For Profit Colleges

On to the Senate...

Stephen Burd — Tue, 22 Sep 2009 19:40:00 -0400

Legislation that the U.S. House of Representatives approved last week would make landmark changes to the federal student loan programs -- changes that we have advocated at Higher Ed Watch for the last three years.

We can not overstate the significance of this achievement. Despite fierce opposition from the deep-pocketed student loan industry and their allies on Capitol Hill, the House moved forward with a bill that would eliminate unnecessary middlemen from the process of originating and guaranteeing federal student loans, and would have the government make all federal student loans directly. If this change is enacted into law, it will overwhelmingly simplify the federal student loan program and redirect a massive amount of federal funds out of the pockets of lenders and into the hands of the students who need the help the most.

Having said that, the House bill is far from perfect. The measure contains one provision that we believe is extremely misguided and will, if enacted, harm the cause of student loan reform, and another that would gut a key consumer protection provision in federal law that aims to safeguard students from unscrupulous trade schools. It also has other provisions that are well-intentioned but, as written, are unlikely to achieve the lofty goals the bill's authors have set for them.

Attention will soon shift to the Senate, where the leaders of the Health, Education, Labor and Pensions (HELP) Committee are expected to release their own version of the student loan reform legislation shortly. While the Senate committee will likely stick to the same broad outlines as the House, it could make a few key changes that would significantly strengthen the measure.

Here are some changes that we would like to see:

Make non-profit lenders compete for servicing contracts:

As we have previously reported, the House bill includes a set-aside for nonprofit student loan agencies to service federal student loans that is nearly identical to a proposal that the Education Finance Council (EFC), which represents these lenders, quietly shopped around Capitol Hill this summer. The legislation would essentially give each and every one of EFC's members a no-bid contract to service the loans of up to 100,000 student loan borrowers in their home states.

What's more, when the bill was on the floor last week, the House agreed to an amendment, sponsored by Rep. George Miller, the Democratic chairman of the Committee on Education and Labor, that would sweeten the pot for these non-profit student loan companies even further. Under the original version of the legislation, these non-profit agencies would have been paid "a competitive market rate as determined by the [Education] Secretary" to service these loans. The measure allowed -- but did not require -- the Secretary to take into account the volume of loans an agency services when making that determination, presumably to help even the smallest entities survive. Under the amended legislation, the Secretary would now be required to set the payment rate at a level that is "commercially reasonable in relation to the volume of loans being serviced" and is high enough so that "the eligible not-for-profit servicer can reasonably provide any additional services, such as default aversion or outreach, provided for in the contracts awarded."

Speaking to education bloggers last week, Representative Miller said that including these provisions in bill was "absolutely" essential to the bill's passage. "You have members of Congress who are very familiar with their nonprofit and state agencies, and they like the attention they give to their students and schools." At the very least, it's unlikely that the bill would have passed by such a wide margin (253 to 171) without making these types of concessions. Miller won the support of all but four of his Democratic colleagues.

At Higher Ed Watch, we understand that there are political tradeoffs that have to be made to win support for the type of landmark legislation. However, we find the provisions particularly troubling because the history of the FFEL program is replete with these types of political tradeoffs and set asides, which have made the program administratively cumbersome, inefficient, and vulnerable to waste and abuse.

To be absolutely clear, we have no problem with allowing non-profit lenders to compete for a servicing contract from the Education Department. But they should not be treated more favorably -- or compensated more generously -- than their competitors.

Do not weaken key consumer protection provisions

The House bill would continue recent efforts by lawmakers to gut the "90-10 rule," which aims to protect financially needy students from unscrupulous proprietary institutions. The rule requires for-profit colleges to receive at least 10 percent of their revenue from sources other than federal student aid to continue to participate in the government's financial aid programs.

Congress introduced the requirement in 1992 (at that time it was the "85-15 rule") as part of a broader effort to crack down on trade schools set up to reap profits from the federal student aid programs. At the time, lawmakers felt that the provision was important because it required proprietary institutions to prove that the training they offered was valuable. They figured that schools that offered worthwhile training would be able to derive at least a small portion of their revenue from students willing to spend their own money on it.

Proprietary school lobbyists have spent years and lots of campaign cash trying to get lawmakers to eliminate the requirement or at least weaken it so much that their institutions could easily evade it. And they have largely succeeded in this pursuit.

The bill the House approved last week would extend by an extra year (from two to three) the amount of time that schools can be out of compliance with the law before being penalized. It also would temporarily exempt from the 90-10 calculations any new money the colleges receive from the legislation's expansion of the Perkins Loan program, and extend an existing exemption for federal student loan limit increases that were approved as part of the Ensuring Continued Access to Loans Act last year.

