Scandal

Revisiting the 9.5 Percent Student Loan Scandal

Stephen Burd — Tue, 23 Sep 2008 13:13:00 -0400

[This is the first in a 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.]

As the Bush administration nears its end, key questions remain about its role in a scandal that allowed student loan companies to bilk taxpayers out of more than $1 billion by overcharging the government for subsidy payments on loans they made to students. At Higher Ed Watch, we think it's especially vital to get answers to the following questions: what did the political appointees at the Education Department know about the 9.5 percent scandal and when did they know it?

Before delving into these questions, it's important to recall the details of the scandal, which has been largely overshadowed in recent years by higher-profile student loan controversies and the credit crunch.

The roots of the 9.5 scandal date back to the 1980s when poor economic conditions and soaring loan costs prompted Congress to keep nonprofit lenders, which use tax-exempt bonds to finance their loans, in business by guaranteeing them a return of 9.5 percent on loans. Congress rescinded that policy in 1993 but grandfathered in the loans already made, believing that the volume of 9.5 loans would decline as they were paid off.

Instead, a group of lenders devised a strategy to aggressively grow the volume of loans that they claimed were eligible for the inflated payments. They did so 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. A particularly egregious actor was Nelnet, which was created in 1998 when Nebraska's nonprofit student loan agency converted to for-profit status. By repeating the transfer and recycling process over and over, Nelnet increased the amount of loans for which it sought the 9.5 percent rate from about $550 million in 2003 to nearly $4 billion in 2004.

Profits began to slow after Congress passed bills in 2004 and then again in 2006 to try to prevent lenders from engaging in these type of loan and bond manipulations. At the time, Department officials claimed that they didn't have the authority to stop these practices without Congressional action or a lengthy rulemaking process. Some believed otherwise, and questioned whether the Department's inaction indicated that it was complicit in the scandal.

All told, according to a report last week The Chronicle of Higher Education, the government appears to have lost nearly $1.2 billion in overpayments to lenders over a six-year period.

Still today, the Bush administration officials who run the Education Department bristle at the suggestion they gave a green light to lenders to fleece taxpayers, or knowingly looked the other way while it was happening. But even they have come to acknowledge that they were slow to react to the abuses-- ignoring calls from their own employees, key lawmakers, and the Government Accountability Office to put a stop to it. The political appointees say they didn't fully understand the extent to which Nelnet and other lenders were gaming the system until the Department's Inspector General (IG) released an audit report in September 2006 explaining the illegality of the loan company's actions.

Department of Education officials say that once the picture became more clear, Education Secretary Margaret Spellings took decisive action to cut off the payments. In January 2007, Spellings barred Nelnet and other lenders that refused to submit to independent audits from making any further 9.5 percent claims. This action, department officials say, saved taxpayers more than $800-million in future subsidy payments to Nelnet alone.

But Spellings' decision in the Nelnet case raised more questions than it answered -- because she ultimately let Nelnet off the hook by rejecting the IG's recommendation to require the company to return the $278-million it had received in overpayments. Instead, she reached a settlement agreement that allowed Nelnet to hold onto the funds as long as it didn't submit future 9.5 percent claims. In addition, she extended the terms of the agreement to all other lenders that had taken part in the scheme, assuring them that they would not have to return excess subsidy payments they had improperly obtained.

In explaining this ruling, Education Department officials initially said that they were not requiring Nelnet to return the overpayments because of concerns about putting small non-profit lenders who had made similar claims out of business. "In some parts of the country, these small not-for-profits are the only option we have," Sara Martinez Tucker, the Department's under secretary of education, told reporters at the time. "We were trying to make the best decision for the taxpayer and for students."

But testifying before the House Committee on Education and Labor in May 2007, Spellings backed away from that explanation and offered another more intriguing one. She said she felt it was better to settle with Nelnet than risk losing in court. "We had significant legal exposure," she said, and "significant liability potential."

Spellings expanded on these statements in comments she made to The Washington Post in the fall of 2007. "The department, I believe, had some responsibility with respect to that confusion [over the rules governing the 9.5 subsidy rates.]," she said.

"We had legal risk, in my view, and the prudent course of action was to, once and for all, end this practice and provide certainty in the industry that that was not allowable," Spellings told the newspaper. "While it cost us $278 million to make that final call, it also saved us potentially a billion dollars had we lost the litigation."

