Sallie Mae

NASFAA's Clouded View

Ed Policy — Thu, 24 Jul 2008 22:54:00 -0400

By Ben Miller and Stephen Burd

As individuals on the "‘front lines" of the financial aid process, financial aid administrators offer an important perspective on the credit crunch's daily effects on student loan availability. As such, the results of a recent survey that the National Association of Student Financial Aid Administrators conducted of its members provide some interesting ground-level impressions of the credit crunch. Unfortunately, this viewpoint is almost entirely clouded by the 30,000-foot spin the organization's leadership has put on it. Needless to say, the association's close ties to the student loan industry remain firmly evident.

On its face, the survey suggests that immediate federal loan availability concerns have been largely satisfied, though worries remain about discriminatory lender practices (i.e. banks refusing to lend to students at community colleges and for-profit trade schools) and the long-term fiscal health of the student-loan market. The vast majority of respondents, for example, said actions that Congress and the Bush administration have taken in recent months have "eased the student loan crunch problem" for now. And only a relatively small proportion of aid administrators (about 25 percent of those surveyed) are worried enough that they have put contingency plans in place to prevent any disruptions in loan availability for their students.

That nuanced take is completely missing from NASFAA's spin on the survey. In a press release announcing its findings, the association twists the data into a picture of panic and a call for more action.

Case in point, the press release starts by stating that the "vast majority (90 percent) of student financial aid administrators said they are concerned about the student loan crunch." But look at the actual results: only 44 percent of the survey's 1,078 respondents reported being "very concerned" about the credit crunch. Another 46 percent said they were "somewhat concerned," but there's a big difference between being "somewhat" and "very" concerned about an issue. Lumping the two together is misleading, if not disingenuous.

Perhaps a better way to gauge aid administrators' level of concern is whether they have an emergency backup plan in place for loan availability. According to the survey, the majority of respondents (54 percent) said they didn't believe that having such a plan was necessary. But in its press release, NASFAA glosses over this finding. Instead, it focuses on the fact that only one quarter of respondent institutions currently have some alternate strategy for loans in place. This gives the reader the misleading impression that most schools are unprepared for possible problems, potentially leaving students in harm's way.

At first glance, NASFAA's decision to sound the alarms now is curious, especially when the report itself acknowledges that the responses the government has taken to the student-loan credit crunch "are having a positive effect." The report notes that some lenders that had stopped making federal loans earlier this year have reentered the market and that the Department of Education has "stepped up its efforts" to streamline the process it uses to transition schools into Direct Lending.

But the association clearly has an ulterior motive -- to persuade federal officials that a crisis still exists and that more needs to be done to help lenders in the Federal Family Education Loan (FFEL) program weather the storm. The group makes that clear when it states in the first sentence of its press release that "more than half of respondents (52 percent) believe that the recently enacted Ensuring Continued Access to Student Loans Act does not do enough to ensure future loan access for students."

The association's stance is not all that surprising considering that the group has been one of the chief proponents of legislation that would provide the loan industry with an even larger bailout than Congress and the Bush administration have already provided. That bill, which, which has been championed by Sallie Mae and sponsored by the loan giant's favorite Democrat Rep. Paul Kanjorski of Pennsylvania, would allow the Treasury Department's Federal Financing Bank and Federal Home Loan Banks to inject cheap federal capital into the student loan market.

Progress on that legislation has come to a grinding halt, as concerns about the student loan crunch have eased on the hopes that the financial markets are beginning to stabilize. Without any proof that students' access to federal student loans is in jeopardy, federal officials are understandably reluctant to provide a potential windfall to the loan industry.

Facing that type of resistance, NASFAA is stepping up its efforts to rally support for the legislation. In a recent letter to Sen. Patty Murray (D-Wash.), Phil Day, the association's president, reaffirmed his support for the measure, saying that it would help ensure "that all eligible students are able to get the loans they need for school. "

The funny thing is that many of the aid administrators surveyed expressed concern about "inaccurate media reports that tend to scare families" about the availability of loans "rather than to inform or help them." Of course, NASFAA officials didn't highlight this concern in its press release. Because if they had, they surely would have had to come clean about why they are still pushing the panic button.

Guaranty Agencies: A Middleman in College Access Clothing

Ben Miller — Wed, 16 Jul 2008 21:59:00 -0400

What do an appendix, plica semilunaris, and student-loan guaranty agency all have in common? They're all vestigial structures whose original purpose is no longer necessary. But unlike the first two examples, guaranty agencies are desperate to show -- despite all evidence to the contrary -- that they are still relevant.

As parts of a system known for its complexity and confusion (the Federal Family Education Loan Program, otherwise known as FFEL), guaranty agencies are the ultimate amorphous entity, branching out into numerous roles that are completely unrelated to their original purposes.

Soon after Congress created the FFEL program in 1965, it authorized the involvement of guaranty agencies (many of which were already in existence in the states), to encourage lenders to offer student loans by providing default insurance. Congress also gave the guarantors important oversight responsibilities, such as ensuring that only eligible students obtain federal loans, and that lenders make a concerted effort to keep delinquent borrowers from defaulting.