At a time when the Obama administration is looking to rewrite federal student aid rules to improve the integrity of the programs, it doesn't make sense for Democratic Congressional leaders to weaken one of the few consumer protection provisions we still have.

Revamp the proposed Perkins Loans funding formula changes

At the behest of the Obama administration, the legislation the House approved would significantly overhaul and expand the Perkins Loan program to help financially needy students avoid having to take out expensive private loans. We agree that this is a vital goal. But as our former colleague Ben Miller of Education Sector has pointed out, the proposed changes in the loan program's funding formula try to do too much and will likely "result in a bunch of challenges being tackled in a mediocre manner."

The House bill would convert the Perkins loan program from a campus-based revolving loan fund to an extension of the Direct Loan program. It would also substantially increase funding for the program, from $1 billion to $6-billion in new loan volume each year. The Department of Education would disburse half of these funds to colleges based on the financial need of their students. The other half would go to rewarding colleges that keep their tuition and fees low, relative to other institutions in their sectors, and to colleges that graduate a large portion of their Pell Grant recipients.

We agree that these are all important aims, but can they all be achieved through the Perkins Loan program? We would like to see the Senate committee choose an overreaching goal and stick with it. Our vote would be to provide the most generous awards to colleges that enroll the largest proportions of low-income students and are most successful in graduating them. The institutions that would benefit the most would be the top performers in their sectors, or those in each sector that show the most improvement over a period of time. Of course, protections should be added to ensure that schools are not just lowering their academic standards to make it easier for their students to graduate.

Helping low-income students avoid taking out high-cost private student loans -- with variable, uncapped rates and few consumer protections -- should be among our top priorities.

Consider alternatives to the "Access and Completion Grants"

This provision has a worthy goal of providing grants to states and colleges to improve their efforts in increasing the academic preparation and college awareness of low-income students. But unfortunately, the language in the bill is so convoluted that, even after multiple readings, it's difficult to know whether the provision will be effective in achieving its aims. A large share of the blame rests with the Obama administration, which never clearly articulated the purpose of this new program. At times, the administration seemed to suggest that much of the $2.5 billion devoted to this effort should go to student loan guaranty agencies as a pay-off to blunt their opposition to the overall student loan reform legislation. We think this would be a terrible way to spend the money, given that there is little empirical evidence to suggest that guarantors do a particularly good job carrying out college access activities.

While we support providing competitive grants and colleges for coordinating their college outreach efforts and forming partnerships with public school systems to improve the preparation of their students, we would also urge the Senate to consider significantly expanding the existing Gaining Early Awareness and Readiness for Undergraduate Programs, which already aims to accomplish these goals. Under GEAR UP, colleges and states partner with schools to provide counseling, mentoring, academic support, and college outreach services to entire grades of disadvantaged students. The partnerships serve these students for seven years, starting no later than seventh grade and continuing through at least high school graduation.

Funding for GEAR UP, however, has been stagnant for much of the last decade, limiting the program's effectiveness. For example, many partnerships have been serving only one grade level in a school, rather than multiple cohorts, as the program's creators envisioned. The benefit of directing savings from ending FFEL to GEAR UP is that a relatively modest increase -- doubling or tripling the program's budget, which is currently about $313 million -- would go a long way to improving its performance and expanding its reach.

In exchange for the additional money, Congress should require the partnerships to serve multiple cohorts or even whole schools of low-income students, rather than just individual grade levels at the schools.

The Senate HELP committee has a great opportunity to make substantial improvements to the House student loan reform bill. We will soon know whether the panel seizes it.

Higher Ed Roundup: Week of August 4 - August 8

Ed Policy — Fri, 08 Aug 2008 21:01:00 -0400

IG Faults Dept. of Ed's Management of Grant Programs

Shareholders Suffer Setback in University of Phoenix Lawsuit

Massachusetts Governor Asks Colleges to Help Save Lender

IG Faults Dept. of Ed's Management of Grant Programs

The U.S. Department of Education has not done enough to promote and oversee two relatively new federal grant programs that aim to reward low-income students who take academically-challenging courses, according to the Department's Inspector General. In an audit report released last Friday, the Inspector General said that the agency needs to do a better job of ensuring that colleges that are required to offer Academic Competitiveness Grants (ACG) and National SMART grants are doing so. According to federal law, all colleges that take part in the Pell Grant program are required to participate in the ACG and SMART grant programs, which Congress created in 2006 as part of the Higher Education Reconciliation Act. Some colleges have been reluctant to offer the programs, which they say the Department has made too difficult to administer. The IG report urged the Department to do more to verify claims by non-participating institutions that they are ineligible for the program and to penalize those that are willfully non-compliant. The grant programs, now entering their third year, have suffered from low uptake, as barely half of the grant money available for the 2006-07 school year was actually disbursed.

Shareholders Suffer Setback in University of Phoenix Lawsuit

Shareholders in a lawsuit against the University of Phoenix, the largest for-profit university in the country suffered a major setback this week, when a federal judge in Arizona overturned a $280-million jury verdict against the Apollo Group, the university's parent company. In January, a federal jury found the company guilty of securities fraud for having withheld crucial information from investors. At issue was the failure of the trade school chain to disclose in its Security and Exchange Commission filings and in its conference calls with financial analysts the existence of a U.S. Department of Education review that blasted its student recruiting practices. That report, which found that the university had violated a federal law that bans colleges from compensating admissions officers on the basis of enrollments, became public only after the university reluctantly agreed to a $9.8-million settlement with the Department in which it denied any wrongdoing. In his ruling overturning the jury's action, Judge James Teilborg of the U.S. District Court of Arizona said that while Apollo Group "misled the market in many ways," evidence presented at the trial "was insufficient to support the jury's finding" that investors suffered significant harm as a result of the company's actions.

Massachusetts Governor Asks Colleges to Help Save Lender

Just in time for classes to start, Massachusetts governor Deval Patrick called upon the state's largest universities and state pensions program to help rescue the state's nonprofit lender, the Massachusetts Education Finance Authority (MEFA), after the loan provider stopped issuing federally backed loans on July 1. Gov. Patrick's proposal asks the state pensions fund, Harvard University, Boston University, the University of Massachusetts system, MIT, and other schools to invest in the upcoming $425 million bond sale by MEFA, which issued $110 million in federally backed student loans last year. Massachusetts state legislators have been pressuring Patrick to loosen up funds for MEFA after more than 40,000 students were left scrambling to find other lenders after the loan provider decided to stop lending.

National associations representing colleges and universities expressed reservations about establishing financial relationships between colleges and lenders in the wake of the high-profile 2007 investigations by New York State Attorney General Andrew Cuomo and ensuing student loan scandal. "It would be risky for a college to invest in a student-loan organization given the charges of conflict of interest that would surely follow," Terry Hartle, senior vice president for government and public affairs at the American Council on Education, told The Chronicle of Higher Education. A representative for Harvard University and the pensions fund said that they will consider the proposal.

Where's the Bail Out for Borrowers?

Ed Policy — Thu, 17 Apr 2008 22:39:00 -0400

After Tuesday's surprisingly one-sided hearing before the Senate Banking Committee on the credit crunch, it's clear that Congress is prepared to take steps to add liquidity to the student loan marketplace. But as lawmakers move forward with plans to bailout student loan giants like Sallie Mae, they shouldn't forget about the financially-distressed borrowers who have been victimized by the lenders' predatory private loan practices. Surely, they deserve a helping hand too.

Over the last two years, we at Higher Ed Watch have written extensively about how loan companies' aggressive marketing practices and cozy relationships with colleges have pushed students to take on unnecessarily high levels of expensive private student-loan debt, often before they have exhausted their lower-cost federal loan eligibility. In fact, at least one in five private student loan borrowers take out a private loan before they exhaust safer, cheaper federal Stafford loan options.

Lenders will deny responsibility until they're blue in the face, but they're the ones who have been feverishly marketing $30,000, $40,000, or $50,000 a year direct-to-consumer private loans to undergraduates. In pop-up Internet advertisements, youtube videos, and television and radio commercials, the companies tout the convenience of applying for private loans but seem to brush by the fact private loans are more expensive than federal loans and lack important safeguards.

Lobbyists for colleges and financial aid administrators place the blame squarely on direct-to-consumer marketers. But many private colleges and high-priced public universities are also putting students in harm's way by including private loans in the financial aid packages they offer students. Packaging private loans gives students the misleading impression that they have no choice but to take out these loans. It also leaves them with the impression that these loans have the colleges' imprimatur and therefore must have pretty reasonable terms, which they seldom do. Worse, some lenders have encouraged colleges to brand the loans with their institutions' names -- which only adds to the confusion.

Perhaps the students who have been hurt the worst have been the low-income and working-class students who were pushed to take out subprime private loans, with rates and fees totaling more than 20 percent, to attend poor-performing trade schools owned by giant for-profit higher education chains like Career Education Corporation and Corinthian Colleges. By all accounts, defaults on these loans are growing alarmingly. And serious questions have been raised about whether these companies have duped disadvantaged students into taking on private loan debt without making them aware of their cheaper loan options first.

Now don't get us wrong. Congress is preparing to take steps that will make private loan borrowing somewhat safer for future students. Lawmakers are finalizing legislation to renew the Higher Education Act that would, for example, ban lenders from co-branding private loan products with a college’s name or logo. The legislation also includes provisions that aim to discourage lenders from making subprime private loans and that would make it easier for colleges to counsel students against taking on private loans prior to exhausting their federal student loan eligibility.

