Education Department

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.

Guest Post: Helping Homeless Students in the Stimulus

Ed Policy — Tue, 03 Mar 2009 14:11:00 -0500

This Guest Post was written by Phillip Lovell from First Focus and Barbara Duffield from the National Association for the Education of Homeless Children and Youth.

Barely a day goes by without a front page story covering some aspect of the recession. Much of what we read hits on the economic nature of the crisis; much less attention has been paid to the impact of the economic downturn on children.

Policymakers are finally noticing the recession's impact on children. Last summer, Congress passed major legislation-The Housing and Economic Recovery Act-that dedicated two (out of 261) pages to addressing the needs of children who have become homeless due to the foreclosure crisis. More recently, the economic stimulus package, otherwise known as the American Recovery and Reinvestment Act, includes millions in funding for school districts to help keep children and youth in school even if they lose their homes. These funds are provided through The McKinney-Vento Act's Education for Homeless Children and Youth (EHCY) program.

EHCY provides stability for children whose lives are fraught with uncertainty. It allows homeless students to stay at their "home" school even if their temporary living situation is outside the school district or attendance area, provided that it is in their best interest to do so. School districts must provide transportation to school, and students must be enrolled immediately in school even if they cannot produce documentation typically required (birth certificates, proof of guardianship, etc.).

EHCY provides a small amount of funding to states and school districts to support the implementation of these policies. These funds are distributed to states that then provide competitive subgrants to school districts. States and school districts use these dollars to ensure that more young people experiencing homelessness stay enrolled in and attend school, while also supporting their academic success. EHCY funds are used for transportation services to school, after-school programs, school supplies, and homeless liaisons who identify, enroll, and connect homeless students with services in the community. During the 2006-07 school year, the Department of Education identified and enrolled 679,724 homeless students through EHCY efforts.

Funding for EHCY has increased very modestly in nominal terms over the past five years, from $60 million in fiscal year 2004 to $64 million in fiscal year 2008. Adjusted for inflation, the program funding has decreased by 6 percent over this period. In fiscal year 2009, the program is slated to receive just over $65 million. At this funding level, only 6 percent of the nation's school districts can expect to receive EHCY funding in 2009.

Needless to say, the economic and foreclosure crises have increased the need for EHCY. We estimate that 2 million children will be directly affected by the foreclosure crisis, and school districts across the country are reporting spikes in their homeless student populations due to job loss and other factors tied to the economic downturn. Last year, over 450 school districts had at least a 25 percent increase in homeless students. In the first few months of this school year, 330 school districts reported enrolling more homeless students than they did all of last year.

The American Recovery and Reinvestment Act includes $70 million for EHCY in 2009 and 2010 - increasing the program's annual appropriation significantly. These dollars will be distributed to States in relation to their population of homeless students, and will be distributed by States to school districts either by competition or by formula.

This is good news for school districts, homeless students, and our country. Students experiencing high levels of mobility or homelessness are more likely to perform below grade level or repeat a grade, and less likely to graduate high school on time. They are more likely to have health and other social and emotional problems as well. EHCY helps to mitigate the detrimental effect homelessness has on children and youth.

EHCY helps to make sure that all of our young people, including those who are most vulnerable, have the opportunity to go to school and become productive members of society. All of our children deserve an education. And right now, we cannot afford to miss the opportunity to educate all of our children, positioning them-and our country-for a successful future.

Pell Grant Budget Mess

Jason Delisle — Thu, 19 Feb 2009 16:56:00 -0500

Pell Grants for the 2009-10 school year have become a budget nightmare. The program has always had its budgeting quirks, but this year is shaping up to be the most complicated and confusing of all. New funding streams, unfinished 2009 appropriations bills, stopgap funding measures, shortfalls, and now a stimulus bill have created one ugly Pell Grant budget. We'll try to sort out the factors that play into the 2009-10 grant.

The Pell Grant program is the cornerstone of federal grant aid for low-income college students. This academic year, low-income students will receive Pell Grants worth between $890 and $4,731 each to pay for tuition and other attendance related costs. When determining Pell Grant appropriations, Congress sets a maximum grant level for the year and provides what it estimates to be the necessary funding. Each student's grant amount is determined by a formula based on his or her financial need.

The Shortfall and Temporary Fix

Last fall, a few news sources reported that 2008-09 Pell Grant funding might run out before students received all of the aid for which they were eligible. This problem was caused by a "shortfall." Congress had not set aside enough funding to pay for all of the grants awarded in the 2007-08 school year because the number of awards exceeded expectations. (2008-09 grants are expected to be underfunded as well.) To ensure student grants were not reduced, the U.S. Department of Education followed common practice and dipped into funding already set aside for the following year (2008-09 grants) in fiscal year 2008 appropriations. (See the Federal Education Budget Project resource page for more on this issue).

By the time the Department of Education distributed 2008-09 Pell Grants last fall, it expected to be about $2 billion short. This is because some of the money Congress set aside for them had already been used to make 2007-08 grants, and the 2008-09 grant was also underfunded. This "borrowed" money and underfunding usually doesn't affect student grants because budget rules require Congress to make up for them when it funds Pell Grants for the next year. But Congress has not yet filled the most recent shortfall because it postponed education appropriations, and therefore Pell Grant appropriations, for fiscal year 2009 (which began Oct. 1, 2008).

In place of fiscal year 2009 appropriations, Congress enacted a stopgap funding measure last fall. The measure gives the Department of Education spending authority to compensate for any grant reduction for students that might otherwise result from the missing $2 billion. When this authority expires on March 6^th, the $2 billion shortfall will come back...except the stimulus should provide enough funds to retire the shortfall.

Stimulus, Pell, and the Shortfall Fix

Congress increased the maximum 2009-10 Pell Grant level by $500 from $4,360 in the stimulus bill enacted earlier this month. Although the $4,360 base level has not actually been set in law yet, an explanatory statement accompanying the bill suggests that fiscal year 2009 appropriations considered later this year will fund at that level. The stimulus appropriates more funding ($15.6 billion) than is necessary to fund the $500 increase for 2009-10, which by default, will be used to retire the $2 billion shortfall from the prior year.

New Mandatory Funding Problems

While the Pell Grant program has experienced shortfall problems in the past, an entirely new funding problem has now emerged with the 2009-10 grant. In 2007 Congress created a new 10-year funding stream for Pell Grants separate from the annual appropriations funding (i.e. mandatory funding). These mandatory funds provide an equal "add-on" to each student's Pell Grant. For academic years 2008-09 and 2009-10, the law states that the add-on must be $490 for every student who receives a Pell Grant.

The Department of Education reported last fall, however, that the available $2.1 billion in mandatory money was not enough to support $490 because more students were eligible for grants than Congress expected in 2007. Instead, it might need to use its authority to reduce the 2009-10 add-on to $400.

The $500 stimulus funding increase compounds the shortfall in the mandatory funding stream. This increase makes 800,000 more students eligible for grants than were previously, according to the House Appropriations Committee. Pell Grants are awarded on a sliding scale, and when the maximum grant is increased, the sliding scale expands and captures more students, awarding them a minimum grant.

As a result of the expanded eligible student population, the separate mandatory add-on now must be spread among more students, reducing its value for all recipients. The stimulus, however, also adds $643 million to the already available $2.1 billion in mandatory funds to restore the add-on to $490 per student.

Putting It All Together

In sum, students attending school in fall 2009 look set to receive bigger Pell Grants. Students with the most need will get as much as $5,350, compared to $4,731 in school year 2008-09. Adding up all the moving pieces to arrive at this figure is a daunting task. Ed Money Watch will keep you posted on any future developments that will affect the 2009-10 Pell Grant.