To this day, it remains unclear why Spellings was so pessimistic about the Department's chances in a potential Nelnet lawuit. Had the Department confused lenders simply by its inaction? Or had political appointees at the Department given Nelnet and other loan companies the impression that they had approved their actions? Many lenders did not partake in the scheme. Should those that tried to game the system not be held accountable?

At Higher Ed Watch, we believe these are vital questions to ask and we will do our best, in the coming days and weeks, to try to shed light on them. Meanwhile, we hope that Congress will exercise its oversight responsibilities and demand answers to these questions themselves. To start, lawmakers should require the Department to turn over all communications it had with lenders about the 9.5 percent payments since the beginning of the Bush Administration.

After all, doesn't the public have a right to know whether public officials were complicit in a scheme to fleece taxpayers?

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.

Attention GAO: Aid Programs are Still at Risk

Stephen Burd — Thu, 10 Jul 2008 18:02:00 -0400

If the events of the last two years have taught us anything, it's that the U.S. Department of Education's oversight of the Federal Family Education Loan (FFEL) program has been unconscionably lax. The recent revelations that the Department had inadvertently allowed convicted felons to become eligible FFEL lenders is just the latest example of the agency's negligence.

Why then, despite all evidence to the contrary, does the Government Accountability Office (GAO) no longer consider the FFEL program to be at a "High Risk" for waste, fraud, and abuse?

Every two years the GAO, the investigative arm of Congress, puts together the "High Risk" list, an official compilation of federal programs it considers to be the most vulnerable to exploitation. Started in 1990, the goal of the list is to help set the oversight agenda for each new Congress. For 15 years, the federal student aid programs stood at the top of the list, along with other notorious trouble areas such as the Defense Department's contracting practices, and the IRS's efforts to police tax law violations.

Among the government's financial-aid programs, the GAO expressed the most serious reservations about the FFEL program. For instance, a January 1999 update to the report noted that the guaranteed loan program was "particularly vulnerable because of its size, the large number of participants, and the federal guarantee under which the federal government bears most of the risk when students default on their loans."

From its start, the Bush administration made getting the student-aid programs off the list among the Department's highest priorities. The Department's political appointees knew they could score easy points by focusing on this area -- as the Clinton administration had taken a lot of political heat from Republican lawmakers over allegations that it had mismanaged the student aid programs and left the agency's finances in shambles.

From 2001 to 2005, Education secretary Rod Paige and other top Department officials applied constant pressure on the GAO to reconsider the designation. At one point, when the prodding became particularly intense, the comptroller general (who heads the GAO) gently admonished Paige -- reminding him that "it is not our policy to address high-risk designations 'out of cycle.'" Providing "an out of cycle assessment for the Department of Education," he explained, "would set a precedent that would result in other agencies asking for such interim determinations." In other words, if we do it for you, we'll have to do it for everybody.

What all the pressure did succeed in doing was to get the GAO to significantly narrow the criteria it used to judge the Department's management of the programs. As long as the Department met certain quantifiable goals -- such as obtaining "clean audits" on its financial records and making sure the student loan "cohort" default rate continues to drop -- it would eventually get its way.

In 2005, the GAO relented and removed the aid programs from the list. In retrospect, the decision was a big mistake. Just look at everything we've learned about the Department's management of the federal student aid programs in recent years:

The Department looked the other way as lenders systematically overcharged the federal government hundreds of millions of dollars in improper 9.5 percent loan subsidy payments. Margaret Spellings, the education secretary, acknowledged that the Department shared "some responsibility" for allowing lenders to bilk taxpayers, but has steadfastly refused to calculate the cost of or demand reimbursement for the overpayments. The Washington Post, however, conducted its own analysis, using subsidy payment data it obtained from the Department, and calculated the government's total losses to be about $600 million.

The Department turned a blind eye while student loan providers routinely violated a federal law forbidding lenders from providing "illegal inducements" to colleges and financial aid administrators in exchange for getting the schools to steer borrowers their way. For years, the Department's top political appointees, many of whom came from the loan industry, ignored concerns about these "pay for play" practices, even from the agency's own Inspector General and lenders who complained about their competitors' activities. Last July, the GAO blasted the Department for its complete failure to oversee the activities of lenders, noting that the agency had "not developed any oversight tools" to help it determine whether lenders offered improper inducements to colleges and students to win student-loan business, and that it failed to heed repeated requests for clearer guidelines on acceptable lender behavior.

Department officials allowed lenders specializing in offering consolidation loans to mine the National Student Loan Data System (NSLDS) to collect personal information about borrowers for marketing purposes. While civil service employees at the Department had loudly complained about these practices, the agency's leaders didn't do anything about it until Higher Ed Watch broke the story and the national news media picked up on our coverage.

The Department has done little to look into widespread allegations that some of the largest publicly-traded for-profit higher education companies have knowingly violated the federal student aid law prohibiting colleges from giving "any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments." In fact, it remains unclear whether the Department ever even punished the agency official who leaked to the University of Phoenix the entire legal strategy of a pair of whistleblowers who had sued the school for violating the incentive compensation ban.

The GAO will release the latest version of its High Risk report early next year. With a new administration taking over, we believe it's absolutely vital for the agency to use this opportunity to admit its mistake and put the student-aid programs back on the list. The next president needs to understand how important it is to protect the integrity of these programs -- for the sake of the students who depend on them, and the taxpayers who finance them.

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.

Allowing Felons in FFEL

Stephen Burd — Thu, 19 Jun 2008 21:56:00 -0400

At Higher Ed Watch, we have written much about the U.S. Department of Education's lax oversight over the lenders and guarantee agencies that participate in the Federal Family Education Loan (FFEL) program. But until we read a recent investigative report in the St. Petersburg Times, we didn't fully grasp just how lax that oversight has been.

As that report revealed, the Education Department does not conduct criminal background checks on individuals who are seeking to become eligible FFEL lenders. The agency leaves it to student-loan guarantee agencies to verify eligibility for participation. But apparently most guarantors often don't even bother to ask about past criminal records of those who apply to become federal student loan providers.

As a result, the St. Pete Times reports, some convicted felons and others with criminal records have gained entry into the guaranteed-loan program and taken advantage of the rich rewards the government bestows on lenders that participate in the FFEL program.

The newspaper's report focuses on two individuals with criminal records who managed to set up and run student loan consolidation companies based in Tampa Bay that dealt in over $300 million worth of federal loans.

According to the articles, Roger Wayne Morgan, a native of North Carolina, "earned felony convictions for safecracking, breaking and entering, and larceny following his first arrest in 1992, when he broke into a North Carolina movie theater and made off with $400 in rolled quarters." In a separate incident, he was arrested and charged with "armed kidnapping in connection with a botched ecstasy deal." Prosecutors, however, ultimately dropped the charges, "citing trouble with witnesses." Morgan also "pleaded guilty to stealing from a cash register and no contest to writing an $18,000 bad check."

Meanwhile, Joseph Pursley of Michigan had a police record that included resisting arrest and public drunkenness. He also carried enormous debt, owing at one point "$2.8-million in unpaid bills" as the result of a failed real estate venture. In 1999, the state of Michigan rejected his application to practice law after the state bar's committee on character and fitness "cited his foul temper and a 'frivolous, cavalier approach to other people's money.'"

Despite their backgrounds, neither man ran into much difficulty starting his own federal student loan consolidation businesses. These companies -- Morgan's Academic Financial Services and Pursley''s Student Funding Services -- grew to be among the top 100 companies refinancing loans in the FFEL program. "It's a great business to be in," Pursley boasted to the St. Pete Times in 2006. "There's essentially no risk for anybody buying these loans."

The good times, however, were short-lived. According to the newspaper, both companies "have collapsed amid lawsuits and a federal raid, leaving creditors, employees, and aggrieved borrowers in the lurch." In March, Morgan was arrested on 24 charges of writing bad checks. Meanwhile, Pursley's company went under in May 2007, after federal agents raided its headquarters, carting away boxes of loan documents. The agents were apparently acting on a tip they had received from a whistleblower that company officials had been forging students' signatures on loan applications.

The St. Pete Times report has justifiably raised alarms on Capitol Hill. On Tuesday, Rep. Kathy Castor (D-FL) announced that she and Rep. George Miller, the California Democrat who is chairman of the House Committee on Education and Labor, plan to introduce legislation requiring background checks be conducted on all individuals wishing to become FFEL lenders.

While all the details of the legislation have not been worked out yet, this appears to be a common-sense solution -- so common-sense, in fact, that it is unbelievable that such a requirement doesn't already exist.

At Higher Ed Watch, we urge policymakers to move quickly to address this problem, so that we can restore integrity to the FFEL program and protect students from such shady operators.

