Higher Ed Watch

[In recent months we have cast a critical eye on federal student loan guaranty agencies by taking a closer look at a few specific agencies to show how concerns about conflicts of interests and misaligned financial incentives operate in practice. Previous entries can be found here, here, here, here, and here. Today, our series continues with a look at the actual amount of subsidies and payments provided to these agencies.]

Guaranty agencies are paid to perform three basic functions within the Federal Family Education Loan (FFEL) Program: provide default insurance for lenders; work with delinquent borrowers to help them avoid default; and collect on or rehabilitate defaulted student loans. Though each individual purpose is important; entrusting a single agency to carry out all of these functions creates opportunities for conflicts of interest. Even worse, the financial payment structure provides guaranty agencies with the greatest compensation for letting a student loan default -- the worst possible outcome for borrowers and taxpayers.

According to the U.S. Department of Education, guaranty agencies received $1.57 billion from the federal government in fiscal year 2008 for dealing with defaulted student loans and working with borrowers. Guaranty agencies also ended the 2008 fiscal year with an additional $1.63 billion worth of federal assets held in trust to reimburse lenders for losses on defaulted loans.

A breakdown of the distribution of federal payments to guaranty agencies reveals why taxpayers and policymakers should be concerned about these companies' financial incentives. As the table below shows, 60.5 percent, or $948.8 million, of the federal payments guaranty agencies received in the 2008 fiscal year were for the collection and rehabilitation of defaulted student loans. (The Department of Education does not separate these payments out so we don't know how much agencies got for each function.) By contrast, they received only $177.3 million for helping keep borrowers out of default. In addition, guaranty agencies received $203.9 million to cover the cost of processing and issuing the initial default guarantee on new loans and another $237.9 million for maintaining existing loan accounts.

In 2007, Congress created two new programs aimed at making it easier for students to repay their federal student loans and encouraging them to pursue careers in the public service. As we wrote yesterday, one of those programs -- Income-Based Repayment -- goes into effect today. The other one -- Public Service Loan Forgiveness -- is already up and running but may not live up to its full potential unless changes are made to the regulations governing it.

Under the loan forgiveness program, which Congress included in the College Cost Reduction and Access Act, the federal government will forgive the remaining debt of Direct Student Loan borrowers who have made 120 payments on their loans while working in a public service occupation. Borrowers with loans through the Federal Family Education Loan (FFEL) program can take advantage of this benefit by consolidating their debt into Direct Lending.

Lawmakers created the program in reaction to reports that student loan borrowers were increasingly shying away from pursuing public-service careers, such as teaching and social work, because of their heavy debt loads. By providing loan forgiveness, the bill's authors hoped to provide incentives to college graduates to enter these fields and reward them for their service.

Sounds pretty straightforward, right? Unfortunately, the program is not operating in the way lawmakers envisioned. That's because the U.S. Department of Education, under its previous leadership, decided to keep people in the dark about whether their chosen jobs qualify them for the benefit. Under regulations the Department issued in October, student loan borrowers will not know whether they qualify for the loan forgiveness until after they have made all 120 required payments.

Some big changes are coming to the federal student aid programs tomorrow that will save students money and make it easier for struggling borrowers to repay their government-backed student loan debt.

Most of these changes are the result of three pieces of legislation that have been enacted over the last several years: the Deficit Reduction Act of 2005, the College Cost Reduction and Access Act of 2007, and the American Recovery and Reinvestment Act of 2009. All contain provisions that go into effect on July 1. These include:

• A $619 increase in the maximum Pell Grant, to $5,350 for the 2009-10 academic year.

• A 0.4 percentage point reduction in the fixed interest rate charged on new federally subsidized Stafford loans to 5.6 percent.

• A one-half percentage point decrease in the origination fees that borrowers must pay on their federal student loans to 1.5 percent of total amount borrowed.

Meanwhile, borrowers with variable-rate Stafford Loans originated before July 1, 2006 will see their rates drop to 2.48 percent on Wednesday. That's two percentage points lower than the current 4.21 rate on these loans. Members of the Class of 2009 can lock in an even lower rate of 1.88 percent if they consolidate their variable rate loans during the sixth month grace period before they enter repaym

What if a defense company was secretly working the back halls of Congress to secure a no-bid contract to build a fighter jet? Or what if a handful of non-profit health insurers were lobbying Congress to divide up the country and grant them legislatively guaranteed monopolies to manage government health benefits? The public would surely be outraged. Yet a trade association for non-profit student loan providers, the Education Finance Council (EFC), has taken a similar approach with its proposed alternative to federal student loan reform under consideration in Congress.

This week Higher Ed Watch received from an anonymous source a copy of the proposal EFC has been shopping to a select group of Congressional offices. EFC confirmed it had crafted the proposal sent to us, but the association has not publicly released it, nor does it mention it on its website.

In its proposal, EFC calls on Congress to guarantee that all currently operating non-profit loan companies and servicers (such as a few guaranty agencies) will be given the servicing rights for a minimum number of federal student loan borrowers attending an institution in their home state. The proposal defines this minimum level as either 100,000 or the total number of borrowers within the state, whichever is less. Thus the proposal seems to suggest that borrowers would be assigned a non-profit loan servicer by the federal government. Has EFC compromised on its key loan program principles - competition and borrower choice - to guarantee its members a role in a new loan program?

