Student Loan Scandals
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.
Earlier this week we urged lawmakers not to put non-profit student loan providers on a pedestal. After all, these agencies are no strangers to scandal.
In our earlier post, we wrote about the central role a group of these nonprofit lenders played in devising and carrying out the 9.5 student loan scandal. Today, we're going to take a closer look at misdeeds that have occurred at individual agencies over the last several years. In case after case, the leaders of these companies appear to have lost sight of their agencies' missions -- acting more like high-rolling executives at for-profit corporations than the leaders of tax-exempt public-purpose organizations.
Here are five such cases:
Iowa Student Loan Liquidity Corporation
The chief executive officer of Iowa's nonprofit student loan company, also known as ISL, has not been shy about his ambitions for the agency. In an internal company e-mail obtained by The Des Moines Register in 2007, Steve McCullough wrote that his aim was to achieve "continued 'hypergrowth" by pursuing "an aggressive, offensive strategy to bring in new loan volume."
With Congress on the verge of considering legislation to eliminate the Federal Family Education Loan (FFEL) program, it is becoming increasingly clear that lawmakers don't want to go quite as far as the Obama administration proposed. Members of both parties are pushing Congressional leaders to preserve a role for nonprofit lenders in the federal student loan program.
In their battle for survival, non-profit loan agencies have benefited from lawmakers' perception that they are more upstanding than their for-profit peers. At a hearing before the House of Representatives Committee on Education and Labor in May, Rep. Carol Shea-Porter (D-NH) expressed this view when she touted the "well-respected and appreciated status" of the New Hampshire Higher Education Assistance Foundation (NHHEAF). "Doesn't NHHEAF represent exactly the type of services that you would like to retain?" she asked Bob Shireman, the Obama administration's point person on this proposal.
Last week, we ran a post critiquing The New York Times' coverage of the collapse of a popular student loan forgiveness program in Kentucky that was designed to encourage students to become school teachers. We credited the Times for bringing national attention to the struggles of thousands of newly-minted teachers who were left in the lurch when the Kentucky Higher Education Student Loan Corporation (KHESLC), the state's nonprofit student loan agency, decided to pull the plug on its "Best in Class" program. But we took the newspaper to task for missing the real story: how officials at the Kentucky loan agency had set the program up for failure by financing it with funds it had improperly obtained by engaging in a risky scheme to overcharge the federal government tens of millions of dollars.
Since then, we have been overwhelmed by the responses we have received on the post. Nearly 100 Kentucky teachers have written to us, explaining the hardships they have faced since the loan agency shut down the program. Today, we thought we'd put a human face on the scandal by printing excerpts from comments we received from the teachers.
Drawn to Public Service by a Promise
The stories they tell are remarkably similar -- about how they were drawn to public service by the promise of having their student loans forgiven. Most of these people, many of whom left other lines of work to take part in the program, say that they never would have been able to consider entering such a low-paying field without the help that the Kentucky loan agency [also known as the Student Loan People (SLP)] offered them:
[This is the seventh 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 and here.]
A new report that the U.S. Department of Education's Inspector General (IG) released on Friday about the Kentucky Higher Education Student Loan Corporation (KHESLC) should put to rest, once and for all, a key argument that lenders have been using to defend their involvement in a scheme to gain windfall profits at the government's and taxpayers' expense. The IG rejects the loan companies' claims that their actions were lawful because several officials at a key office within the Education Department had approved them.
In January 2007, then-Education Secretary Margaret Spellings put a stop to what has become known as the 9.5 scandal, in which a group of lenders were improperly growing the volume of federal student loans that they claimed were eligible for the 9.5 guarantee available on loans financed through tax-exempt bonds issued before 1993.
But, as Higher Ed Watch first revealed last month, the Financial Partners division of the Department's Federal Student Aid (FSA) office carried out a controversial series of program reviews from the fall of 2005 through the summer of 2006 that signed off on these student loan companies' 9.5 billing practices. In some cases, the program reviewers even showed the lenders how they could take greater advantage of these inflated subsidies (at the time the borrower interest rate on regular federal student loans hovered around 3.5 percent).
Last week, The New York Times brought national attention to the struggles of thousands of newly-minted teachers in Kentucky who were left in the lurch when a popular loan forgiveness program designed to encourage students to become educators ran out of money. The Times certainly deserves credit for putting the spotlight on these teachers who have been left heavily indebted with student loans that they took out in good faith -- with the promise that they would have help paying them off in exchange for their public service.