The Honeymoon is Over

Stephen Burd — Wed, 28 May 2008 15:55:00 -0400

Up until now, we've been willing to give Philip Day the benefit of the doubt.

In March, Day, the former chancellor at the City College of San Francisco, became the president of the National Association of Student Financial Aid Administrators (NASFAA), a group with such strong ties to the student loan industry that in recent years its policy positions have closely mirrored those of the Consumer Bankers Association and Sallie Mae.

At Higher Ed Watch, we have been critical of NASFAA in the past. We were hopeful, however, that the organization's first presidential change in its 32 year history -- coming on the heels of reforms imposed on NASFAA by New York State Attorney General Andrew Cuomo that cut into the financial support the group receives from loan providers -- would set the association on a new track.

We were especially encouraged by statements Day made shortly after accepting the job. In January, he told The Chronicle of Higher Education that NASFAA needed to "reassess" its relationship with lenders. "It's something I don't feel 100 percent comfortable with," he stated. Amen to that.

But Day changed his tune after his comments caused a minor backlash among supporters of the Federal Family Education Loan (FFEL) program within the organization. In a letter to NASFAA members, he took himself and others to task for making statements that "cast the association in a negative light."

And once Day formally took charge, it quickly became clear that our hopes have been misplaced. NASFAA continues to push policy proposals favored by lenders. The group, for instance, has been a lead player in trying to persuade federal policymakers to block state officials from policing the student loan programs. [Take that, Attorney General Cuomo!]

In addition, Day has been one of the chief proponents of legislation, which has been championed by Sallie Mae, that would provide an even more substantial government bailout of the loan industry than the Department of Education supplied to student loan providers last week. Keep in mind that not one student has gone without access to a federal student loan. And yet, Day, without any special knowledge of markets or it seems federal student aid, is calling for additional new subsidies to the lending industry.

Despite our disappointment, we had not planned to voice our concerns. After all, Day is still new, and his policy positions could evolve. But after we read this interview he gave Higher Education Washington Inc. (HEWI) a publication owned and run by a top student loan industry lobbyist, we realized we had no choice.

The interview shows that Day is not only ill-informed, but that NASFAA, in the aftermath of last year's "pay-to-play" student loan scandal, has not changed its stripes.

In his remarks, Day argues that the scandal was overblown. "You get generalized that this is a problem for the whole, when you've really got a problem with just a few," he said.

Actually, what the loan scandal really showed was that lenders were routinely providing gifts, payments, and other inducements to colleges with the express intent of getting schools to steer borrowers their way. We're not just talking about a few isolated cases. We're talking about how business was routinely conducted.

Don't just take our word for it. Ask Walter O'Neill, the assistant vice president for financial aid at Roosevelt University, who has long been a fervent supporter of FFEL. In an impassioned e-mail on a message board for financial aid administrators, he recently expressed his disillusionment with the loan industry and revealed the "ugly reality" behind lenders' dealings with colleges. "We have seen where their priority is and it is not 'students first' unless it is profitable to do so," he wrote. "All of the outreach, cute little scholarship programs, participation in professional organizations and college fairs were all for the bottom line, my friends."

In light of all the controversy the scandal created, Day acknowledges to HEWI that "we need to reassess and reevaluate things." But he cautions against going too far for fear of driving lenders away. "If the student lenders and everybody who's in that business suddenly decided to fold up the tent and go home, the whole student aid program in this country would collapse."

He concluded the HEWI interview by saying, "It's important to have an arm's length relationship but at the end of that arm is another arm that's being extended and we join hands in trying to continue to work together and address the needs of our students."

Or in other words, the new boss sounds a lot like the old boss -- except the new one knows a whole lot less about how the student aid programs actually work.

Prostitutes and Pre-K

Sara Mead — Wed, 12 Mar 2008 10:57:00 -0400

By now anyone with access to a television, radio, newspaper, or internet connection knows that New York Governor Eliot Spitzer has become ensnared in a federal investigation into an interestate prostitution ring. It's a major disappointment for both his family and the people of the state of New York. The internets are abuzz with speculation about the salacious details and whether or not Spitzer will step down as governor. As a family blog, we'll eschew the tawdry aspects of this story to ask a substantive question: What does this mean for early education in New York State?

New York's been a happening state on early education lately. Last year Spitzer, who made pre-k expansion and school reform key planks of his 2006 election campaign, and the legislature increased universal pre-k funding by nearly 50 percent, expanding pre-k access to another 44,000 four-year-olds after years of stagnant funding under Gov. George Pataki. Pre-K Now, a national advocacy group on high-quality pre-k, has lauded Spitzer's efforts on behalf of early education, and he's also won raves from school reformers for his support for accountability, charter schools, and school finance reform. New York still has a long way to go on pre-k however: Even the increased funding covers only half of the state's four-year-olds, the expansion has faced a host of implementation challenges, and charter schools still aren't allowed to offer pre-k. The state also lags behind in linking pre-k with K-3 school reform efforts.

Do Spitzer's woes threaten New York's progress to date on early education, undermine his education reform agenda, or jeopardize future funding increases needed to make pre-k truly universal? Most likely not. The New York legislature, including powerful Assembly Chairman Sheldon Silver, has been a driving force in pushing greater pre-k funding even during the Pataki years. And New York also has a strong network of advocates supporting quality pre-k. The most serious potential consequence of the Spitzer scandal for education and children's issues is probably its impact on the composition of the New York State Senate. A special election last month put Democrats one seat away from taking control of the State Senate for the first time in more than 40 years. Spitzer's scandal could undermine Democratic efforts to gain a Senate majority, and if he resigns and is succeeded by Lt. Governor David Paterson, the Senate would also lose Paterson as a Democratic tie-breaking vote. This could affect education legislation. Paterson, who would be New York's first African American governor, is not particularly associated with early education, but does have a strong record of supporting education funding and reform.

Parents and teachers in New York are likely to face a lot of akward moments over the next few days as children start asking them why the governor is in so much trouble. We wish them luck. Fortunately, there are reasons to hope this won't have more serious consequences for New York State kids.

UPDATE: It looks like Spitzer is going to resign today.

Roundup: Week of February 4 - February 8

Ed Policy — Fri, 08 Feb 2008 00:00:00 -0500

House Approves Bill to Reauthorize Higher Education Act

[slideshow]In an overwhelming 354 to 58 vote, the House approved legislation on Thursday that would reauthorize the Higher Education Act for the next five years. The College Opportunity and Affordability Act (H.R. 4137) would impose new restrictions on the relationships between student loan providers and colleges, increase transparency in the private student loan market, simplify the process of applying for financial aid, keep textbook costs down, increase aid for veterans and military families, and tackle rising tuition costs. The legislation would also significantly weaken a provision in the law that protects students from unscrupulous for-profit trade schools.

More than two dozen amendments were included in the legislation, among them a requirement that colleges report how much of their endowment is spent on reducing tuition costs. The House also passed a measure, sponsored by Reps. Patrick Murphy (D-PA) and Sue Myrick (R-NC) that would require colleges to provide prospective students with an estimate of how much they will be expected to pay in tuition and fees before they earn their degrees. The chamber, however, rejected an amendment, favored by the New America Foundation, that would have made private student loans dischargeable in bankruptcy.

White House Voices Opposition to HEA

While the Higher Education Act moved a step closer to its first reauthorization in a decade, the Bush administration issued a statement of administration policy on Wednesday saying that the president "strongly opposes" the House version of the bill. The administration’s main complaint was that the legislation allows colleges to set their own standards of quality for accreditation purposes — significantly weakening the already minimal authority of regional accreditors. In addition, the administration complained about the inclusion of four dozen "costly" and "duplicative" programs, and of a provision that rewards colleges that hold down their prices with extra federal grant aid. Despite these complaints, however, the president did issue a veto threat against the bill.

Ed Dept. to Allow 7 Lenders to Keep Receiving 9.5% Loan Payments

A little over a year after it halted payments on 9.5 percent loans, the Department of Education announced this week that it will provide subsidy payments at that level to seven lenders. The lenders — which include nonprofit lenders from states such as Mississippi, Texas, Montana, and Vermont — were chosen from a group of 15 that had agreed to an audit to prove they legitimately qualified for payments that guarantee a 9.5 percent return on student loans. The need for this scrutiny arose last year after an Inspector General’s report revealed that both student loan provider Nelnet and the Pennsylvania Higher Education Assistance Agency (PHEAA) overcharged the department by millions of dollars. Secretary of Education Margaret Spellings decided not to collect any of the estimated $278 million in overpayments by Nelnet and will receive no more than $15 million of the estimated $34 million that the department's own Inspector General concluded that Pheaa had overcharged. One notable applicant who failed to pass the Department audit is the New Mexico Educational Assistance Foundation, which was the first entity to be exposed for overcharging on its 9.5 loans.

NCAA Settles Antitrust Lawsuit

Thousands of student athletes will now be able to receive additional funds to cover college expenses, following the settlement of a multi-million dollar antitrust lawsuit against the NCAA last week. This ends a nearly 2-year-old lawsuit, White v. National Collegiate Athletic Association, brought by several Division I football and basketball players who claimed that the NCAA’s restriction that scholarships could only go toward tuition, books, housing and meals meant that they could not basic expenses such as health care and travel. Under the settlement, the NCAA will provide $218 million over six years to cover these additional expenses, with much of the money going toward the cost of tutoring and facilities. The high figure, however, is misleading — according to Inside Higher Ed, the NCAA will only provide $20 million in new funds, with only half that amount going to compensate students. Eligible parties, which include Division I football and men’s basketball players from 2002 to 2007, will be able to receive $500 to cover "career development" expenses and up to $2,500 a year for three years to cover additional education expenses.

Roundup: Week of January 21 - January 25

Ed Policy — Fri, 25 Jan 2008 00:00:00 -0500

Economic Woes Hit Sallie Mae, Nelnet

Tightening credit markets and the slowing economy appear to be spreading into the student loan industry, as two major lenders announced recently that they will be cutting jobs and shying away from riskier loans. Last Friday, Virginia-based Sallie Mae said it would be trimming 350 jobs across the country, roughly 3 percent of its workforce. Nelnet, located in Nebraska, announced it would cut 300 jobs, about 10 percent of its workforce — its second round of major layoffs since September. Both companies also announced changes to the loan services they would be offering. Sallie Mae said it would be more selective about offering private loans to students with low credit scores and those enrolled at schools with low graduation rates. Nelnet, meanwhile, announced it would stop offering loan consolidation services and would be more selective with the loans it offered.

The job and loan cuts were among a slew of negative Sallie Mae stories this week. The loan provider also reported that increased borrowing costs and loan defaults caused the company to lose $1.6 billion in the fourth quarter of 2007. In addition, Sallie Mae revealed that the Securities and Exchange Commission has been asking questions about public disclosures by high-level executives around when they sold shares of Sallie Mae stock — a likely outgrowth of the probe into allegations of insider trading by current CEO Al Lord. Somewhere, former Sallie Mae CEO, Larry Hough, is smiling.

Cuomo Extends Study Abroad Probe with 15 Subpoenas

New York Attorney General Andrew Cuomo’s investigation of study abroad companies reappeared this week with the announcement that his office had sent subpoenas to 15 colleges and universities. The investigation originally began back in August as an outgrowth of Cuomo’s student loan investigation, which uncovered numerous improper dealings between colleges and student aid providers. Cuomo initially sent subpoenas in August and September to five study abroad providers, uncovering a series of deals in which the programs would pay colleges a portion of their fees in exchange for signing up students. Despite this, the investigation lay largely dormant until Cuomo reportedly sent subpoenas out to more than a dozen colleges this week, including prestigious institutions such as Harvard, Brown, and Columbia. According to the New York Times, these subpoenas ask colleges about their process for selecting approved study abroad programs and whether they have received any inducements to sponsor a specific program.

Three More Colleges Announce Aid Expansions

Dartmouth, Bowdoin, and Colby colleges all announced substantial changes to their financial aid packages this week, following the recent lead of Harvard and Yale. Dartmouth’s expansion is the most impressive of the three, eliminating tuition contributions for students from families making under $75,000 annually, replacing all loans with scholarships, and considering all international applications need-blind. Dartmouth’s announcement differs from plans recently unveiled by Harvard and Yale, which cut costs significantly for upper-income families but still kept some form of contribution for all families making more than $60,000 a year. Meanwhile, Colby and Bowdoin announced this week that they would eliminate all loans from current and future student aid packages and replace them with grants, an impressive move given that both have endowments well under $1 billion (subscription required).

Roundup: Week of August 20 - August 24

Ed Policy — Fri, 24 Aug 2007 01:00:00 -0400

9.5% Program Cost Taxpayers $3.5 Billion Since 2001

From 2001 to 2006 the Department of Education paid out $3.5 billion under a subsidy program designed to guarantee nonprofit student loan providers a 9.5 percent rate of return, the

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