Ed Policy Watch

At Ed Money Watch, we discuss and analyze major issues affecting education funding. In our Friday News Roundup, we try to highlight interesting stories that might otherwise get overlooked. These stories emphasize how federal and state policy changes can affect local schools and districts.

Arizona Schools Receive Federal Stimulus Funds

Pennsylvania Education Secretary, Local Officials Push for Proper Use of Stimulus Funds

Teachers in Arizona Recalled After April Layoffs

California Legislative Committee Rejects Cal Grant Cuts

Data-Driven Schools See Improvements

At Ed Money Watch, we discuss and analyze major issues affecting education funding. In our Friday News Roundup, we try to highlight interesting stories that might otherwise get overlooked. These stories emphasize how federal and state policy changes can affect local schools and districts.

$100 Million in Stimulus Funds at Risk in Tennessee

South Carolina Supreme Court Orders Governor to Apply for Stimulus Funds

Kentucky Educators Will Be Spared Major Cuts

Stimulus Funds are Slow to Reach Pennsylvania Schools

At Ed Money Watch, we discuss and analyze major issues affecting education funding. In our Friday News Roundup, we try to highlight interesting stories that might otherwise get overlooked. These stories emphasize how federal and state policy changes can affect local schools and districts.

North Carolina May Drop Some Standardized Tests

Some States May Base College Funding on Graduation Rates

The U.S. Department of Education's announcement this week that it plans to rewrite its federal student aid rules to improve the integrity of these programs is certainly welcome news. We are particularly pleased that the agency is considering strengthening a regulation that aims to prevent unscrupulous for-profit colleges and trade schools from taking advantage of financially needy students.

As we have reported previously, Congress in 1992 added a provision to the Higher Education Act prohibiting colleges from giving "any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments" to admissions officers. The ban on incentive compensation for college recruiters was included as part of a broader effort by lawmakers to crack down on fly-by night trade schools that had been set up to reap profits from the Title IV federal student aid programs. With reports rampant that trade schools were enrolling unqualified low-income individuals simply to get access to Title IV funds, policymakers believed it was important to bar postsecondary-education institutions from paying recruiters on the basis of how many students they enrolled.

A decade later, top Education Department officials with ties to the for-profit sector decided to weaken this prohibition. In November 2002, the Department issued new regulations that created 12 "safe harbors" for colleges that wished to provide incentive payments to their admissions employees. The agency took this action over the objections of a negotiated rulemaking panel made up of college officials, advocates for students, and consumer groups that had been assembled to consider the rule changes and of the two main national organizations representing college admissions officers.

In January, the Federal Education Budget Project published an issue brief on the student loan purchase programs put in place under the Ensuring Continued Access to Student Loans Act of 2008 (ECASLA). Given the new developments and new information released by the Obama Administration, it's a good time to catch up on the ECASLA programs.

When financial markets began to break down last year, Congress confronted the possibility that private lenders issuing federally-backed student loans (the Federal Family Education Loan Program, FFEL) might not be able to meet student demand. In response, Congress passed legislation (ECASLA) granting the U.S. Department of Education temporary authority to purchase FFEL loans. The new loan purchase authority helps ensure that FFEL lenders have access to adequate and affordable capital and can convert their loan assets into cash to fund new loans. ECASLA gives the Department of Education considerable discretion in designing and implementing loan purchase programs. Using this discretion, the Department designed and implemented four separate loan purchase arrangements: a put option; a short-term purchase program; a financing arrangement; and an asset-backed commercial paper support program. Each option involves different purchase arrangements and targets loans from different years. The ECASLA issue brief, which will be updated in the coming weeks, includes an explanation of each program and is available here.

ECASLA Performance Info Released

Since January, new information has been made available about the ECASLA programs. In March, the Obama Administration reported the volume of loans each private lender made under each program. The reports show that eleven lenders exercised put options on FFEL loans issued during the 2008-09 academic year, selling $701 million in loans back to the Department of Education. Two lenders, Edamerica and Wachovia Education Finance, accounted for about 90 percent of that volume. Subsequently, the Office of Management and Budget (OMB) released estimates in May 2009 showing that $4.8 billion in 2008-09 loans ultimately will be put to the Department (about 8 percent of expected 2008-09 FFEL issuance).

At Ed Money Watch, we discuss and analyze major issues affecting education funding. In our Friday News Roundup, we try to highlight interesting stories that might otherwise get overlooked. These stories emphasize how federal and state policy changes can affect local schools and districts.

Report Released on Stimulus Funds and Reform

California Voters Reject Budget Proposals

Credit Card Bill Could Limit Student Access to Credit for College

California Community Colleges Plan to Slash Enrollment

Florida Lawmakers use Stimulus Aid to Avoid K-12 Budget Cuts

At Ed Money Watch, we discuss and analyze major issues affecting education funding. In our Friday News Roundup, we try to highlight interesting stories that might otherwise get overlooked. These stories emphasize how federal and state policy changes can affect local schools and districts.

Limited Loan Access Makes Community Colleges Hard to Afford

Texas Schools Use College Prep Money for Various Needs

Report Highlights Risks of Merit Pay

[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.

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 Scott Fleming

The Obama Administration has proposed a bold agenda for student financial aid, including calling on Congress to provide nearly $130 billion in additional funding to pay for a massive expansion of the Pell Grant program, the creation of a new grant program for states to support local student completion and retention programs, and a significant retooling of the Perkins Loan program. Despite the Administration's aggressive proposal, a promising approach to improving college affordability appears to have been overlooked: leveraging the advantages of saving to help the lowest income students.

While the proposed increase in spending on Pell Grants is certainly substantial, it's unlikely to have much of a long-term effect, as long as tuition costs continue to spiral out of reach. And while Perkins Loans offer more advantageous terms than federal Stafford loans and private loans, the program's expansion will only contribute to further student indebtedness. The emphasis on "point of sale" aid, where students receive aid as they enter postsecondary education, may be falling victim to the law of diminishing marginal returns. Even in the midst of historic investments in student financial aid, increasing numbers of students still find themselves with considerable unmet need.

There is an alternative, however. For a relatively modest sum, Congress could begin an important policy shift toward helping low-income families plan and save for college by building tax-advantaged college savings plans for low-income children, popularly known as "529" college savings plans. For example, if the $500 million in annual spending set aside for the completion and retention fund were applied to financing college savings plans for low-income children, it could have a substantial impact on college attendance. It may just take a few years to see the full impact.

Higher Ed Watch has some questions for the Obama administration about the president's fiscal year 2010 budget request, which it released today. We hope these questions are helpful to policymakers, the news media, and the public in evaluating these proposals.

1) The president's 2010 budget proposal would end the Federal Family Education Loan (FFEL) program and use the savings to finance the Pell Grant program as an entitlement. This proposal has been controversial in Congress, as some lawmakers oppose creating a new entitlement program. If Congress does not go along with this aspect of the plan, would the administration support using FFEL program savings to increase spending on Pell Grants without making the program an entitlement? Or is the administration open to other ideas for spending this money in ways that would promote its higher education agenda?

2) The president's budget request proposes an increase in funding for the Perkins Loan program from $1.1 billion in available loan assistance in 2009 to $5.8 billion in 2010. Yet the 2010 funding allocated for this change is negative $498 million. Furthermore, the administration shows that the proposal saves $3.2 billion over five years. How does the $4.7 billion increase in available loan funds achieve savings? Is this accomplished by recalling the federal share of the revolving fund that colleges use to make Perkins Loans? If so, why not be more upfront about it?