Department of Education

The dismal state of America's high school graduation rates - less than 75 percent nationally and below 50 percent in some areas - has become a key federal public policy issue in the last decade. Existing federal programs, including TRIO and GEAR UP, already seek to improve high school graduation and college going rates in underserved populations. But recent developments, the Student Aid and Fiscal Responsibility Act, and President Obama's 2010 Budget Request, have brought new high school intervention programs to the table. Are these programs really all that different? And what resources could the federal government commit to these efforts?

TRIO/GEAR UP
TRIO Talent Search, TRIO Upward Bound, and the Gaining Early Awareness and Readiness for Undergraduate Programs (GEAR UP) are three existing federal programs that attempt to increase high school graduation and college going rates in low-income students through small programs aimed at individual students or groups of students. These programs include out-of-school programs or pull-out sessions during the regular school day, after-school and weekend instruction, tutoring support for core academic subjects and college and financial aid applications, and counseling, mentoring, academic support, and college outreach services.

[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!

In July we analyzed funding for K-12 school facilities in the student loan reform bill, the Student Aid and Fiscal Responsibility Act, as passed by the House Education and Labor Committee. The full House passed the bill in September and preserved the $2.0 billion per year school repair program. Although the Senate has not yet acted on a similar student loan reform bill, a version drafted by the Senate Health, Labor, Education and Pensions Committee was leaked a couple of months ago. The leaked bill suggests the Senate is headed in a different direction than the House when it comes to funding school facilities construction.

Both of these pieces of legislation provide a glimpse into the federal government's first major foray into directly funding K-12 school facilities and neither propose an insignificant amount of money. The most striking difference between the two versions is that the House includes a two-year, formula-based investment in K-12 school facilities, and the Senate bill creates a five year competitive program for K-12 school repair, renovation, and construction.

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.

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.

Yesterday the Department of Education released the finalized applications for Phase 2 of the State Fiscal Stabilization Fund (SFSF). The SFSF, a major component of the American Recovery and Reinvestment Act (ARRA), provides $48.6 billion in federal funds to states so that they can fill gaps in their education budgets. States that successfully complete the Phase 2 application process will receive the remaining 33 percent of their SFSF monies (unless the state was eligible to receive more than 67 percent during Phase 1). Much like the Phase 1 applications, the Phase 2 applications require state governors to sign off on a series of promises surrounding four areas of reform outlined in the ARRA. The Phase 2 promises center on the collection and public availability of data and information on each state's progress towards the reform areas.

When Congress passed the American Recovery and Reinvestment Act (ARRA), they included extensive data reporting requirements so that the public could closely track expenditures. Now that the recipient reported data on expenditures is publically available, tracking education funds should be easy. But as we discussed earlier this week, data reported by school districts and institutions of higher education is lacking in comprehensive information and is difficult to decipher. Unfortunately, state-level recipient reported data does not match previously available Department of Education (ED) reported data for many states, further undermining the value of the data. If the point of the data collection process was to provide accessible data on the progress of the stimulus, this data falls short of that goal.

ARRA recipients reported the total amount of federal stimulus funds they had received as of September 30^th, 2009 for all stimulus programs (except Pell Grants). This data can be compared to data ED reported on the amount of funds disbursed for the same programs. To do this comparison, we aggregated the recipient reported data on total ARRA funds received by state and compared it to ED's reports on funds it disbursed after subtracting any disbursements related to Pell Grants. We found a fair number of discrepancies between the recipient and agency reported data.

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.

Last Friday, the first round of recipient reported Recovery Act grant and loan data was made available on the Recovery.gov website. Much like the previously released federal contract data, this wave of data lacks the comprehensive information needed to truly determine how the funds are being spent and from what source. The data are both difficult to decipher and include several instances of human error.

While working with the data we discovered several issues that make the data difficult to understand.  For example, less than half of all education-related data are tagged with the funding agency name "Department of Education." Other possible funding agencies include "Federal Student Aid," "Impact Aid Programs," "Office of Elementary and Secondary Education," "Office of Higher Education Programs," "Office of Special Education and Rehabilitative Services," "Office of Postsecondary Education," and "Office of Vocational and Adult Education."

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...