While it made sense for guaranty agencies to occupy these roles at a time when technological limitations made it difficult for solely the federal government to oversee FFEL, the program's current setup and recent oversight failures make it clear that guaranty agencies should not be the ones to carry out these functions.

Consider loan guarantees. Currently, all FFEL loans must be certified by one of the 35 guaranty agencies. If a loan defaults, the guaranty agency reimburses the lender for 97 percent of its loss. The agency then takes control of the loan and attempts to either get the borrower to begin making payments or start collection proceedings -- both of which result in compensation for the guarantor. But if neither effort is successful, the guaranty agency is reimbursed for nearly all of its losses by the U.S. Department of Education. Guaranty agencies can thus serve as little more than a pass-through of federal funds from the Department to the lender -- a middleman at its finest.

The oversight role, meanwhile, has been completely undermined by overly close ties between lenders and guaranty agencies. Take the relationship between Sallie Mae and USA Funds, the nation's largest guarantor. As The Chronicle of Higher Education outlined in a recent article, the two companies have a contractual relationship, in which USA Funds pays the lending giant a quarter of a billion dollars each year to handle nearly all of its guarantor functions - essentially putting Sallie Mae in charge of monitoring itself.

This problem of incestuous lender/guarantor relationships is far from novel. In 1993, for instance, the U.S. General Accounting Office (GAO) raised red flags about these types of relationships, warning that "many guarantee agencies have expanded their operations to activities that create serious conflicts of interest with their stewardship responsibilities in the program."

Given the superfluity of their guarantees and the ineffectiveness of their oversight, it's not surprising to see guaranty agencies stretching into other areas to show their relevance. In fact, guaranty agencies successfully lobbied Congress to insert a provision into a 2006 budget reconciliation bill that explicitly required them to take steps to promote college access -- a role completely unrelated to loan guarantees. Under that law, guarantors are to "promote and publicize information" for low-income students and those from traditionally underserved populations "on how to plan, prepare, and pay for college."

Now, guaranty agencies are using these college access activities to justify their continued existence -- and at least some members of Congress seem to be buying it. In June, caucuses representing black, Hispanic, and Asian American lawmakers sponsored a briefing touting guaranty agencies for their role in "enhancing higher education access and success for minority students."

In a letter to lawmakers announcing the briefing, the leaders of these groups praised guarantors for "support[ing] programs that promote higher education preparedness, access and success for students who are members of ethnic minority groups, including scholarships, early awareness programs, symposiums for minority-serving institutions, research to promote college access for minority students and Spanish-language college planning materials."

The real purpose of the event, which was co-hosted by USA Funds and Texas-based guarantor TG, was to show the damage that would occur to college access efforts if the FFEL program was eliminated, as the presumptive Democratic presidential nominee Barack Obama has proposed. Speaking at the briefing, Marshall Grigsby, a USA Funds board member and former top aide to Rep. William Clay (D-MO), warned that if FFEL is abolished, guaranty agencies "will disappear" and take all the positive college access benefits with them.

While we strongly support efforts to increase college access, we aren't convinced that guaranty agencies are the most appropriate entities to fulfill this purpose. For one, there is no accountability for how taxpayer dollars are spent on these efforts. Congress has put in place no standards for measuring success or effectiveness. And, there is no way to gauge how much federal money guaranty agencies are spending on this purpose.

If, however, guarantors really want to move in this direction, then perhaps it's time to shift the agencies' reimbursement and incentive structure accordingly. Rather than funneling billions of dollars through them as middlemen, Congress should provide guaranty agencies with a simple block grant to help run counseling and education services. In exchange, the Department would take on the reimbursement and oversight roles, functions it already handles or should handle. Collection activities, meanwhile, could be handed over to the same agencies that have already won the competitive bidding on the Direct Student Loan servicing contract. Using a block grant over the current haphazard system would also allow provide a way for overseeing the effectiveness of these efforts.

While these changes might decrease the number of guaranty agencies, that's not a bad thing, particularly for taxpayers. Like the appendix, these agencies have served their purpose, and are unlikely to be missed.

Where in the World is Matteo Fontana?

Ed Policy — Tue, 08 Jul 2008 21:25:00 -0400

We hope you all enjoyed your Fourth of July vacation. While it’s nice to have the occasional hard-earned day off, we know someone else who has been on a very long paid break.

It has been 459 days since Matteo Fontana, the then-general manager of Financial Partners Division of the U.S. Department of Education’s Federal Student Aid office, was placed on administrative leave. The Department took this action after Higher Ed Watch revealed that he held at least $100,000 worth of insider stock in the student-loan company Student Loan Xpress. At the time, Education Secretary Margaret Spellings promised that she was taking the matter “very seriously.” But as far as we can tell, the Department hasn’t done anything beyond giving Fontana his regular paycheck and telling him to disappear.

It is clear that Fontana’s purchase and subsequent sale of the stock represented a substantial conflict of interest -- he was, after all, responsible for overseeing the lenders and guaranty agencies that participate in the Federal Family Education Loan (FFEL) program. In addition, at the time he received the stock he was in charge of the National Student Loan Data System (NSLDS), a national database that keeps track of the student aid awards of tens of millions of students. Last year, the Department was forced to shut it down temporarily because, as Higher Ed Watch also revealed, student-loan companies had been mining it to collect personal information about borrowers for marketing purposes.

The stock holding wasn’t Fontana’s only controversial action -- he also overruled the Department’s Inspector General (IG), over the question of whether a lucrative arrangement that exists between Sallie Mae and USA Funds, the country's largest guarantee agency, violated the law and needed to be severed. Fontana’s decision in December 2004 to bless the arrangement essentially cleared the way for Sallie Mae to achieve its long-sought goal of becoming a fully privatized corporation.

But there are still many unanswered questions surrounding Fontana.

First, how much did the Department know about Fontana’s stock holdings? Fontana appears to have disclosed that he owned stock in the company, but was he upfront about all the shares he owned? Did he buy new stock after initially selling some of it? And why hadn’t his ownership and sizeable sale of the stock raise any red flags at the Department?

Federal rules appear to have required Fontana to receive a Departmental waiver before working on anything connected to Student Loan Xpress. Did Fontana receive such a waiver? If so, why hasn’t it been produced? If there was no waiver, this seems to be yet another example of the Department being asleep at the switch.

Also, has the Department even bothered to investigate whether Fontana actively helped loan companies, such as Student Loan Xpress, mine NSLDS to help market their products to potential borrowers?

Then there’s Fontana’s ruling on Sallie Mae's relationship to USA Funds. Why why was a former Sallie Mae employee ever in the position to rule on a matter of such importance to the company and its shareholders?

Finally, why has there been such a long delay in making a decision over his status? Is his case really so complicated that it requires a 15-month investigation by the Department’s Inspector General? Given that Fontana is still collecting his $142,227 salary more than a year after being placed on paid administrative leave, we’re left to wonder whether the Department actually found wrong-doing on his part, or is simply using him as a scapegoat to cover up for its own negligence.

While we don’t know the answers to any of these questions, there’s one thing we’re certain of. It’s time for the Department to stop dragging its feet. Even European countries don’t give vacations this generous.

A Well-Deserved Award

Stephen Burd — Wed, 25 Jun 2008 19:08:00 -0400

Too many times of late, we have seen mainstream journalists fall for the spin of lenders, who in the wake of the credit crunch have had a vested interest in raising panic levels about the availability of student loans.

That's why it's such a pleasure for us to see good, critical, and insightful reporting on the loan industry receive the recognition it deserves. Case in point: Paul Basken, a senior reporter at The Chronicle of Higher Education, has received a National Press Club award for a revealing piece he wrote last May showing how the revolving door between the Bush Administration and the student loan industry brought great rewards to Sallie Mae and put financially needy students in harm's way. [Disclosure: the author of this post used to work for the Chronicle.]

We wrote about Basken's article last year. But at a time when the student loan scandals of yore are fading fast from memory, we felt that it was important to remind our readers of just what he found. The conflict of interest that he uncovered still exists and needs to be dealt with.

Going to Bat for Sallie Mae

The Chronicle article revealed that Matteo Fontana, a high-ranking official in the Department of Education's Federal Student Aid office, made "a controversial and high stakes legal ruling" in December 2004 that greatly benefited Sallie Mae, his former employer, the day before the company officially broke its ties with the federal government and became a private corporation. In fact, Fontana's action essentially removed the last obstacle to the company's long-sought transformation. [Yes, this is the same Matteo Fontana who was at the center of a Higher Ed Watch investigation that found that he held 10,500 shares of insider stock from Student Loan Xpress. Nearly 15 months later, Fontana remains on paid administrative leave pending the outcome of a Department investigation.]

In his ruling, Fontana rejected an opinion offered by the Department's Inspector General (IG) two years earlier that a lucrative arrangement that exists between Sallie Mae and USA Funds, the country's largest guarantee agency, violated the law and needed to be severed in order to protect borrowers.

Sallie Mae's relationship with USA Funds dates back to 2000 when the loan giant purchased the guarantor's parent company, USA Group, which had been one of its largest competitors.

On its face, the sale didn't give Sallie Mae control of USA Funds. Under federal law, for-profit lenders, such as Sallie Mae, are not allowed to own nonprofit entities such as guarantee agencies. That prohibition makes sense because the Higher Education Act puts guarantors in charge of overseeing loan providers -- making sure, for instance, that lenders do everything required to keep borrowers who are delinquent on their loans from defaulting.

Sallie Mae, however, found a creative way around the restriction. While the loan company's purchase didn't include USA Funds, it did gain control of USA Group Guarantee Services, a for-profit subsidiary that provided administrative services to help the guarantor carry out its functions. The deal also required USA Funds to contract its loan guarantee services to Sallie Mae.

USA Funds is now a shell of its former self. Sallie Mae employees carry out most of the agency's operations. Meanwhile, the guarantor pays Sallie Mae about $250 million a year for staffing and other purposes, according to the Chronicle.

Raising Red Flags

In 2002, the Department's IG raised a giant red flag. Sallie Mae's relationship with USA Funds, the IG's office wrote, presents "a conflict of interest" that needs to be cured. Because Sallie Mae effectively controls the guarantor, the IG pointed out, there is no independent agency ensuring that the loan giant is doing all it can to ensure borrowers don't fall behind on their payments. By working hand-in-hand, the two entities actually have a perverse incentive to let borrowers fall behind so that the USA Funds can collect the generous subsidies the government provides guarantors for keeping delinquent borrowers out of default.

What makes the story especially outrageous is that the Federal Student Aid office initially agreed with the IG's assessment. In March 2004, Fontana sent a letter to USA Funds saying the "conflict of interest" needed to be eliminated. But on the eve of the day Sallie Mae was finally to become a fully private for-profit company, he had a change of heart.

In the follow-up letter he sent that December, Fontana wrote that the Department "had reconsidered its prior position." He said the conflict of interest did not exist because the Sallie Mae (SLM) subsidiaries that helped manage USA Funds had separate tax identification numbers from other parts of the company. "It is apparent from SLM's website that SLM regards these subsidiaries as separate corporate entities," he wrote. Great detective work there.

Basken's piece showed how Sallie Mae's friends at the Department went to bat for the corporation, despite having concerns that students could be hurt. Hopefully next year, when the Department's leadership changes, the agency will revisit this dubious decision and, as a change of pace, put the interests of students first.

Congratulations on the award, Paul. Keep up the good work.

A "Key" Development in the Case of Silver State Helicopters

Stephen Burd — Tue, 17 Jun 2008 19:15:00 -0400

For a long time we have known that KeyBank has played a leading role in aiding and abetting the efforts of sham for-profit trade schools to scam vulnerable students. What we didn't realize, however, was the integral role that KeyBank played in fueling the growth of Silver State Helicopters, an unlicensed and unaccredited Nevada-based flight-school chain that left its 2,500 students in the lurch when it shut its doors without warning on Super Bowl Sunday and filed for bankruptcy liquidation. Most of these students are now stuck having to repay nearly $70,000 in high-cost private loan debt for training they did not receive.

Thanks to a class-action lawsuit filed by several former Silver State students in California, we recently learned that KeyBank was Silver State's exclusive private student loan provider from 2002 to 2005, a time when the flight-school chain grew by "an astounding 2,786 percent." KeyBank appears to have severed its ties to Silver State in 2005, forcing the flight-school chain to find other lenders to provide private loan funds to its students. As we previously reported, Silver State then forged an exclusive arrangement with the infamous Student Loan Xpress and the Pennsylvania Higher Education Assistance Agency (PHEAA), to make and service the loans.

Key Bank's involvement with Silver State is far from the first time the Cleveland, Ohio-based national lender has assisted the efforts of sham trade schools to scam students.

These practices first came to light several years ago when dozens of unaccredited computer training schools unexpectedly shut down, leaving their students with heavy private loan debt. Just like Silver State, these schools (owned by now-defunct chains such as Ameritrain, Solid Computer Decisions, and The Academy Schools, among others) had forged sweetheart deals with KeyBank and the student loan giant Sallie Mae to provide their students with tens of thousands of dollars of private loans to cover the full cost of tuition before any classes were provided.

In a 2003 article in the trade journal The Consumer Advocate, the consumer lawyer Tom Domonoske explained how the easy availability of private loans helped disreputable schools thrive by allowing them to attract students without having to worry about enrolling in the federal student loan programs and the government regulation such participation entails.

Under pressure from consumer advocates and some state regulators, Sallie Mae eventually agreed to provide some repayment relief to the students left in the lurch after these computer schools unexpectedly shut down. KeyBank, on the other hand, has vigorously (and often successfully) resisted shafted students' demands for debt forgiveness for classes they never attended. In doing so, the corporation has systematically denied borrowers basic protections that are in federal law to safeguard consumers from the most predatory practices of lenders.

Now it turns out that KeyBank's focus has not just been on providing liquidity to unlicensed and unaccredited computer schools but also to unregulated flight schools as well. Silver State appears to be only the tip of the iceberg. According to the class-action lawsuit, KeyBank provided private loans to students attending the Makarion Institute of Aeronautics, as well as the Sierra Academy of Aeronautics and Airman Flight School in Norman, Okla. -- all of which shut down unexpectedly, leaving students with a heavy debt load and without the training needed to become certified pilots.

As part of the class-action lawsuit, lawyers for the Silver State students accuse KeyBank of violating the federal Racketeer Influenced and Corrupt Organizations (RICO) Act by using the "U.S. mail and wires" to engage "in a deliberate pattern and practice of aiding and abetting fraudulent vocational schools that aggressively induce students into obtaining loans with KeyBank."

We do not know if this line of argument will prevail. But at Higher Ed Watch, we firmly believe that federal and state regulators, as well as policymakers, need to understand the essential role KeyBank played in the proliferation of sham schools, and the harm that the bank, in providing liquidity to these disreputable schools, has done to countless low-income and working-class students who were just trying to better their lives.

In future posts, we will take a closer look at the tactics that KeyBank and other private-loan providers have used to erode key consumer protections for borrowers. Stay tuned.

Important News for College Graduates

Christina Satkowski — Tue, 10 Jun 2008 16:30:00 -0400

Attention recent college graduates: starting July 1st, you will have a once-in-a-lifetime opportunity to significantly reduce your federal student loan costs. We at Higher Ed Watch are telling you this, because if some in the student loan industry get their way, you may never hear about it.

For six months beginning July 1st, members of the Class of 2008 who have taken out variable interest rate federal student loans will have the opportunity to refinance those loans and lock in a low, fixed 3.61 percent interest rate. That's about 3 percentage points lower than the variable rate that was set last year. This is the biggest one year drop in student loan interest rates ever, and the 4th lowest interest rate in the 15 year history of the student loan consolidation program.

All borrowers with non-consolidation federal student loans that were issued before July 2006 [when the interest rate on new student loans changed to a fixed rate of 6.8 percent] can save big money by refinancing their debt after July 1st of this year. But it is the most recent graduates who can get the lowest rate by consolidating variable interest rate federal student loans during their post-graduation, six month grace period that takes place before student loan repayment begins.

A typical member of the Class of 2008, for example, with $17,125 in federal student loan debt can be expected to save approximately $2,542 in lifetime student loan repayment costs if they consolidate in the second half of this calendar year, assuming their loans' current variable interest rate of 7.2 percent is their approximate average interest rate over the next 15 years (the maximum repayment term for a consolidation loan under $20,000). Variable interest rates go up and down from year to year, whereas a new consolidation loan interest rate is fixed at 3.61 percent.

There's a catch. Because of subsidy cuts that Congress made last year and liquidity problems due to the credit crunch, most private lenders have stopped making consolidation student loans, which are necessary for the refinancing boon to borrowers. As a result, private lenders have little incentive to make students aware of the opportunity offered elsewhere (they don't want to lose your business), and given past behavior, are likely to try to actively dissuade students from refinancing.

In fact, this is particularly true this year since most borrowers who wish to consolidate their federal student loans are most likely to do so through the U.S. Department of Eduction's competing Direct Student Loan program. Can we really expect the student loan giant Sallie Mae to actively encourage its borrowers to seek Direct Consolidation Loans -- when such a move will require Sallie Mae to lose out on years of interest payments?

If you have any doubt, just listen to what Martha Holler, a Sallie Mae spokeswoman told TheStreet.com during a recent interview on the subject. "There is no immediate need to consolidate as the new rates will be in effect for the next year and many other options, such as extended and graduated plans, exist to help borrowers manage student loan repayment, " she stated. No matter that these other repayment programs don't reduce the cost of the loans for borrowers, and in fact, under the extended repayment program, actually increase a borrowers' lifetime costs by stretching out the loan repayment period over many, many years.

All of this is to say that the onus for alerting recent graduates of this great opportunity lies squarely with the U.S. Department of Education and other public officials. Unfortunately, the Department has a weak record of marketing and promoting the Direct Loan program. In addition, loan industry officials are likely to put the Department under tremendous pressure to play down this cost-saving option for borrowers. There's little doubt that lenders will play the "credit crunch card" with policymakers -- warning them that the potential loss of borrowers to direct lending, on top of the turmoil created by the credit crisis, could cripple them.

The Department must resist this pressure. It must also be prepared to penalize lenders that prevent borrowers from refinancing their loans. One way that lenders have done this has been by refusing to complete the loan verification certificates (LVC) that allow a loan to be shifted from one lender to another. While the Department has issued guidance to lenders to clarify the rules regarding LVCs, the agency's own Inspector General has faulted it for failing to take action against lenders who continually refuse to comply with the rules. "When a loan holder fails to return an LVC timely, or fails to provide all of the information requested on the LVC, the Department does not take effective action to ensure that the applicant's loan is consolidated," according to a 2005 Inspector General report.

The Department and other public officials need to move quickly to ensure that recent graduates are aware of this once-in-a-lifetime opportunity and to alert lenders that it won't allow them to block borrowers from refinancing their loans. Department officials must remember that the point of the federal student aid is not to protect lenders' profits, but to make college more accessible and affordable for the millions of students who benefit from these programs.

Note: Stephen Burd and Michael Dannenberg with Higher Ed Watch contributed to this post.

Higher Ed Roundup: Week of June 2 - June 6

Ed Policy — Thu, 05 Jun 2008 21:53:00 -0400

Risky Lending a ‘Mistake', says Sallie Mae's Al Lord

Education Department Report Reveals Differences in Borrowing, Graduation Rates

Risky Lending a ‘Mistake', says Sallie Mae's Al Lord

In an interview with The Wall Street Journal on Thursday, Al Lord, Sallie Mae's chief executive officer, acknowledged that the company had made "a mistake" in pushing high-cost private loans on subprime borrowers attending poor-performing trade schools. "It was obviously a mistake and I'm not going to step away from responsibility because I was either chairman or CEO when those loans were made," he said. "We got a little too confident in our own view that credit scores are of limited meaning for undergraduates."

As Higher Ed Watch has reported, financial analysts have long raised red flags about Sallie Mae's private lending practices. During earnings calls and at shareholder meetings and investment conferences over the last five years or so, analysts regularly peppered Sallie Mae officials with questions about whether the company, which is used to having government backing on the Federal Family Education Loans (FFEL) it makes, had the expertise needed to assess the risks associated with lending unsecured, private loan debt to financially-needy students. In the interview with the Journal, Lord acknowledged that the company had lacked that expertise. "The culture of the company has been a FFELP culture for 35 years," he said. "That meant you made every loan to every student. I guess with 35 years of experience of saying yes, we were just not very good at saying no." Unsurprisingly, Lord did not offer to provide any relief to the borrowers who have fallen victim to the company's predatory loan practices.

Education Department Report Reveals Differences in Borrowing, Graduation Rates

Students attending for-profit trade schools are the most likely to borrow student loans to finance their education, according to a report released Tuesday by the U.S. Department of Education's National Center for Education Statistics. According to "Enrollment in Postsecondary Institutions, Fall 2006; Graduation Rates, 2000 and 2003 Cohorts; and Financial Statistics, Fiscal Year 2006," 73 percent of students at two-year for-profit institutions, and 67 percent at four-year for-profit institutions took out federal student loans during the 2005-06 academic year, compared to 60 percent of students at private non-profit schools and 44 percent of students at public colleges. The report also shed light on institutional differences in graduation rates. Department researchers found that 26 percent of students at for-profit schools earned their bachelor's degree in 4 years, compared to 50 percent at private non-profit colleges and 29 percent at public institutions.

Mailbag: Private Loan Borrowers in Distress

Ed Policy — Thu, 05 Jun 2008 15:45:00 -0400

At Higher Ed Watch, we hear regularly from financially-distressed borrowers with private student loans who believe they have been victimized by lenders' predatory practices. Much of that feedback comes in the way comments we continue to receive on blog posts that ran more than a year ago.

At a time when the federal government is providing a major bailout of the student loan industry, we think it is important to highlight the experiences of borrowers who are struggling with unmanageable levels of high-cost, private student loan debt. Surely borrowers such as these could use a helping hand too.

Many of our readers have shared stories with us about the seemingly inescapable burden these loans have had on their lives. Here are a few examples:

"I have borrowed about $50,000 in private loans. My estimated monthly payment for both loans is right around $800 and I earn around $1200 monthly. You guys do the math. I know I have a responsibility, but all I wanted was an education, not a $375,000 debt that i'm gonna carry all the way to my grave...At 18, I had no idea what I was doing to myself!!" (I have borrowed, May 7, 2008)

"My husband and I have over $200,000 in private student loans and over $150,000 in federal student loans. I am currently not working and my husband is a teacher. When our loans enter repayment, the monthly payment will be about $3,000! My husband doesn't even make that much per month and my degree (HISTORY-Lib. Arts) will not land me a high-paying job...We are currently driving one car that is 13 years old and we have two children in elementary school. HELP!" (Massive Debt, April 10, 2008)

"I'm a single mother that is not receiving child support. I have $39,000 of private loans and $17,000 in federal loans. I'm in default with my private student loans based on them not working out a payment plan with me. I have to pay $717 a month on my private loans -- mind you this does not include my federal loans. After taxes, I make about $1,700. This makes me hate the fact I even went to school and received an education." (Private Student Loans, May 8, 2008)

"I took out my loans two or more years ago. Part of that time I was working on my master's degree, but then put it on hold when I had my son in March of 2007. Since then I have been harassed, threatened, and basically called a liar and scam artist by Sallie Mae, when I was unable to start payment of the private loans. They want over $1000 a month and have now bullied me into putting my loans in forbearance twice, which they were kind enough to waive the $100 forbearance fee, but tacked on nearly $5000 each time for the forbearance itself. I am drowning in all this debt, I am disabled and my disability got worse after I gave birth and has been on a downward spiral ever since. I live on $600 a month from disability, so obviously I can not pay over $1000 a month to Sallie." (Disabled and Desperate, May 7, 2008)

Some of our readers say they fell victim to aggressive direct-to-consumer loan companies that never made them aware of their lower-cost federal loan options. Many of them acknowledge that they made bad decisions, but also believe that the loan companies took advantage of them:

"I am a victim of these financial institutions that are targeting college students with good credit. I was able to get $52,000 worth of loans over the internet never speaking to anyone. The terms were very unclear. I had no one to explain to me the devastating impact this would have on my life. By the time that these loans went into repayment status, I owed about $73,000. WOW!!! That is $20,000 worth of interest that they have racked up! My payment which I thought would be around $350 per month is over $700. There was no one to guide me and to explain what a libor rate is. I thought that my interest rate would be 4% and calculated like a regular federal student loan. I was so wrong and now my family is suffering because of this poor stupid choice that I made...I was only 22 years old and had no idea what a life changing event this would be." (Private Student Loans, April 12, 2008)

Others blame the colleges they attended for encouraging them to take on heavy loads of private loan debt with their favored lenders:

"I used Sallie Mae because the school I went to spoke of them like a god company. I borrowed $66,000 from them unfortunately, and now the payback amount is $266,000. (And they get away with it, April 23, 2008)

"I came to America to chase a dream and become a better person in this competitive world. I enrolled in the California School of Culinary Arts and being naive they recommended Sallie Mae to me. I wish I knew better. I was excited since I had no co- signer or good credit and I had the opportunity to get money for school. I jumped onto the train. I was told my payments would be about $200 dollars. Well, I am now looking at $500 dollar bills from Sallie Mae. I earn $2000 dollars a month. I can't even afford to send my people back in Africa some form of help because I basically have nothing left after I pay my bills. " (Sallie Mae worse than Enron, May 9, 2008)

And most cannot understand why the federal government treats private student loans differently than other forms of consumer debt by making it so difficult for financially-distressed borrowers to be able to discharge these loans in bankruptcy.

"Students should be able to discharge their student loans in bankruptcy as they can other non secured debt. Everyone knows there is risk involved with student loans and everyone should play by the rules that any other entity is forced to when it comes to loans. Sallie Mae is a company. A non government entity that is in the business of making money. The sooner people start realizing what is happening to the people of this country, the sooner things may turn around." (Will It Ever End?, December 11, 2007)

We appreciate all of the comments we have received on private loans and other items. Please keep them coming.

Higher Ed Roundup: Week of May 19 - May 23

Ed Policy — Thu, 22 May 2008 19:39:00 -0400

Ed Dept. Unveils Plan for Loan Availability, and Pleases Sallie Mae

Trade School Acted Improperly to Reduce Default Rate, IG Finds

Felonies No Barrier to Entry in FFEL Program

DeVry is Latest For-Profit School Chain Under Investigation

Ed Dept. Unveils Plan for Loan Availability, and Pleases Sallie Mae

The U.S. Department of Education released additional details about its strategy for ensuring student loan availability Wednesday -- including a proposal that apparently acquiesced to lender demands by providing low-cost federal financing for student loans. As outlined in a letter sent by Education Secretary Margaret Spellings, the Department will not only buy student loans from lenders, as Congress authorized it to do, but it will also purchase for one year "participation agreements" in pools of new loans, temporarily giving lenders a source of cheap capital with student loans serving as collateral. The Department will charge lenders a rate of commercial paper plus 50 basis points for the agreements. Since all lenders receive special allowance payments that are set at fixed rates, this means participants will have a predetermined return on all new loans.

The federal financing proposal bears a striking resemblance to a plan originally proposed by student-loan giant Sallie Mae Vice Chairman and Chief Financial Officer Jack Remondi. Early in the week, Sallie Mae dropped hints that it was considering leaving the FFEL program, though it withdrew that threat (and saw a healthy spike in its stock price) after the plan's details were released.

Trade School Acted Improperly to Reduce Default Rate, IG Finds

Concern over a high student loan default rate, and the potential loss of federal financial aid funds, has led at least one for-profit trade school to act illegally to keep its students out of default, according to an audit released this week by the Department of Education's Inspector General. The audit found that Technical Career Institute (TCI) in New York City had improperly paid off $440,487 worth of federal loans taken out by students who dropped out before completing their first semester. The school then set up its own repayment plans with the students and referred them to collection agencies if they failed to make payments. This arrangement allowed the school to manipulate its official cohort default rate by keeping the percentage of students who failed to repay their loans below the threshold at which the institution would face sanctions. The Inspector General recommended that TCI stop paying off students' debt, retract negative credit reports, and recalculate its default rates for the past three years. The Inspector General also urged the Department to limit, suspend, or terminate TCI's eligibility to participate in the federal student aid programs -- the ultimate penalty that the agency can exert. Department officials are reviewing the report, and will likely make a final decision later this year.

Felonies No Barrier to Entry in FFEL Program

Felons may not be able to vote in several states, but they can run student loan companies, according to a report last week in the St. Petersburg Times . According to that article, Roger Wayne Morgan, a convicted felon, and Joseph Pursley, who had heavy debts and a police record that included resisting arrest and public drunkenness, both managed to set up and run student loan consolidation companies that between them dealt in over $300 million worth of federal loans. The companies grew to be the 36th and 82nd largest holders of loans through the Federal Family Education Loan (FFEL) program before they collapsed amidst allegations of fraud and abuse. "No one -- not the U.S. or Florida Departments of Education, not their backers at the Bank of New York -- raised concerns about the men's criminal backgrounds," the article states. "And without tighter regulation, experts say, there's nothing to prevent it from happening again."

DeVry is Latest For-Profit School Chain Under Investigation

DeVry Inc., a chain of for-profit colleges, is under investigation by the Justice Department for making false statements about its policies on compensating recruiters. The company has been accused of providing bonuses to its admissions officers based upon how many students they enroll -- which is illegal under he Higher Education Act. DeVry is just the latest in a long line of publicly-traded for-profit higher education companies to come under scrutiny for its recruiting practices. For instance, the Apollo Group, the parent company of the University of Phoenix, paid $9.8 million to the Department of Education as part of a 2004 settlement surrounding the company's practice of rewarding and penalizing recruiters based on the number of students they enrolled. Officials with Devry denied any wrongdoing and said they would cooperate with the probe.

Kanjorski's Conflict

Stephen Burd — Thu, 22 May 2008 15:11:00 -0400

On Wednesday, the U.S. Department of Education offered a full-scale plan to bail out the student loan industry. Under the plan, the Department will not only buy student loans from lenders, as Congress authorized it to do, but it will also purchase interests in pools of loans to provide lenders with additional liquidity.

Despite these aggressive actions, Rep. Paul Kanjorski (D-PA) wants more. He applauded Education Secretary Margaret Spellings for her “initial plans” but urged her to take even stronger steps “to maintain an effective student loan distribution system.”

“[W]e must remain vigilant in the coming weeks and take further administrative and legislative action, as needed to address the problems in the student lending marketplace,” he contends. In other words, he is going to continue to push proposals that the student loan giant Sallie Mae has promoted to resolve "the crisis" -- pressing Congress, for instance, to pass bills that would allow the Treasury Department's Federal Financing Bank and the Federal Home Loan Banks to inject cheap federal capital into the student loan market.

Over the past six months, no Congressman has pushed as strongly for a lender bailout as Kanjorski. In doing so, he has consistently presented himself as a champion for students. "Since identifying the student loan crunch problem early in 2008, I have led the efforts in Congress to raise awareness and identify solutions," he said at a roundtable forum he held in his district on the subject, adding that he would help insure that "students' long-term dreams won't be ruined."

But what he has been less upfront about in Washington, DC (until we asked for comment yesterday morning) is the political stake he has in the fortunes of student loan giant, Sallie Mae. The company is one of the largest employers in the Congressman's economically-depressed district.

Kanjorski is locked in a tough reelection battle, probably the toughest since he was first elected to Congress in 1984. If Sallie Mae decides to shut down or significantly downsize its giant loan origination and processing center in Wilkes-Barre, as it has done in some other states, he could find himself with some pretty unhappy constituents. Today more than 900 Pennsylvania residents are employed at the 133,000 square foot center, which is one of Sallie Mae's largest facilities.

Keeping Sallie Mae Happy

By his own account, Kanjorski played a pivotal role in the late 1980's in persuading the loan company to move its origination and processing center to his district. And he has often boasted, in his reelection campaigns, about how he has used his leverage as a leading member on the House Financial Services Committee to keep Sallie Mae healthy and happy so that it would continue to increase its presence in his district.

"I got Sallie Mae here and I kept Sallie Mae here because of my activities with them at a federal level making sure that we have a very favorable climate for them to remain," he said while defending his record during a wide-ranging interview with the editorial board of the Wilkes-Barre Times Leader shortly before the November 2002 Congressional elections. Similarly, on his House website, he says that "his influence played a part in Sallie Mae's decision to maintain current staffing levels at its Wilkes-Barre center even as other centers were cut back or closed."

Sallie Mae officials have offered similar accounts. In 1998, a Sallie Mae executive was quite candid about why the company had decided to boost employment at the processing center. "Congressman Kanjorski is a fierce and effective advocate in Washington for Sallie Mae and the student loan program," Joe Bailey, who was the company's vice president of Northeast Operations at the time, said in a news release put out by Kanjorski's campaign. "That advocacy was a major factor in the decision to expand employment at the Hanover Township facility." [The processing center is located in the Hanover Township Industrial Park, which is in Wilkes-Barre.]

Sallie Mae has rewarded Kanjorski for his support in other ways as well. According to federal campaign finance records, the loan giant has contributed, through its PAC and from individual company officials, nearly $70,000 to the Congressman's campaign coffers over the last decade. In addition, the Sallie Mae Fund, the company's charitable arm, has made generous contributions to one of the Congressman's pet causes: donating $1 million in 2003 to the Wilkes-Barre Catholic Youth Center, which provides daycare and overnight care to children from primarily lower-income and minority families. Kanjorski has long championed the center and fought to get federal funding for it. In Sallie Mae's news release, the center's executive director "expressed deep gratitude" to the Congressman for helping to secure the loan company's donation.

Raising Alarms and Spreading Panic

Sallie Mae's longstanding relationship with the Pennsylvania Congressman is paying dividends for the company now. Kanjorski was the first Congressional Democrat to raise concerns about the impact of the credit crunch on the student loan industry, even though not a single student has gone without access to a federal student loan, and he was able to band together other party members to demand action. Having Democrats argue for a bailout gave an aura of legitimacy to the loan industry's lobbying efforts. In a recent news release, Sallie Mae praised Kanjorski for "working hard to study the best options available to the government and prompting broad, bipartisan support for addressing the problem before it impacts students."

In a response to Higher Ed Watch on Wednesday, Kanjorski did not deny his close ties to Sallie Mae, and in fact said that they helped him understand “the urgent need for action.”

“Sallie Mae is a large employer in my Congressional District,” he stated. “As a result, I heard about the problems in the student loan market early on. There are also twelve colleges and universities in my district, and they are all feeling the effects of the problems that continue to escalate as a result of the volatile student loan market."

Kanjorski would like to promote himself merely as an advocate for students. But, as we have shown, there are other motivations at work as well. With a tough Republican challenger, the Congressman cannot afford to see Sallie Mae struggle. That's why he is pulled out all of the stops to help the company.

We want to be clear. Congressman Kanjorski is engaged in perfectly legitimate representative politics. He'd potentially be endangering himself politically were he not to work so hard on behalf of a major local employer. But at Higher Ed Watch, we believe his parochial interests are an important context for policymakers and journalists to consider when evaluating the messages he's sending and the legislation he is pushing.

Benjamin Miller contributed to this report.