For-profit college lobbyists have suddenly become concerned about overborrowing by their institutions' students.

On Monday, a procession of career college lobbyists urged the U.S. Department of Education officials to give their schools more discretion to limit the amount of federal loans students can take out to cover their living expenses. The industry representatives made their remarks at a public hearing the Education Department held at the Community College of Philadelphia to gather ideas for strengthening federal student aid rules to improve the integrity of the programs.

"Schools are trying to limit borrowing," said Richard Dumaresq of the Pennsylvania Association of Private School Administrators, which advocates for proprietary institutions in the state. "But it's not enough to stem the tide of overborrowing, especially in a down economy." His comments were echoed by Harris Miller, the president of the Career College Association, and lobbyists for some of the largest publically traded chains of for-profit colleges, such as ITT Educational Services Inc.

At Higher Ed Watch, we would obviously be happy if students didn't have to take on such a heavy load of debt to attend for profit colleges and trade schools, many of which have had trouble graduating students. But it is hard to take the lobbyists' concerns too seriously, considering the recent conduct of many of these institutions.

By Travis Reindl

Every year, colleges and universities send reams of data to the federal government, on subjects ranging from campus crime to research by foreign nationals. Yet, there's still a lot we don't know about our system of higher education. Congress and the executive branch bear some responsibility for this state of affairs, continually adding to an already massive and uncoordinated regulatory structure. But some higher education leaders are also on the hook here, having fought efforts over the years to bring more transparency to colleges' admissions and financial aid practices, as well as their performance in educating and graduating students.

This is no longer acceptable. Higher education is a major enterprise in the U.S., representing three percent of the total Gross Domestic Product (GDP) and employing more than 3.5 million Americans. Taxpayers also play a big part in this enterprise, contributing $21 billion toward federal student grants and billions more for research grants and contracts. Given that, it is troubling that we can't get better answers about who's getting into college, what happens to these students, and how much it costs to educate them.

As Congress and the Obama administration prepare to invest billions more in our colleges and universities, they should require colleges to provide better answers to the following five questions:

Yesterday, at Higher Ed Watch, we urged Democratic Congressional leaders to keep their eye on the ball and move forward with President Obama's plan to make Pell Grants into a true entitlement for low-income students.

But what if eliminating the Federal Family Education Loan (FFEL) program doesn't produce enough savings for Congress to achieve this lofty goal (as recent media reports suggest)? Or what if opposition to creating a new Pell Grant entitlement program is strong enough among fiscally conservative Democrats and appropriators to kill the proposal? What then should be done with the tens of billions of dollars the government would save by providing loans entirely through the Direct Loan program? 

We have a few ideas at Higher Ed Watch about how that money could be spent -- none of which involve extending the interest rate reduction that we wrote about yesterday.

When it comes to student aid, President Obama has made his wishes clear: he wants Congress to use the savings it derives from eliminating the Federal Family Education Loan (FFEL) program to make Pell Grants a true entitlement for low-income students. But as Democratic Congressional leaders take up legislation to enact the President's plan, they are likely to have other ideas about how this money should be spent.

Some lawmakers will surely be tempted to take advantage of this opportunity and push for an extension of an interest rate reduction Congress approved in 2007 on subsidized federal student loans. Doing so would prevent a sudden rise in the student loan interest rate -- from 3.4 to 6.8 percent -- at the tail end of Obama's first term, when the rate cut is set to expire.

At Higher Ed Watch, we recognize that allowing the rate reduction to expire in 2012 would be a politically risky move. Nonetheless, we would strongly urge Congressional leaders to stay faithful to Obama's plan. The administration has handed them a once-in-a-lifetime opportunity to put the Pell Grant program on a firm financial footing by financing it entirely with mandatory funds. Diverting funds to pay for an interest rate cut could cripple this effort, without providing much of a public policy benefit.

On May 21, René Drouin, the president and chief executive officer of the New Hampshire Higher Education Assistance Foundation (NHHEAF) Network Organizations, appeared before the House of Representatives Committee on Education and Labor to discuss reforms to the federal student aid programs. Drouin and the New Hampshire guaranty agency received heaps of praise from Representatives, who lauded them for fulfilling their charitable mission by establishing an educational foundation and providing a college planning center for Granite State students.

But no mention was given to the other ways guaranty agencies like NHHEAF spend their taxpayer subsidies, including how much they compensate top officials. Curious, we looked up the New Hampshire agency's latest 990 tax form and found that Drouin had earned a salary  in 2007 of $550,072, an amount that seemed high to us considering the agency's size. So we decided to dig further and see how Drouin's compensation compared to the leaders of the 34 other guaranty agencies. Using Guidestar, a repository of nonprofit tax filings, and assorted state and newspaper databases, we found compensation information for the highest paid employee at every agency except the Oklahoma Guaranteed Student Loan Program. That information is presented in the table below.

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: