Department of Education

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...

Earlier this month the National Center for Education Statistics (NCES) released a preliminary report on graduation rates in the 50 states and the District of Columbia for the high school class of 2006-07. The report shows that graduation rates vary widely by state - from as high as 88.6 percent to as low as 52.0 percent - and by student race or ethnicity. Interestingly, the NCES figures differ from the graduation rates most states report under the No Child Left Behind (NCLB) Act. In fact, 14 states claim to have graduation rates at least 10 percentage points higher than what the national standard shows. (Data for both nationally and state defined graduation rates can be accessed on the Federal Education Budget Project website at www.edbudgetproject.org.)

[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.)

State education agencies across the country just completed the first round of reporting for the American Recovery and Reinvestment Act (ARRA) programs, an onerous and massive undertaking. Unfortunately, the quarterly reporting process is not likely to get any easier for states from here - on December 1^st, 2009 the Department of Education (ED) will require districts to report local and state expenditures at school-level for the 2008-09 school year, the first time such data has ever been required for any program. Rather than tracking federal funds like the majority of ARRA reporting, the school-level data will show baseline state and local funding at schools in districts that receive federal Title I Part A funds. As a result, this data could help determine whether districts and schools are using federal funds to supplement, rather than supplant, state and local funding.

Draft Department of Education guidance for the new school-level reporting indicates that any districts receiving Title I Part A funds will have to report school by school expenditures for the 2008-09 school year on:

Despite all of the evidence to the contrary, the student loan industry has always denied that loans made through the Department of Education's Direct Loan program cost taxpayers less than subsidizing private lenders under the Federal Family Education Loan (FFEL) program. With a bill pending in Congress that would eliminate FFEL in favor of 100 percent direct lending, the loan industry is again claiming that billions of dollars in savings projected by non-partisan budget experts are a mirage.

In one recent claim, the loan industry suggests that direct loan savings, as estimated this year by the Congressional Budget Office (CBO), are a sort of stars-are-aligned anomaly arising from historically low U.S. Treasury interest rates. The interest rates are indeed a key component of program costs. Thus, the loan industry argues that under "normal" circumstances, eliminating FFEL would not generate savings -- or at least not the shocking $47 to $87 billion over 10 years (depending on the estimate) that CBO projects.

There is a simple, albeit crude, way to check the accuracy of such a claim. Every year, CBO calculates the subsidy rate (i.e. cost to the government) of the average loan made under the two programs in its 10-year baseline estimate. Under these projections direct loans have always had a lower rate than FFEL because the Education Department doesn't have to make payments or provide insurance to private lenders and guaranty agencies under the program. Thus, the subsidy rate difference is a measure of direct lending's lower cost to the government, and CBO uses that figure when calculating the savings from switching to 100 percent direct lending.

The 2009 estimate, which determines the savings under the proposal pending in Congress, shows that the gap in subsidy rates for the two programs averages 12.3 percentage points over the next 10 years. If the student loan industry's argument was correct, that would be an unusually large difference compared to estimates from earlier years. But just the opposite is true.

Late last week the federal government released the first round of data on economic stimulus spending through the new website Recovery.gov. This preliminary data, which is reported by stimulus funds recipients, included data only for federal contracts as opposed to grant and loan programs. Very few education contracts have been awarded thus far because the majority of education stimulus funds go directly through local education agencies and institutions of higher education. However, the data does include information on 16 contracts made through Department of Education programs. Unfortunately, this data is not detailed enough to provide comprehensive information on how the funds are being spent and from what source, suggesting that future waves of stimulus recipient reported data may not be as useful as we had hoped.

These 16 contracts amount to more than $27.7 million in stimulus funding distributed by 11 states including Alaska, Kansas, Massachusetts, Minnesota, Nebraska, Oregon, Pennsylvania, Tennessee, Virginia, Washington, and Wisconsin. Thus far, the contracting organizations have received $1.9 million (6.9 percent) of the total funds. According to the data reported, these funds have either saved or created 162 jobs. (A table containing this information is available here.)

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.