Sallie Mae

The Subprime Student Loan Racket

Ed Policy — Wed, 28 Oct 2009 14:00:00 -0400

[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.

Leveque was intrigued, though she was initially put off by the $29,000 tuition. But the school's recruiters assured her there was nothing to be concerned about: Everest had an exceptional track record of helping students find employment -- they claimed the typical Everest College LVN graduates landed a job paying between $28 and $35 an hour straight out of school. And the school would arrange a financial aid package to cover her costs.

In the end, Leveque decided to enroll. The day she came in to fill out her paperwork, she says, the recruiters rushed her through the process and discouraged her from taking the forms home to look over. They told her that she would be taking out private loans in addition to federal loans that are traditionally used to pay educational expenses, but did not explain what the terms of those loans would be. "They just kept telling me that ‘we're with you,' and that they would try to get me the maximum amount of federal loans allowed," she says. Only later did she learn that those private loans -- which made up two-thirds of her "financial aid" package --carried double-digit interest rates and other onerous terms.

To make matters worse, the program did not come close to delivering on the promises that had been made. The instructors had little recent medical experience. Instead of really teaching, she says, they usually just read textbooks aloud in class and sometimes offered students the answers on tests ahead of time. On the rare occasions when Leveque and her class were given time in the lab, she found that the equipment was broken down and shoddy-except for the expensive new mannequin, which no one knew how to use. Instead of the promised rotations at UCLA Medical Center, her clinical training consisted of helping pass out pills at a nursing home. (A spokeswoman for Corinthian Colleges denied many of Leveque's allegations, insisting that the company does not condone cheating, that all LVN instructors at Everest College have "at least the minimum qualifications" set by the California Board of Vocational Nursing, and that UCLA Medical Center "is not and has never been" one of the school's official clinical training sites.)

Since graduating in 2008, Leveque has been unable to find a nursing job, perhaps because she never learned how to perform basic tasks such as giving shots. Instead, she works as an occasional home health care aid earning at the most $1,200 a month --not enough to pay her rent on the cramped apartment she shares with her sister and son or keep gas in her car, much less pay off her student loans. As a result, her loan balance has ballooned to $40,000, and she has no idea how she will ever pay it off. "My credit is ruined," Leveque says. "I made one mistake, and I will be paying for it for the rest of my life."

Leveque's story is far from unique. Each year, more than two million Americans enroll in for-profit colleges, also known as proprietary schools, and their popularity has only grown since the financial crisis. While traditional four-year colleges are struggling with dwindling student bodies and budget gaps, proprietary schools are reporting record enrollments as the newly unemployed try to retool their skills so they can wade back into the job market. Some of the largest for-profit chains say their numbers have doubled over the last year.

The students who are flocking to these schools are mostly poor and working class, and they rely heavily on student loans to cover tuition. According to a College Board analysis of Department of Education data, 60 percent of bachelor's degree recipients at for-profit colleges graduate with $30,000 or more in student loans-one and a half times the percentage of those at traditional private colleges and three times more than those at four-year public colleges and universities. Similarly, those who earn two-year degrees from proprietary schools rack up nearly three times as much debt as those at community colleges, which serve a similar student population. Proprietary school students are also much more likely to take on private student loans, which, unlike their federal counterparts, are not guaranteed by the federal government, offer scant consumer protections, and tend to charge astronomical interest -- in some cases as high as 20 percent.

These figures are all the more troubling in light of these schools' spotty record of graduating students; the median graduation rate for proprietary schools is only 38 percent -- by far the lowest rate in the higher education sector. What's more, even those students who make it through often can't find jobs. The reason for this is simple: while some proprietary schools offer a good education, many more are subpar at best. Thus large numbers of students leave with little to show for their effort other than a heap of debt. Not surprisingly, students at proprietary schools are far more likely to default on their loans than those at other colleges.

The appalling treatment of disadvantaged students at the hands of proprietary schools ought to be a national scandal, especially at a time when America desperately needs more college graduates to stay competitive. But the problem has barely registered in Washington. That's partly because the proprietary school lobby has enough clout among lawmakers on both sides of the aisle to keep the issue quiet. But Congress and the Obama administration have also had their hands full advancing other higher education reforms -- in particular, legislation to kick private lenders out of the federally subsidized student loan program. This will create tens of billions of dollars in cost savings that will go toward larger Pell grants for low-income students. But that measure, vital as it is, affects only lending within the federal student loan program. It leaves untouched the private loans that are increasingly being foisted on students like Leveque and the loosely regulated schools that are profiting as a result.