But unfortunately, the Times didn't tell the whole story and instead left its readers in the dark about the real reasons for the loan forgiveness program's collapse. We fear that this omission could lead policymakers and the public to learn the wrong lessons from this debacle.
Ever since the Kentucky Higher Education Student Loan Corporation (KHESLC), the state's nonprofit student loan agency, pulled the plug on its "Best in Class" student loan forgiveness program, agency officials have tried to shift the blame on to the federal government. They have argued that the Democratic-controlled Congress effectively killed the program in 2007, when it approved the College Cost Reduction and Access Act, which cut lender subsidies to pay for increased spending on student aid.
The Times appears to have accepted this line of argument without question. In two articles it ran last week (here and here), the newspaper placed the blame for the program's demise squarely on the subsidy cuts and the credit crunch, which made it difficult for the loan agency to raise funds to make new loans. Undoubtedly, last year's crash in the financial markets was the final straw in the agency's decision to cut the program. But that certainly does not explain how the Kentucky student loan agency got itself into this mess to begin with.
By Ben Miller and Stephen Burd
The Federal Reserve Board has proposed regulations that could significantly weaken a federal law that aims to protect students from being misled into taking out high cost private student loans. In a notice in the Federal Register on March 24, the agency said that it is considering including exemptions, or "safe harbors," to a provision Congress added to the Higher Education Act last year that prohibits lenders from using a college's name, mascot, logo, or emblem to market private loans to students.
Under the Federal Reserve's proposal, a lender would be able to continue engaging in these practices as long as it disclosed "in a clear and prominent way" that the college it is referring to "does not endorse the creditor's loans, and that the creditor is not affiliated with the educational institution." The agency says that this "safe harbor approach" is needed because a lender "may at times have legitimate reasons for using the name of a covered educational institution" in its marketing materials.
The Federal Reserve also proposes widening this exemption even further for private student loan providers that appear on a college's preferred lender list. In those cases, the agency says, it "would be misleading" for a lender to state that a school has not endorsed its loan products. Instead, it would simply require that the lender "clearly and conspicuously disclose that the loan is not being offered or made by the educational institution."
At Higher Ed Watch, we believe that these proposals would completely undermine both the letter of the law and its intent. But we don't believe that the fault for offering these misguided proposals rests entirely with the Federal Reserve. Congress is also to blame for sending mixed signals to the agency about how this provision should be enacted.
[This is the sixth in a 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, and here.]
For years, we have known that nonprofit student loan companies engaged in an illegal scheme to gain windfall profits at the government's and taxpayers' expense. But these lenders did not act alone. Higher Ed Watch has learned that they received assistance and encouragement from several officials at a key office within the Department of Education.
FSA's Program Review Timeline
Spring 2005: The Department of Education’s Inspector General opens investigations into lenders, like Nelnet, that had been among the most active in engaging in serial loan and bond manipulations to grow the volume of federal loans they claimed eligible for the 9.5 subsidy rate.
Fall 2005: The Financial Partners division of the Department’s Federal Student Aid office begins conducting program reviews of nonprofit lenders examining their 9.5 loan holdings.
May 2006: Financial Partners releases program reviews on the Kentucky Higher Education Student Loan Corporation (KHESLC) and CollegeInvest in Colorado, that find that these two lenders have undercharged the government on 9.5 loans. The program reviewers invite the companies to determine the additional amount of subsidy payments for which they are entitled.
September 2006: The Inspector General's Office releases its audit on Nelnet, declaring that the company’s scheme and that of other lenders to aggressively increase their 9.5 holdings violates the Higher Education Act and Department regulations. It also releases a separate report that accuses the Financial Partners division for taking its “partnership approach” with the student loan industry too far.
November 2006: In a response to the Inspector General’s audit, lawyers for Nelnet cite three program reviews of lenders that Financial Partners conducted between 2005 and 2006 that they say “should put to rest” any “lingering doubts” about the loan company’s 9.5 claims.
January 2007: Education Secretary Margaret Spellings concurs with the Inspector General’s conclusion that the practices the lenders have engaged in are illegal. She requires lenders to undergo special independent audits to determine the legality of any future claims. She does not, however, require lenders to return subsidy payments they have already received.
