraska's non-profit student loan agency converted to for-profit status, became the most active participant in the scheme, making about $407 million in improper 9.5 student loan subsidy claims, the complaint states. In turn, the Kentucky Higher Education Student Loan Corporation (KHESLC) "observed Nelnet's activity" and decided "to increase its own 9.5 claims." According to a recent Inspector General's report, KHESLC engaged in a massive loan and bond refinancing and recycling project over the course of four days in January 2004 so that it could claim 9.5 subsidy payments on "nearly all of its loan portfolio."

The lawsuit suggests that both PHEAA and KHESLC relied on the authority of the Education Finance Council (EFC), the national trade group for non-profit lenders, to justify their practices. While the complaint doesn't state this explicitly, it hints that EFC played a central role in devising the strategy that allowed some of its members to raid the federal treasury. If true, this would be very significant, as officials with close ties to the group held prominent positions at the Education Department and on the Republican staff of the House committee with jurisdiction over student loan policy while the 9.5 scandal was occurring. For example, Bill Hansen was the president and chief executive officer of EFC from 1993 to 2001 before becoming the Deputy Secretary of Education during President Bush's first term. Meanwhile, Kathleen Smith served as the chief of staff and director of corporate communications at EFC before becoming a top aide on the House education committee under Rep. John Boehner, the Ohio Republican. As head of the panel, Boehner vigorously opposed efforts to require lenders to return the overpayments. Smith returned to EFC in 2005 to become its president. She stayed until November 2008, when she took a civil service job at the Department.

The lawsuit undercuts a central argument that the Education Department's former political leaders have made to explain why they were slow to react to the abuses. They have said they were unaware of the extent to which Nelnet and other lenders were gaming the system until the Department's Inspector General (IG) released an audit report in September 2006 explaining the illegality of the loan company's actions. The complaint makes clear, however, that as early as 2003, Oberg had warned his superiors about the lenders' scheme -- providing them with detailed memos explaining how the loan companies were engaging in loan and bond manipulations to improperly grow their 9.5 student loan holdings. This suggests that the Department's leaders had other motives for failing to act expeditiously to stop the lenders from bilking taxpayers.

The lawsuit reveals that an Education Department official provided his or her tacit approval for Nelnet's scheme to overcharge the federal government. According to the complaint, "Nelnet was advised by the Department employee, according to two separate accounts shared with Dr. Oberg contemporaneously, that the Department of Education would never put approval in writing but that Nelnet could take its chances that the Department would never ask for the money back." The complaint does not identify who the employee was, but it is believed to be a former high ranking official in the Department's Office for Postsecondary Education.

At Higher Ed Watch, we applaud Jon Oberg for his tenacity in trying to get to the bottom of the scandal and to recover the government's money. But it's outrageous that our political leaders have left this job to a private citizen.

In June, Rep. Tom Petri (R-WI) sent a letter to Education Secretary Arne Duncan recommending that the Department "explore all options" to recover "these illegal subsidies" that these lenders obtained. "To my knowledge, no funds have been recovered regarding illegal subsidies claimed by lenders and no disciplinary action has been taken against Department of Education officials who allowed this abuse to occur," Petri wrote. "I strongly believe the current Administration should work to restore the integrity of this program by getting to the bottom of this scandal."

Congressman Petri is right. We hope that Secretary Duncan was listening.

A New Chapter in the 9.5 Scandal

Stephen Burd — Tue, 01 Sep 2009 19:00:00 -0400

On Monday, a federal court in Virginia unsealed a whistleblower lawsuit filed by Jon Oberg, the U.S. Department of Education researcher who uncovered the 9.5 student loan scandal, against 10 student loan companies that participated in the scheme. The lawsuit, which Oberg filed in 2007 under the federal False Claims Act, seeks the return to the federal government of $1 billion in excess student loan subsidies these lenders improperly obtained.

The roots of the 9.5 student loan case go back to the 1980s when Congress guaranteed non-profit lenders, which use tax-exempt bonds to finance their loans, a minimum rate of return of 9.5 percent on federal student loans made with these bonds. As interest rates on all other student loans fell in the 1990s, policymakers became concerned that these nonprofit student loan providers were making a killing. So in 1993, Congress rescinded that policy, but grandfathered in loans made from the old bonds, believing that the volume of 9.5 loans would decline as they were paid off and the bonds retired.