These provisions are all good, but they won't provide any relief to borrowers who have already fallen victim to lenders' predatory private student loan practices. The House had a chance to start to make things right for these students in February but punted. Under pressure from the loan industry, the House defeated a measure that would have allowed borrowers in severe financial distress to discharge their private loans in bankruptcy.

But now that Congress is considering bailing out lenders for past risky financing decisions, we believe that lawmakers have an even stronger obligation to revisit the bankruptcy issue. Private student loans should not be treated any differently from other forms of consumer debt when it comes to bankruptcy. Folks who borrow private students loans are trying to better their lives. They certainly shouldn't be treated more harshly than those who rack up credit card debt at the mall.

We also believe that policy makers need to consider efforts to help borrowers who took on private loan debt before exhausting their federal student loan eligibility. They can do this by authorizing the Department of Education to offer a debt swap to these borrowers. Under this proposal, which we floated last month, the federal government could make new unsubsidized federal Stafford loans available for all borrowers (out-of-school or in-school) with private loan debt and untapped federal loan eligibility. These newly borrowed funds would have to be used to pay off existing private student loan debt. Presumably, a debt swap policy would ease the financial burden of private loan borrowers and infuse liquidity into the private student loan market.

These proposals -- for revising the bankruptcy law and authorizing a debt swap -- are reasonable steps that Congress can take to help out private loan borrowers in dire straits. Borrowers with unmanageable debt loads may not be able to hire high-priced lobbyists or lavish lawmakers with generous PAC contributions, but that doesn't mean that they should be left out of the discussions. Because really, if we're talking about a bailout, who's more deserving?

This post was prepared by Stephen Burd and Michael Dannenberg.

Roundup: Week of February 18 - February 22

Ed Policy — Fri, 22 Feb 2008 00:00:00 -0500

Career Education Corp. Settles With Pennsylvania A.G.

Private Giving to Colleges Up in 2007

Stanford, Wash U to Increase Financial Aid

Widening Education Gap Hinders Economic Mobility

Career Education Corp. Settles With Pennsylvania A.G.

Pennsylvania Attorney General Tom Corbett announced on Tuesday that he has reached a $200,000 settlement with Career Education Corporation, one of the country's largest chains of for-profit trade schools, over allegations that one of its schools had duped students into taking high-interest private loans, exaggerated career opportunities, and misrepresented options for credit transfer. The allegations against Lehigh Valley College were central to a lawsuit filed by the school's former students in 2005. That lawsuit accused the school of misleading students into thinking that the loans they were receiving "were low-interest, government-guaranteed student loans, when in reality the loans were not government-backed loans and included interest rates in excess of 15%." As part of the settlement, Career Education has promised full disclosure of student aid practices and agreed to pay $50,000 on top of $150,000 to fund a consumer financial awareness campaign. However, as noted by The Morning Call, the Allentown newspaper that first reported on the schools' practices, the settlement will not provide any money to the school's former students who "were misled" and left "with overwhelming debt."

Private Giving to Colleges Up in 2007

Private donations to colleges and universities hit a record level in 2007, but most of the money is going the wealthiest institutions, according to a survey released this week by the Center for Aid to Education. The report found that colleges raised an estimated $29.7 billion in 2007, 6.3 percent more than the year before. Despite the increase, the report found that a substantial share of the money is going to a handful of elite colleges, such as Stanford, which raised $832 million in 2007 alone. All told, the top 20 colleges that received donations -- representing about 2 percent of the more than 1,000 institutions surveyed -- pulled in more than a quarter of all contributions. While donations have increased substantially, the report noted that alumni giving has decreased.

Stanford, Wash U to Increase Financial Aid

Stanford University became the latest elite institution to join the affordability race, with an announcement Wednesday that it will eliminate tuition for students whose families make under $100,000 a year, and significantly increase aid for all other students. Washington University in St. Louis, meanwhile, announced this week that it will eliminate fees for students from families that make under $60,000. The two universities join Harvard, Yale, Dartmouth and others that have spearheaded massive aid expansions in the past few months, though not always for low and middle-incomes students.

Widening Education Gap Hinders Economic Mobility

Economic mobility has been largely stagnant for the last 30 years and could actually decrease due to minority educational attainment gaps, according to a study released this week. The Brookings Institution report, "Getting Ahead or Losing Ground: Economic Mobility in America," found that a poor student who goes to college has a 19 percent chance of moving into the top fifth of the country’s earners, compared to a 5 percent chance if they don’t pursue a higher education. African American students in particular have fallen behind their Asian and white peers in attaining college degrees over the past half-century. The study found that family background still plays a significant role in determining income levels. Students from families in the top fifth of the income bracket have a 54 percent chance of staying at the top if they get a college degree and a 23 percent chance if they don’t.