April 2009: The Inspector General releases a report blasting the Financial Partners division, saying that its program review reports did not always comply with the Higher Education Act and Department regulations.
In January 2007, then-Education Secretary Margaret Spellings put a stop to what has become known as the 9.5 scandal, in which nonprofit lenders were improperly growing the volume of federal student loans that they claimed were eligible for the 9.5 guarantee available on loans financed through tax-exempt bonds issued before 1993. This was a goldmine for lenders at a time when the borrower interest rate hovered around 3.5 percent.
But between the fall of 2005 and the end of the summer of 2006, the Financial Partners division of the Education Department's Federal Student Aid (FSA) office wrote a series of program review reports in which they signed off on these companies' billing practices and, in some cases, showed the lenders how they could take greater advantage of these inflated subsidies.
The timing of these reviews is curious, to say the least. They were conducted at a time when federal lawmakers had repeatedly taken action in 2004 and again in early 2006 to try to shut these payments off. The Department's Inspector General (IG) had also begun its own investigations into lenders, like Nelnet, that had been the most active in engaging in serial loan and bond manipulations to grow the volume of federal loans they claimed eligible for the 9.5 subsidy rate.
A One-Time Only Offer in Kentucky
One lender that the Financial Partners division had chosen to review was the Kentucky Higher Education Student Loan Corporation (KHESLC), the state's nonprofit student loan agency. Between 2003 and 2004, the Kentucky company became one of the most aggressive participants in the 9.5 student loan scheme, increasing the volume of loans it claimed eligible for the special rate from $140 million to nearly $1 billion over that period of time.
Still, a May 2006 Financial Partners program review report, which Higher Ed Watch obtained from the Education Department through a Freedom of Information Act (FOIA) request, concluded that the corporation had, in fact, "underbilled" the Department. The reviewer provided a spreadsheet of loans that he said were eligible for the 9.5 payments, and he invited the agency to determine the additional amount of subsidy payments it was owed on these loans and others like it. He made clear that this was a one-time only offer -- warning that a decision not to claim these payments, which had to be provided in writing to his office, could not be reversed. "This declaration is permanent and KHESLC may not decide later to recover this special allowance," the report stated. [Efforts by the Kentucky agency to receive these payments were later rejected by the Department.]
By now it's hardly news that the U.S Department of Education has failed, over the last eight years, to provide adequate oversight over the lenders and guaranty agencies that participate in the Federal Family Education Loan (FFEL) program. Perhaps that explains why a new report on this subject from the Department's Inspector General (IG) received little attention, getting only the briefest of mentions in the trade publications that follow the agency's every move.
But that's unfortunate because the report provides the most vivid picture to date of how little the previous leaders of the agency's Federal Student Aid (FSA) office cared about oversight, and how they put their allegiances to the student loan industry over their responsibility to safeguard the integrity of the federal student loan programs.
The report provides numerous examples of how the Financial Partners division of FSA, which is in charge of monitoring lenders and guarantors, fell down on the job. Take, for example, the fact that the division's leaders:
- Assigned only one person to review the hundreds of compliance audit reports that lenders and guarantors submit to the Department each year.
- Regularly allowed program participants that were subject to review "to determine the liability" they owed the Department, and had "no formal procedure" to verify the results of the loan companies' calculations.
- Did not consult with the Department's Office of Postsecondary Education or Office of General Counsel before issuing program review reports that dealt with "sensitive" and "political" issues to ensure that the findings in these reports were consistent with the Higher Education Act and the Department's regulations.
Something fishy appears to be going on in South Carolina.
Financial reporting documents that Higher Ed Watch obtained from the U.S. Department of Education suggest that the state student loan agency in South Carolina may be exploiting its ties to a closely affiliated guaranty agency to receive excessive taxpayer subsidies from the federal government. At issue is the guarantor's apparent abuse of an emergency program that the government has in place to ensure that all eligible students are able to obtain federal student loans.
The federal lender-of-last-resort program is administered by the designated guaranty agency in each state to provide government-backed loans to students whose applications have been denied by other lenders. Since the agency must give qualified borrowers a loan-of-last-resort, the federal government agrees to take on all the risk associated with the debt. This means that holders of these loans are reimbursed for 100 percent (page 8) of any losses sustained due to borrower default, as opposed to ordinary loans made through the Federal Family Education Loans program (FFEL) that are reimbursed at only a 97 percent rate.