Instead, beginning in 2002, a small group of lenders devised a strategy to aggressively grow the volume of loans that they claimed were eligible for the 9.5 guarantee. This was a goldmine for lenders in the existing low interest rate environment (at the time, the borrower interest rate on regular loans hovered around 3.5 percent.) They accomplished this scheme by transferring loans that qualified for the 9.5 subsidy payment to other financing vehicles and recycling the proceeds into new loans that they claimed were then eligible for the subsidy. The lenders repeated this process over and over again.

As a researcher in the Education Department's Institute for Education Sciences, Oberg discovered the scheme in 2003 while reviewing internal agency spreadsheets that showed that the total volume of outstanding 9.5 loans was growing rather than shrinking. He brought his concerns to his superiors at the Department but they brushed them off. His supervisor, Grover Whitehurst, ordered him to stop pursuing the issue, and instead to focus solely on his responsibilities as a research administrator in the final 18 months before his scheduled retirement.

But Oberg had also reported his findings to the Department's Inspector General, which launched its own investigation into the 9.5 scandal. His work paid off in September 2006 when the Inspector General declared the lenders' loan and bond manipulations to be illegal. In January 2007, Education Secretary Margaret Spelling concurred with the Inspector General's opinion and barred the student loan company Nelnet and other lenders that refused to submit to independent audits from receiving any further 9.5 payments. But she did not require the lenders to return the overpayments they had already received.

Unhappy with this resolution, Oberg (who first revealed himself to be the whistleblower on the 9.5 scandal at an event hosted by the Education Policy program here at the New America Foundation in 2006) decided to file his own false claims lawsuit on behalf of the government, his lawyers stated. The lawsuit has been under government seal for the last two years, as the U.S. Justice Department weighed whether or not to join it. The federal district court lifted the seal last week after DOJ decided against joining the lawsuit. By law, Oberg has to right to continue to pursue recovery on behalf of the United States, with the Justice Department retaining the right to intervene at a later time.

Among the main targets in the case is Nelnet, which was created in 1998 when Nebraska's nonprofit student loan agency converted to for-profit status. The most active participant in the scheme, Nelnet increased the amount of loans for which it sought the 9.5 percent rate from $393 million in 2001 to more than $3.3 billion in 2004. The lawsuit estimates that Nelnet made approximately $407 million in unlawful 9.5 claims.

Other student loan companies named in the suit are the following:

The Pennsylvania Higher Education Assistance Agency
The Kentucky Higher Education Student Loan Corporation
Panhandle Plains Higher Education Authority (Texas)
Sallie Mae
Southwest Student Services Corporation (Arizona)
Vermont Student Assistance Corporation
Education Loans Inc.(South Dakota)
Brazos Higher Education Services Corporation (Texas)
Arkansas Student Loan Authority

Here is a link to the news release that his lawyers distributed yesterday. To read some of our recent coverage of the 9.5 scandal, read here, here, here, and here.

Tomorrow we will provide further analysis of this important lawsuit. Stay tuned.

Not So Innocent After All

Stephen Burd — Wed, 05 Aug 2009 18:45:00 -0400

[This is the eighth in the Higher Ed Watch series "Revisiting the 9.5 Student Loan Scandal." The series takes a closer look at the origins of the scandal with the purpose of trying to resolve unanswered questions and dispel lingering myths surrounding it. Links to earlier parts of the series are available here, here, here, here, here, here, and here]

Sallie Mae has long boasted that it did not take part in the 9.5 percent student loan scheme. But a new report from the U.S. Department of Education's Inspector General (IG) refutes that claim.

According to the report, which was released on Monday, Sallie Mae improperly obtained $22.3 million in excess student loan subsidies from the federal government between Oct. 1, 2003 and Sept. 30, 2006. The actual amount that the company over-billed the government is probably substantially higher -- as the IG looked only at how the student loan giant handled the 9.5 loans it obtained through its purchase of Nellie Mae [NLMA], the Massachusetts non-profit student loan agency. Between 2000 and the end of 2004, Sallie Mae bought three other non-profit lenders, including the Arizona-based Southwest Student Services Corporation, which had increased the volume of federal loans that it claimed eligible for the 9.5 percent guarantee by 135 percent in the years immediately preceding the sale.

To be clear, Sallie Mae does not appear to have engaged in the type of loan and bond manipulations that other companies, like Nelnet and the Kentucky Higher Education Student Loan Corporation, did to massively grow their 9.5 loan holdings. Instead, the loan company violated the law by submitting 9.5 claims on loans financed by tax-exempt bonds that had matured and been retired, the IG report states.

In the 1980s, Congress guaranteed non-profit lenders a minimum rate of return of 9.5 percent on federal student loans made with tax-exempt bonds. As interest rates fell in the 1990s, policymakers became concerned that these non-profit student loan providers were making a killing. So in 1993, Congress rescinded that policy, but grandfathered in loans made from bonds that had been issued before the new law went into effect. By making that change, lawmakers believed that the volume of 9.5 loans would decline as they were paid off and the bonds retired.

According to the IG, Sallie Mae submitted 9.5 claims for, and received payments on, federal loans funded by bonds that had expired several years before the claims were made. Sallie Mae officials defended their practices, saying that it was entirely lawful for them to continue billing loans under the 9.5 percent floor until the last bond associated with an "indenture" -- "a formal agreement between the issuer of bonds and a trustee bank," according to the report -- was retired. In other words, the loan company argued that as long as one bond included in this type of trust agreement remained active, all loans financed by bonds included in the agreement were still eligible for the inflated subsidy rate.

The IG rejected this argument. "We do not agree that SLMA's position is a reasonable interpretation of the HEA [Higher Education Act] or regulations," the report states. As a result, Sallie Mae's "billing activities for its NLMA subsidiary did not comply with laws, regulations, and guidance for the 9.5 percent floor calculation."

Interestingly, Nellie Mae had been in full compliance with the law before the purchase. Sallie Mae "took the position that NLMA was mistaken when it ceased billing on a particular bond prior to the maturity of the particular bond indenture," the IG said.

Sallie Mae was certainly not the worst player in the 9.5 scandal. But like the other loan companies involved, it did exploit the law to gain windfall profits at the taxpayer's expense. Unfortunately, this type of waste and abuse appears to have become endemic to the Federal Family Education Loan (FFEL) program. Is it any wonder that the program is on the brink of extinction?

A Leap Forward

Stephen Burd — Wed, 22 Jul 2009 16:30:00 -0400

The U.S. House of Representatives Committee on Education and Labor took a huge step forward today by approving, on a mostly party line vote, landmark legislation that would eliminate the Federal Family Education Loan Program (FFELP) and use a large share of the savings to significantly increase spending on Pell Grants. The bill would require that as of July 1, 2010, all federal loans be made by the federal government through the Direct Loan program.

We can not overstate the significance of the committee leaders' accomplishment. Despite fierce opposition from the student loan industry and their allies in the financial aid world, the committee passed a bill that would eliminate all of the unnecessary middlemen from the process of originating and guaranteeing federal student loans. This change would substantially simplify the federal student loan program and redirect federal funds out of the pockets of lenders and into the hands of the students who need the help the most.

The measure is far from perfect. We have already stated our dissatisfaction with a provision in the bill that would provide a set-aside for all existing non-profit student loan agencies to service the loans of up to 100,000 borrowers in their home states. Non-profit lenders that wish to continue to service loans in the future should have to compete for a contract from the U.S. Department of Education, like all other student loan providers.

As we said yesterday, if the Democratic Congressional leaders are intent on keeping the proposal in the measure, they should at least bar lenders that have been found to have deliberately overcharged the government or acted against the best interests of students from participation.

We were also disheartened that the committee overwhelmingly approved an amendment to the bill that would further weaken the "90-10 rule," a key consumer protection provision. The rule requires for-profit colleges and trade schools to receive at least 10 percent of their revenue from sources other than federal student aid in order to participate in the government's financial aid programs.

The amendment, which was sponsored by Rep. Rob Andrews (D-NJ), would extend by an extra year (from two to three) the amount of time that schools can be out of compliance with the law before being penalized. It also would temporarily exempt from the 90-10 calculations any new money that the colleges receive from the legislation's expansion of the Perkins Loan program, as well as extending an existing exemption for federal student loan limit increases that were approved as part of the Ensuring Continued Access to Loans Act last year.

At a time when the Obama administration is looking to rewrite federal student aid rules to improve the integrity of the programs, it doesn't make any sense for Democratic Congressional leaders to try and gut the few consumer protection provisions left that are aimed at protecting students from unscrupulous schools.

But those concerns should not overshadow the significance of yesterday's action. As we said earlier, the House education committee took a major step forward in ending FFEL. Hopefully, the Senate Committee on Health, Education, Labor and Pensions will soon follow suit.

