Higher Ed Watch

[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!

[Editor's Note: A version of this post ran yesterday in the Albany Times Union]

The College Board reports tuition is up nine percent this year in inflation-adjusted terms, despite declining prices throughout the economy and stagnant median family income. Parents want to know why the sharp increase and why college costs so much in the first place.

The answer, in a word, is demand. Until we channel higher education demand in a more rational direction, tuition will continue to outpace inflation, grant aid, and family income.

Higher Ed Watch readers know that demand isn't the only factor driving tuition. College supply is relatively limited. Higher education is slow to embrace productivity gains seen elsewhere in the economy. Most important, states cut higher education funding to balance budgets, and colleges backfill those cuts by hiking tuition. Banks act as enablers, supplying big student loans to anyone willing to borrow.

But at its base, tuition rises because suppliers, including those who finance them, take advantage of high, under-informed, and often irrational consumer demand. As families shop colleges this fall, they would be well served to focus on value. The Department of Education can help by protecting consumers from the worst deals. We need a lemon law for colleges that cost too much and deliver too little.

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.

Yesterday the Lexington Institute held a policy forum in Washington, D.C. on the future of the federal student loan programs. Jason Delisle of the New America Foundation was a featured speaker along with representatives from Sallie Mae, the financial aid industry, and a student organization. A webcast of the entire event is available here.

Readers may wish to pay particular attention to a discussion between Sallie Mae Vice Chairman Jack Remondi and Jason Delisle regarding federal student loan program costs and market based cost estimates. The discussion begins 1 hour and 19 minutes into the forum.

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.

By Travis Reindl

For the better part of the last decade, the higher education community has debated the question of whether public colleges and universities are on the path to privatization. Will state support for public institutions sag to the point where they are not really public? Should these institutions be given greater autonomy to do things like build buildings and raise tuition? This conversation usually follows the ebb and flow of the state budget cycle, intensifying understandably during downturns.

The current state fiscal meltdown, which has prompted steep funding cuts and tuition hikes for higher education, has breathed new life into the issue of privatization. College presidents, researchers, and even campus newspapers are pondering whether the current fiscal slump is severe enough to force a revisiting of the state-campus relationship. The old joke among college presidents about their institutions moving from state supported to state molested is enjoying a comeback on the conference circuit.

Having watched this conversation for the better part of a decade, I've come to realize that a reality check is in order. To evaluate these claims, I believe that there are several important questions that need to be answered:

• Are we really that close to losing the "public" in public higher education?

• Is there some threshold below which a public university can or should be relieved of its public mission?

• Does it matter if major public universities become quasi-public enterprises? Will they operate any differently than they do now?

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.

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...

[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.)

 [Editor's Note: In this month's edition of the Washington Monthly, Higher Ed Watch Editor Stephen Burd looks at the subprime student loan crisis at some of the nation's largest chains of for-profit colleges. We've included an excerpt from the piece below. To read the full article, click here.]

At the age of forty-three, Martine Leveque decided it was time to start over. For several years, she had worked in the movie business, writing subtitles in Italian and French for English-language films, but her employer moved overseas. She then tried her hand at sales, but each time the economy dipped sales tumbled, along with her income, and as a single mother with a teenage son, she wanted a job that offered more security. She decided to pursue a career in nursing, a high-demand field where she could also do some good.

While researching her options online, Leveque (pictured on the left) stumbled on the Web site for Everest College, part of the Corinthian Colleges chain, which pictured students in lab coats and scrubs probing a replica of a human heart and a string of glowing testimonials from graduates. "Now I know exactly where I am going. And now I'm making very good money," enthused a former student named Anjali B. The school, near Leveque's home in Alhambra, California, offered a Licensed Vocational Nursing program that would take her just one year to complete. When Leveque contacted the admissions office, she was told she would receive hands-on training from experienced nurses in state-of-the-art labs with the most modern equipment-including a recently purchased $30,000 mannequin that could simulate the birthing process. She also says recruiters told her that she would be able to do rotations at the University of California, Los Angeles Medical Center, one of the nation's best hospitals.