The Student Loan Industry’s Messaging Machine at Work

Stephen Burd — Thu, 22 Oct 2009 17:45:00 -0400

As we reported on Tuesday, Qorvis Communications, a top public relations firm in Washington, has taken the lead in the student loan industry's efforts to manufacture grassroots student opposition to legislation that would eliminate the Federal Family Education Loan (FFEL) program. But getting students to rally behind an unpopular industry that profits from their indebtedness has not proven to be an easy task. The firm's desperation has become all too evident in recent weeks.

Take, for instance, the case of Patrick McBride. In a press release announcing the launch of its "Protect Student Choice" public relations effort, Qorvis officials listed McBride, a student at Vanderbilt University, as one of four "local campaign members" -- with the others being leaders of non-profit student loan agencies.

But who is McBride? A former colleague of ours, the enterprising Ben Miller of Education Sector, sought to find out. In an interview he conducted with McBride, Miller learned that he was a first-semester freshman who got interested in the issue while doing research on the Internet. McBride, who would not say whether or not he had taken out student loans (although he added that he "did not have a stake" in the issue), was initially "ambivalent" about the student loan reform legislation. But after talking to David Mohning, the university's financial aid director and a longtime supporter of the FFEL program, he was convinced that the bill was a bad idea.

McBride then wrote a column for the school's conservative publication the Vanderbilt Torch, decrying the measure as a "government intrusion into private markets" [despite the fact that FFEL is already a government program]. Soon after, Qorvis contacted him, asking whether he would be interested in participating in its campaign.

To be absolutely clear, we do not have any beef with McBride. Individuals are entitled to their own opinions, and far be it for us to object to them expressing their views in writing. But isn't it telling that after working for months to manufacture grassroots opposition among students, this is the best they could come up with? A first semester freshman, who may not have even borrowed student loans, writes a column in a college publication and suddenly becomes one of the campaign's chief spokesmen???

But contrary to reports, McBride is not the only student that Qorvis has recruited for this effort. The firm has actively courted the College Republican National Committee to mobilize its members to speak out against the legislation. Uncharacteristically, the group, which typically focuses on helping elect Republican candidates and training future Party leaders rather than taking positions on specific legislation, recently agreed to take part in the campaign.

Zach Howell, the national chairman of the College Republicans, made the announcement during a faux television interview conducted by Karen Hanretty, a managing director at Qorvis who previously served as the communications director for the National Republican Congressional Committee. "We're engaging our membership in any way we can on this issue," Howell said. "It certainly is important to them and to the future of higher education in this country."

During the interview, Howell acknowledged that he had not done a lot of research on the issue and demonstrated that he didn't fully understand how the federal student loan programs work. For instance, he warned that a shift to 100 percent direct lending would result in having "rates set in Washington," when of course they already are. He raised the specter of "long lines" at the financial aid office and "poor service," and said that "all sorts of burdensome regulations and difficulties will be placed on students and schools." The one example he gave was of California Polytechnic State University, whose "depleted Financial Aid office" (as described by the student newspaper) appears to have perennial problems administering federal financial aid (see here and here). Howell neglected to mention that the vast majority of schools that have made the transition to the Direct Loan program so far have found the process to be easier than they thought.

But, of course, it makes little difference to Qorvis officials whether the students it recruits have a firm grasp of what they are talking about (those who do probably wouldn't want to shill for the loan industry). They are simply looking for warm bodies to make it appear that there is a genuine grass roots movement against the legislation. Focusing on the College Republicans seems like an odd choice, considering that the bill's fate rests in the hands of moderate Democrats. The group does, however, boast of having more than 200,000 members and if the individual students are not upfront about their affiliation when they contact their lawmakers, they could provide the illusion that there is genuine student angst over the bill.

As we said on Tuesday, this is a truly cynical effort. It is indeed a prime example of special interest lobbying at its worst.

Exclusive: A Peek into the Student Loan Industry’s Messaging Machine

Stephen Burd — Tue, 20 Oct 2009 21:45:00 -0400

It's no wonder Americans are deeply suspicious of special interest lobbyists in Washington. Take the student loan industry's latest efforts to kill legislation pending in Congress that would end the Federal Family Education Loan program. It's a prime example of special interest lobbying at its worst.