Tighter Controls Needed for Non-Profit Lender Set-Aside

Jason Delisle — Tue, 21 Jul 2009 17:15:00 -0400

The House Education and Labor Committee has taken up a bill today to eliminate the Federal Family Education Loan (FFEL) program and use the savings in part to significantly boost spending on Pell Grants. The legislation includes a provision that would provide a set-aside for all existing non-profit student loan agencies to service the loans of up to 100,000 borrowers in their home states.

Last week, we stated our opposition to this provision, which was crafted by a trade association for non-profit lenders, the Education Finance Council, and shopped behind closed doors on Capitol Hill. But if Democratic leaders insist on keeping it in the bill, they should at least bar lenders found to have deliberately overcharged the government or acted against the best interests of students from participation.

Case in point: The South Carolina Student Loan Corporation. Should the bill become law, it would give the agency, known as SCSLC, a guaranteed direct loan servicing contract in the state. But according to a recent Higher Ed Watch investigation, SCSLC appears to have used its ties to the state student loan guaranty agency to obtain excessive taxpayer subsidies from the federal government. The loan agency has allegedly done this by helping the state guaranty agency exploit an emergency program the government has in place to ensure that all eligible students are able to obtain federal student loans. The U.S. Department of Education is carrying out its own investigation of these allegations and is expected to issue a report soon.

Why would Congress provide the South Carolina agency with a direct loan servicing contract before the Education Department has had a chance to issue its findings in the case? Perhaps the House committee should make the agency's future participation in the federal student loan program contingent on the Department of Education giving it a clean bill of health. Or perhaps the Department should be given the authority to strip the agency of the set-aside if it finds that the agency has indeed exploited the FFEL lender-of-last-resort program. Otherwise lawmakers might be handing a guaranteed contract to a lender that has abused the FFEL program and imposed unnecessary costs on taxpayers.

The committee should also think twice before awarding no-bid contracts to non-profit student loan agencies, like the Kentucky Higher Education Student Loan Corporation, that were major players in the 9.5 student loan scheme. Lawmakers might also want to consider whether they want to guarantee business for the Iowa Student Loan Liquidity Corporation, which the state's attorney general found deliberately steered students to its most expensive loan products.

Time and again, the federal government has refused to hold lenders accountable for their actions. Now would be a good time to start.

Stephen Burd contributed to this post.

First Thoughts on Student Loan Reform Bill

Ed Policy — Thu, 16 Jul 2009 00:45:00 -0400

At Higher Ed Watch, we have spent most of the day eagerly awaiting the release of legislation that the Democratic leadership of the House Committee on Education and Labor has written to overhaul the federal student loan programs. Based upon news releases and press reports we had read over the last 24 hours, we had very high hopes for the bill.

Unfortunately now that we have begun to read the legislative text, we have decidedly mixed feelings about it. We are very pleased that Rep. George Miller, the California Democrat in charge of the committee, has followed President Obama's lead in proposing to end the Federal Family Education Loan (FFEL) Program and thereby eliminate unnecessary middlemen from the process of originating and guaranteeing federal student loans. Instead, as of July 1, 2001, all new federal loans would be made by the U.S. Department of Education through the Direct Loan Program.

We are also happy to see that a substantial share of the savings produced by shutting down FFELP would be used to significantly increase spending on Pell Grants and other high-need and chronically underfunded education programs.

However, we are sorely disappointed to see that the committee has included a set-aside for nonprofit student loan agencies to service federal student loans that is nearly identical to a proposal that the Education Finance Council (EFC), which represents these lenders, has been quietly shopping to a select group of Congressional offices in recent weeks. The legislation would essentially give each and every one of EFC's members a no-bid contract to service the loans of up to 100,000 student loan borrowers in their home states.

We are having a hard time finding a public policy justification for that provision, given that it doesn't seem to provide any benefit to borrowers or taxpayers. We understand that there are political tradeoffs that have to be made to win support for the bill, as is the case with all legislation. However, the history of the FFEL program is replete with these types of political tradeoffs and set asides, which have only made the program administratively cumbersome, inefficient, and vulnerable to waste and abuse. [And as faithful readers of Higher Ed Watch know, these non-profit loan providers are no stranger to scandal.]

Stay tuned tomorrow for more thoughts and questions as we work our way through the rest of the 181-page bill.