In 2007, shortly after President Bush signed into law a bill cutting government subsidies to lenders and guaranty agencies, the student loan industry bought into a new strategy to thwart any future Congressional action that might reduce its subsidies further: manufactured grass roots opposition (otherwise known as astroturfing). With Democrats firmly in control of Congress and in a good position to take back the White House in the upcoming presidential election, industry officials knew that the FFEL program was in jeopardy.

Enter Qorvis Communications, a prominent Washington-based public relations firm that had gained notoriety earlier in the decade for its work on behalf of the Saudi Arabian government. Eager for the loan industry's business, one of the firm's partners made a pitch for the company at the 2007 legislative conference of the National Council of Higher Education Loan Programs, a trade group that represents guaranty agencies and non-profit lenders. In a power-point presentation entitled "What Just Hit Us?", this Qorvis executive said that the loan industry had lost the loan subsidy battle because it "had no organized constituency" to "counter" its critics.

"The messages and messengers we used to defend the program were not effective and thus we need new voices, new messages, and new ways to mobilize these voices," he stated.

The industry, he said, especially needed to wage a campaign to get students and their parents to speak out on its behalf. Lenders and guarantors could do this by reaching out to student organizations and parent groups, as well as spreading their message over the Internet through social networking sites like Facebook, blogs, and a website dedicated to the cause of preserving FFEL.

Qorvis, the executive said, was uniquely qualified to carry out this campaign because of its previous work building grassroots networks on college campuses dedicated to giving "students a voice in the national debate surrounding digital rights and freedoms in the 21^st Century." He suggested that the firm would be able tap into these networks to mobilize students to speak out in favor of the FFEL program.

"There are now fifteen chapters on campuses nationwide where students meet to discuss current events in technology policy and take action to support or oppose relevant legislation -- and more importantly, to recruit more advocates for us [emphasis included in original text]."

Qorvis got the job on the strength of his pitch. Now two years later, with the FFEL program facing possible extinction, we can see how this strategy has worked out. The loan industry is still struggling to generate grassroots support from anyone other than those who have a vested interest in the program's survival -- particularly loan company employees and financial aid administrators who serve on lender and guaranty agency boards and/or belong to state associations that depend heavily on student loan providers for financial support.

Despite the efforts of the loan industry and the Qorvis communication team, students and their parents are not rushing the barricades to demand that lenders be allowed to continue collecting generous subsidies for making virtually risk-free loans. Evidently, digital rights supporters on campuses aren't interested in being used as pawns in the battle over the future of the FFEL program. Perhaps they're also wise to the fact that the pending legislation pits student grant aid increases against lender subsidies. Did lenders really think students would choose the latter?

As we've said before, the indifference of students to the lenders' plight shouldn't come as a surprise, considering that the terms and conditions of federal student loans are pretty much identical whether they come from the loan industry or from the U.S. Department of Education's Direct Lending program.

In our next post, we will take a closer look at the loan industry's increasingly desperate efforts to show that it has students on its side. Stay tuned.

How Americans (Actually) Save for College

Mark Huelsman — Fri, 18 Sep 2009 22:44:00 -0400

This week, Sallie Mae and Gallup released "How America Saves for College", an annual report on higher education savings behaviors. The whole survey deserves a read, but here are a few highlights:

Only 32% of low-income families (those making under $35,000 a year) have saved for college. By contrast, 62% of all families have saved for higher education.
The current economy is impacting college savings behaviors. For example, 36% of low-income families are saving less for college than before. Only 5% are saving more.
Families making under $50,000 who are currently saving for college put away, on average, larger amounts than those making between $50,000 and $150,000.
Families making under $50,000 annually save 7.5% of their income for college, on average. By comparison, the average college savings rate among all income levels is 3.6%.
In order to reach estimated "savings goals," low-income families need to save nearly 10% of annual income until a child reaches college. On the other hand, families of all income levels only need to save 5.7% of annual income to reach their savings goals.
529 college savings plans are the third most popular savings vehicle for college - with one-third of all families using them.
Only 4% of low-income families consider themselves "very familiar" with 529 college savings plans. A whopping 75% were "not at all familiar."

What are the key takeaways from this survey? And how can we apply these findings towards enlightened federal policy?

First, this provides yet more evidence that the poor can save, when given the opportunity to do so. In fact, annually, lower-income families are outpacing higher-income families in both savings rates and amount saved. See the graph at the bottom for the breakdown.

Despite the admirable behavior, low-income families are expected to save a much greater percentage of their income to reach savings goals. While families of all income levels expect to need 5.7% of income socked away for college, lower-income families need to save 9.9% of income. Low-income savers are putting away more than the 5.7% that the average family needs, but less than the 9.9%.

The importance of these numbers is twofold: First, those lower-income families that are saving are outpacing families higher up the income spectrum, which makes the importance of facilitating enrollment in college savings vehicles paramount - especially considering that low-income families that do not save vastly outnumber those that do. Second, the playing field needs to be leveled for lower-income savers in order to reduce the need to save one-tenth of income on higher education.

Near the end of the report, families are asked what would motivate them to save more. Two of the more striking answers:

Over half (52%) of low-income families would be "very likely" to save more if presented with a matching contribution from an employer.
If money in college savings accounts were excluded from financial aid eligibility consideration, nearly a third (32%) of low-income families would be "very likely" to save more.

These two answers are noteworthy, as there are current policy models to provide these incentives (or remove disincentives, as is the case with the latter issue). First, the state of Illinois recently passed legislation creating a tax credit for employers to provide 529 plans. Additionally, 11 states currently provide matching funds for 529 plan contributions to families below certain income levels, similar to employer matches in retirement plans.

Second, a handful of states have already excluded assets in college savings plans from financial aid calculations. However, current federal policy dictates that 5.6% of the assets in a parent-owned 529 plan can be used in federal financial aid calculations. 5.6% may not seem like much, but any penalty may discourage low-income families from saving out of fear that Pell Grants and other forms of aid will be taken away if they save. By excluding all 529 assets from consideration, federal policymakers could remove a significant disincentive that many families cite as a reason for not saving.

Broadly, low-income families should not be discouraged from saving and should not be expected to save nearly twice the percentage of income for college as higher-income savers in order to meet the expected cost of higher education. This survey should provide policymakers with an impetus to focus on some of the existing and promising policy models for making saving for college easier on families that have already shown they can do it.

A New Chapter in the 9.5 Scandal

Stephen Burd — Tue, 01 Sep 2009 19:00:00 -0400

On Monday, a federal court in Virginia unsealed a whistleblower lawsuit filed by Jon Oberg, the U.S. Department of Education researcher who uncovered the 9.5 student loan scandal, against 10 student loan companies that participated in the scheme. The lawsuit, which Oberg filed in 2007 under the federal False Claims Act, seeks the return to the federal government of $1 billion in excess student loan subsidies these lenders improperly obtained.

The roots of the 9.5 student loan case go back to the 1980s when Congress guaranteed non-profit lenders, which use tax-exempt bonds to finance their loans, a minimum rate of return of 9.5 percent on federal student loans made with these bonds. As interest rates on all other student loans fell in the 1990s, policymakers became concerned that these nonprofit student loan providers were making a killing. So in 1993, Congress rescinded that policy, but grandfathered in loans made from the old bonds, believing that the volume of 9.5 loans would decline as they were paid off and the bonds retired.

Instead, beginning in 2002, a small group of lenders devised a strategy to aggressively grow the volume of loans that they claimed were eligible for the 9.5 guarantee. This was a goldmine for lenders in the existing low interest rate environment (at the time, the borrower interest rate on regular loans hovered around 3.5 percent.) They accomplished this scheme by transferring loans that qualified for the 9.5 subsidy payment to other financing vehicles and recycling the proceeds into new loans that they claimed were then eligible for the subsidy. The lenders repeated this process over and over again.

As a researcher in the Education Department's Institute for Education Sciences, Oberg discovered the scheme in 2003 while reviewing internal agency spreadsheets that showed that the total volume of outstanding 9.5 loans was growing rather than shrinking. He brought his concerns to his superiors at the Department but they brushed them off. His supervisor, Grover Whitehurst, ordered him to stop pursuing the issue, and instead to focus solely on his responsibilities as a research administrator in the final 18 months before his scheduled retirement.

But Oberg had also reported his findings to the Department's Inspector General, which launched its own investigation into the 9.5 scandal. His work paid off in September 2006 when the Inspector General declared the lenders' loan and bond manipulations to be illegal. In January 2007, Education Secretary Margaret Spelling concurred with the Inspector General's opinion and barred the student loan company Nelnet and other lenders that refused to submit to independent audits from receiving any further 9.5 payments. But she did not require the lenders to return the overpayments they had already received.

Unhappy with this resolution, Oberg (who first revealed himself to be the whistleblower on the 9.5 scandal at an event hosted by the Education Policy program here at the New America Foundation in 2006) decided to file his own false claims lawsuit on behalf of the government, his lawyers stated. The lawsuit has been under government seal for the last two years, as the U.S. Justice Department weighed whether or not to join it. The federal district court lifted the seal last week after DOJ decided against joining the lawsuit. By law, Oberg has to right to continue to pursue recovery on behalf of the United States, with the Justice Department retaining the right to intervene at a later time.

Among the main targets in the case is Nelnet, which was created in 1998 when Nebraska's nonprofit student loan agency converted to for-profit status. The most active participant in the scheme, Nelnet increased the amount of loans for which it sought the 9.5 percent rate from $393 million in 2001 to more than $3.3 billion in 2004. The lawsuit estimates that Nelnet made approximately $407 million in unlawful 9.5 claims.

Other student loan companies named in the suit are the following:

The Pennsylvania Higher Education Assistance Agency
The Kentucky Higher Education Student Loan Corporation
Panhandle Plains Higher Education Authority (Texas)
Sallie Mae
Southwest Student Services Corporation (Arizona)
Vermont Student Assistance Corporation
Education Loans Inc.(South Dakota)
Brazos Higher Education Services Corporation (Texas)
Arkansas Student Loan Authority

Here is a link to the news release that his lawyers distributed yesterday. To read some of our recent coverage of the 9.5 scandal, read here, here, here, and here.

Tomorrow we will provide further analysis of this important lawsuit. Stay tuned.

Sallie Mae's Influence Peddling

Stephen Burd — Thu, 06 Aug 2009 18:00:00 -0400

Anyone who thinks that getting legislation through Congress this fall that would eliminate the Federal Family Education Loan (FFEL) program is going to be a cakewalk needs to read this informative article from the Huffington Post. The piece provides the most comprehensive picture to date of how Sallie Mae has used the fortune it has amassed from making federally backed student loans to try to persuade Congressional Democrats to oppose President Obama's call for a full-scale conversion to the federal Direct Lending program.

For years, Sallie Mae had tilted its political contributions and lobbying efforts toward Republicans. According to a recent report published by the Center for Responsive Politics, "Since 1989, political action committees and employees affiliated with Sallie Mae have poured $6.3 million into the war chests of federal candidates and party committees." More than 60 percent of these contributions have gone to Republicans, with the largest recipients by far being Reps. John Boehner of Ohio and Howard P. (Buck) McKeon, both of whom led a key House committee in charge of student loan policy. Meanwhile, Sallie Mae also contributed $250,000 to President Bush's 2005 inaugural committee, the report states.

But as soon as Democrats won control of Congress in 2006, the company realized that it had to reverse course. As we've previously reported, Sallie Mae outlined its plans to "grow" a "pro-FFELP coalition within the Democratic party" in an internal strategy document it produced soon after the election. In the document, which was obtained by Rep. George Miller (D-CA) and published on Higher Ed Watch, the student loan giant said that it would target its campaign contributions to "Blue Dog and Financial Services Democrats," as well as members of the Congressional Black and Hispanic Caucuses.

Sallie Mae has lived up to its word. According to the Huffington Post, through its Political Action Committee (PAC) the loan company provided $145,000 during the 2008 election cycle to the individual campaign committees of Blue Dogs and Democratic members of the House Financial Services Committee. The corporation also provided an additional $10,000 to the Blue Dog Democrats' PAC.

In addition, at Higher Ed Watch, we have found that Sallie Mae's PAC donated $89,000 to members of the Congressional Black and Hispanic Caucuses during the 2008 election cycle, with two-thirds of the contributions going to members of the black caucus. We also found that Sallie Mae made total contributions of between $60,000 and $100,000 to the Congressional Black Caucus Foundation in 2006 and 2007 (see here [p.22] and here [p. 22]).

At the same time, according to the Huffington Post, the loan company has assembled a dream team of high-powered Democratic lobbyists to help it maintain its prominent position in the federal student loan program. The group is headed up by Tony Podesta, "a legendary Democratic fundraiser whose brother headed the Obama transition team," and Jamie Gorelick, the former deputy attorney general in the Clinton administration.

Also on the team are Paul Brathwaite, the former executive director of the Congressional Black Caucus; former top aides to Senators Barbara Boxer (CA), Byron Dorgan (ND), Richard Durbin (IL), and Charles Schumer (NY); as well as to House Speaker Nancy Pelosi, and Reps. Edward Markey (MA), David Scott (GA), and Tim Walz (MN).

So far, Sallie Mae has had little success in the House, where the Education and Labor Committee approved its version of the student loan reform bill in July. The legislation is expected to come up for a vote on the House floor in early September -- and despite defections from Blue Dog and Financial Services Democrats, it is expected to pass fairly easily. The real battleground is going to be in the Senate, which plans on taking up the student-loan reform legislation late next month. Already, at least a handful of Senate Democrats have expressed strong reservations, and in some cases outright opposition, to the President's proposal.

In recent weeks, Sallie Mae has expressed optimism about its prospects in promoting an alternative plan to Obama's, confidently telling financial aid administrators (as Tim Ranzetta of Student Lending Analytics recently pointed out) that "the legislative process is far from over."

At Higher Ed Watch, we would hope lawmakers who were recipients of Sallie Mae's largesse will not let the money and influence peddling cloud their better judgment. After all, Sallie Mae's lobbying prowess shows just what's wrong with the current system -- lenders collect taxpayer funded subsidies on government-backed loans with no financial risk and then recycle some of the earnings back to friends on Capitol Hill to keep the whole scheme going. It's high time to stop this vicious cycle that is wasting billions of taxpayer dollars each year.

Not So Innocent After All

Stephen Burd — Wed, 05 Aug 2009 18:45:00 -0400

[This is the eighth 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, here, and here]

Sallie Mae has long boasted that it did not take part in the 9.5 percent student loan scheme. But a new report from the U.S. Department of Education's Inspector General (IG) refutes that claim.

According to the report, which was released on Monday, Sallie Mae improperly obtained $22.3 million in excess student loan subsidies from the federal government between Oct. 1, 2003 and Sept. 30, 2006. The actual amount that the company over-billed the government is probably substantially higher -- as the IG looked only at how the student loan giant handled the 9.5 loans it obtained through its purchase of Nellie Mae [NLMA], the Massachusetts non-profit student loan agency. Between 2000 and the end of 2004, Sallie Mae bought three other non-profit lenders, including the Arizona-based Southwest Student Services Corporation, which had increased the volume of federal loans that it claimed eligible for the 9.5 percent guarantee by 135 percent in the years immediately preceding the sale.

To be clear, Sallie Mae does not appear to have engaged in the type of loan and bond manipulations that other companies, like Nelnet and the Kentucky Higher Education Student Loan Corporation, did to massively grow their 9.5 loan holdings. Instead, the loan company violated the law by submitting 9.5 claims on loans financed by tax-exempt bonds that had matured and been retired, the IG report states.

In the 1980s, Congress guaranteed non-profit lenders a minimum rate of return of 9.5 percent on federal student loans made with tax-exempt bonds. As interest rates fell in the 1990s, policymakers became concerned that these non-profit student loan providers were making a killing. So in 1993, Congress rescinded that policy, but grandfathered in loans made from bonds that had been issued before the new law went into effect. By making that change, lawmakers believed that the volume of 9.5 loans would decline as they were paid off and the bonds retired.

According to the IG, Sallie Mae submitted 9.5 claims for, and received payments on, federal loans funded by bonds that had expired several years before the claims were made. Sallie Mae officials defended their practices, saying that it was entirely lawful for them to continue billing loans under the 9.5 percent floor until the last bond associated with an "indenture" -- "a formal agreement between the issuer of bonds and a trustee bank," according to the report -- was retired. In other words, the loan company argued that as long as one bond included in this type of trust agreement remained active, all loans financed by bonds included in the agreement were still eligible for the inflated subsidy rate.

The IG rejected this argument. "We do not agree that SLMA's position is a reasonable interpretation of the HEA [Higher Education Act] or regulations," the report states. As a result, Sallie Mae's "billing activities for its NLMA subsidiary did not comply with laws, regulations, and guidance for the 9.5 percent floor calculation."

Interestingly, Nellie Mae had been in full compliance with the law before the purchase. Sallie Mae "took the position that NLMA was mistaken when it ceased billing on a particular bond prior to the maturity of the particular bond indenture," the IG said.

Sallie Mae was certainly not the worst player in the 9.5 scandal. But like the other loan companies involved, it did exploit the law to gain windfall profits at the taxpayer's expense. Unfortunately, this type of waste and abuse appears to have become endemic to the Federal Family Education Loan (FFEL) program. Is it any wonder that the program is on the brink of extinction?

Trade School Lobbyists' New Cause?

Stephen Burd — Wed, 24 Jun 2009 18:15:00 -0400

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.

As we have previously reported, some of the largest chains of for profit schools have, over the last decade, aggressively steered financially needy students to take out high-cost private loans from lenders like Sallie Mae, with annual interest rates as high as 20 percent. According to company disclosures last year, private loans made up 30 percent of the total revenue at ITT, 18 percent at Career Education Corporation, and 13 percent at Corinthian Colleges. Corinthian also revealed that 75 percent of its private loans were going to high-risk, subprime borrowers.

Overall, the percentage of students at proprietary institutions taking out private loans has skyrocketed over the past several years, from 13 percent in 2003-04 to 42 percent in 2007-08, according to recently released data by the Education Department's National Center for Education Statistics (NCES). In other words, more than 4 in 10 students took out these expensive loans last year to attend schools that have a spotty record of retaining students. In addition, the NCES data reveals that for-profit college students are borrowing private loans at rates that are extremely disproportionate to their numbers. While only 9 percent of all of this country's undergraduates attend these institutions, these students represent 27 percent of all private loan borrowers.

So why this sudden concern by the lobbyists?

Does it have to do with the fact that schools have to increasingly rely on the federal student loan programs because lenders are no longer willing to enter into sweetheart deals to provide subprime private loans to their students? And, as a result, are these schools in danger of violating a federal law requiring them to receive at least 10 percent of their revenue from sources other than federal student aid in order to continue to participate in the government's financial aid programs?

Now don't get us wrong. We're sure that many for-profit college officials are genuinely concerned about their students' debt load. But given the conduct of some of the largest chains of proprietary schools in the recent past, we'd urge the Education Department to not take the lobbyists' pleas at face value.

What do you think? Please send us your thoughts.

A Failure of Leadership

Stephen Burd — Tue, 05 May 2009 21:30:00 -0400

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.

The IG particularly takes issue with FSA's failure to target its program reviews on those lenders and guarantors that posed the greatest risk to the FFEL program. While FSA conducted risk assessments on lenders and guarantors, it did not use the results to decide which FFEL participants to investigate, the report states. Several program reviewers told the IG that these decisions were "political not programmatic." [According to the "review specialists," these determinations were made at the highest levels of FSA without their input. Over the last few years, they said they have been shut out of the decision-making process.]

In fact, the IG found that the Financial Partners division has focused its program reviews "on small lenders that pose limited risks" to the government instead of the biggest players that dominate the program. Noting that the top 10 lenders hold 72 percent of the outstanding guaranteed loan volume, the IG questions why these loan providers do not "merit more focus," considering "their overall financial impact on the FFEL program."

Perhaps the most damning part of the report deals with an exchange that the IG had with a program reviewer:

"The review specialist questioned why there are not more frequent program reviews of a particular large lender. According to the review specialist, "they (FSA managers) do not want us to do the work. All our bosses are from [the lender] and that is why we do not go to [the lender] very often."

At Higher Ed Watch, we're pretty sure we know which giant loan company they're talking about.

The report also includes several examples in which FSA leaders overrode decisions made by review specialists or limited their ability to effectively carry out their investigations. In one such case, a reviewer wrote a draft program review report about how a loan servicing company was "taking adverse actions against borrowers without issuing a final determination letter and/or allowing borrowers to respond to the determination letter," as required by law. While that specialist was on vacation, the report was released in his name, but "all of the findings and observations in the draft report had been removed."

In another case, FSA managers refused to allow a review team to seek additional documents -- primarily marketing materials -- from a lender even though it felt they were vital to determining whether the company had violated the law by offering illegal inducements to colleges to win their student loan business.

These cases are similar to ones that the IG exposed in a 2006 publication that blasted the Financial Partners division for taking its "partnership approach" with lenders and guarantors too far. For example, in that report, the IG found that a program reviewer had suggested to a guaranty agency different accounting methods it could use to reduce its liability to the government. It was also revealed that a Financial Partners Regional Director had leaked "internal pre-decisional documents" to a non-profit lender (the New Mexico Educational Assistance Foundation). That lender then tried to use the documents "in an unsuccessful attempt to obtain a federal court order to block the issuance of" an Inspector General's audit report on the agency.

The IG's latest report also includes a glaring example of how FSA has allowed its close ties to the loan industry to put the FFEL program at risk. According to the report, guaranty agencies were upset about the methodology the Department was using to assess their financial strength. These calculations showed that many guarantors had allowed their reserve funds (the federal money they use to reimburse lenders for defaulted loans and to prevent borrowers from going into default) to drop to dangerously low levels, putting them in danger of collapse. The agencies were apparently particularly unhappy that this information was available to the public.

Officials at FSA caved to these concerns. Instead of requiring the struggling guarantors to take steps to improve their financial viability as one would expect, Department officials agreed to change the methodology to one that put the guarantors in a more positive light. As a result, the IG states, "the financial conditions of guaranty agencies" are now "overstated" and those that may be in danger of becoming insolvent are not being monitored closely enough.

As the report illustrates, the revolving door between the Department of Education and the student loan industry has allowed widespread abuses to occur in the FFEL program. At Higher Ed Watch, we have called on the Obama administration to close that door once and for all. To date, some of the same former loan industry officials who made the decisions that the IG faults appear to still be in place.

If the Obama administration really wants to bring change the culture at the Department of Education, FSA is certainly a good place to start.

Sallie Mae’s Self-Serving Proposal

Stephen Burd — Thu, 16 Apr 2009 16:45:00 -0400

At Higher Ed Watch, we would be remiss if we didn't salute Sallie Mae for acknowledging in its student loan proposal that there is significant waste in the Federal Family Education Loan (FFEL) program and that the time has come for fundamental reform. We couldn't agree more.

Sallie Mae's plan, however, seems to be primarily designed -- surprise, surprise -- to maintain and even significantly expand the loan giant's predominance over the federal student loan program. Because of its size and economy of scale, Sallie Mae is a clear favorite to be one of a handful of student loan companies to win a highly coveted servicing contract from the U.S. Department of Education. As a result, the proposal would allow the company to make loans; sell them to the Department for a fee; and earn another payment from the government for servicing these loans. In addition, Sallie Mae would be paid to service Direct Loans and other loans made by lenders that don't wish to or cannot comply with servicing standards put out by the Department.

While the plan might make some sense politically (the more lenders buy in to change, the less resistance), it makes little sense from a public policy point of view. Why should the government pay lenders to originate loans when it can make the loans itself at a lower cost? Isn't part of the point of student loan reform to stop subsidizing unnecessary middlemen?

The plan also potentially opens up opportunities for abuse. The proposal would allow colleges to continue providing preferred lender lists to their students - and appears to leave out important protections Congress put in place last year to guard against "pay-for-play" conflicts of interest between lenders and colleges. While the plan includes perfunctory language to prohibit lenders from offering illegal inducements to schools, we know how well that has worked out in the past. In addition, the proposal would give colleges, in many cases, the power to choose the loan company it wishes to service its students' loans (from among those that have won the Department's servicing contract). We can only imagine the types of incentives these companies will give schools to try and win that business.

But even more fundamentally, the proposal fails the test because it would not deliver the amount of savings needed to make the Pell Grant program into a true entitlement for low-income students, as President Obama has proposed.

In a letter it sent to colleges yesterday, Sallie Mae said that its proposal would help President Obama "achieve his policy objectives" by increasing funding for Pell Grants. But this is a misreading of Obama's plan. The White House is not just looking to provide another short-term boost in the maximum Pell Grant, as Congress has done repeatedly over the last couple of years. It is looking to fundamentally restructure the way the program is financed to make Pell Grants into a more reliable and predictable source of funding for financially needy students.

Under President Obama's plan, money saved from ending FFEL would be used to turn the Pell Grant program into a true entitlement for low-income students by financing it entirely through mandatory funding. The president proposes raising the maximum grant to $5,550 for the 2010-11 academic year, and then indexing future increase to the Consumer Price Index plus 1 percentage point so that it will keep up with inflation.

As we've said before, this change is needed because the way the government is currently financing Pell Grants is a huge mess. Congressional appropriators currently set the maximum Pell Grant each year based on estimates of expanded demand for the grants made by federal budget officials. Because the estimates are made far in advance, they are generally off the mark. As a result, the Pell program has often been plagued by large budget shortfalls. To make up for the gaps, the Department of Education often dips into future program funds, pushing the shortfall off to the future.

Over the last two years, Congress has created new funding streams (through the College Cost Reduction and Access Act of 2007 and the giant stimulus package that lawmakers recently approved) to boost spending on Pell and increase the maximum award. These new funding source, however, are only temporary. When they run out in a few years, policymakers will again face the tough choice of either substantially decreasing the Pell Grant (by more than $1,200) or shelling out billions of dollars more just to keep the maximum award constant.

The president's plan would end this budgeting nightmare by removing it from the annual appropriations process. As a result increases in the maximum award would be reliable and predictable, making it easier for low- and moderate-income high school students to know how much financial aid they will be eligible for if they go to college.

The Sallie Mae plan would not achieve this crucial goal.