Higher Ed Watch

Bailout Measure Provides Government with Authority to Buy Up Bad Private Loans

Congress Extends and Expands Tuition Tax Relief

Many Community College Students Fail to Apply for Aid, Report Finds

The U.S. Department of Education is about to begin a major rewrite of its federal student aid regulations to put into effect changes Congress made to the programs when it renewed the Higher Education Act this summer. While working on these regulations, we believe that agency officials should also reconsider rule changes made in 2002 -- changes that have made it easier for unscrupulous trade schools to take advantage of financially needy students.

In 1992, Congress added a provision to the Higher Education Act prohibiting colleges from giving “any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments.” The ban on incentive compensation for college recruiters was included as part of a broader effort by lawmakers to crack down on fly-by-night trade schools that had been set up to reap profits from the Title IV federal student aid programs. With reports rampant that trade schools were enrolling unqualified low-income individuals simply to get access to Title IV funds, policymakers believed it was important to bar postsecondary-education institutions from paying recruiters on the basis of how many students they enrolled.

A decade later, top officials at the Department of Education with ties to the for-profit sector decided to weaken this prohibition. In November 2002, the Department issued new regulations that created 12 "safe harbors" for colleges that wished to provide incentive payments to their admissions employees. The Department took this action over the objections of the negotiated rulemaking panel that had been assembled to consider the rule changes and of the two main national organizations representing admissions officers.

Regular readers of Higher Education Washington Inc. (HEWI), a pro-student loan industry publication, were probably not too surprised by a recent blurb it ran discouraging lawmakers from reopening the 9.5 percent student loan case. After all, it's hardly news that supporters of the Federal Family Education Loan (FFEL) program are unenthusiastic about any further inquiry into the scandal, which is estimated to have cost taxpayers more than $1 billion in improper payments made to student loan providers.

But these readers may be surprised by what the publication did not disclose. The blurb failed to note the central role its founder -- the lawyer and student loan-industry lobbyist John Dean -- played in counseling the loan company Nelnet on its planned attempt to gain windfall profits from the government.

By Nelnet's own account (see p. 56), the Nebraska-based loan company did not move forward with its plan to aggressively grow the volume of loans it would claim to be eligible for the 9.5 percent subsidy rate until after it received a series of legal opinions, starting in March 2003, from Dean assuring the company of the lawfulness of these actions.

Higher Ed Watch has obtained these legal opinions, which the Department of Education Inspector General recently released as part of a Freedom of Information Act request.

Dean expressed his views most clearly in a January 2004 letter in which he advised Nelnet that the loans it planned to manipulate would be "entitled" to the 9.5 percent "special allowance paid by the U.S. Department of Education under the rules applicable to loans made or purchased with the proceeds of such tax-exempt bonds."

At Higher Ed Watch, we recently called on Congress to reopen the 9.5 percent student loan case. We believe that lawmakers should exercise their oversight responsibilities and get to the bottom of the scandal, which is estimated to have cost taxpayers more than $1 billion in improper subsidy payments made to student loan providers. Among other things, they should try to determine the origins of the scandal and the role that the Bush administration played in allowing it to occur.

Loan industry officials are understandably unenthusiastic about having Congress revisit the scandal. In a recent blurb entitled "Student Loan ‘Loophole' -- Will Congress Look Back or Look Ahead?", Higher Education Washington Inc, (HEWI) a publication owned and run by a top student loan industry lobbyist, warned that such an inquiry would distract Congress from focusing "on issues of student loan access and liquidity":

Several lender representatives say Congress should focus on the future, and that the "overpayments" were both legal, and received only after the lenders repeatedly asked the Department of Education for guidance in whether they were proper. But whether Congress holds hearings on the matter or not, this is just another event which will make any effort to restore liquidity to the market by restoring subsidies to lenders (which were cut under last year's College Cost Reduction and Access Act) that much more difficult.

This argument is not only incredibly self serving and cynical but also contains factual errors. For one thing, the notion that these overpayments were legal is simply untrue. In 2006, the U.S. Department of Education's Inspector General concluded that the mechanisms lenders were using to aggressively grow the volume of loans that they claimed to be eligible for 9.5 percent subsidy payments violated the law. In January 2007, Education Secretary Margaret Spellings concurred with this opinion when she barred Nelnet and other lenders that refused to submit to independent audits from seeking any further 9.5 percent payments.

Direct Loan Volume Soars in Response to Credit Crunch

Spellings Presents Plan to Shrink the FAFSA

Ed Dept. Underestimates Improper Payments to Lenders, IG Reports

New IRS Form Questions Colleges on Spending, Endowments

It would be understandable if news of the impending multi-billion dollar shortfall in the Pell Grant program made recipients nervous about whether they will get the same level of federal support next school year. But low-income students who receive these awards have no need to worry -- the political stakes are too high for lawmakers to be stingy. We are confident that Congress will do all that it can to provide the dollars needed now to ensure that Pell Grant award levels remain at least at current levels next year.

Maintaining the grants will require substantial amounts of effort and resources from lawmakers. But keeping Pell Grants whole in the immediate future isn't the biggest challenge Congress will have to face. As we have noted previously, an even more daunting Pell Grant shortfall is looming in the future when the mandatory funds that are currently being used to boost the maximum award run out. While lawmakers may be motivated to "fix" Pell in the short term, it is unlikely that fundamental reform and expansion -- of Pell and the other federal student aid programs -- is on the near horizon.

So what accounts for the impending shortfall in the Pell Grant program? One cause is the downturn in the economy, which has helped lead to an unexpected surge in demand for the grants. According to the U.S. Department of Education's budget chief, 800,000 more students have applied for student aid this year than last, and a significant share of these applicants (about 41 percent) come from families making less than $30,000. In addition, Congress significantly expanded eligibility for Pell Grants last year when it made changes to the needs analysis formula as part of the College Cost Reduction and Access Act (CCRAA). These changes not only expanded the number of students eligible to receive the grants, but also qualified many current recipients for larger awards.

Is there another round of fighting brewing between the government's two competing student loan programs? Consider recent events:

• In the wake of the credit crunch, more colleges are opting to join the Direct Loan program, driving up its volume as a share of student loans for the first time in well over a decade.
• Recent government efforts to shore up the Federal Family Education Loan (FFEL) program have moved us closer to letting lenders make loans with federal capital (looks a lot like the Direct Lending model to us).
• Democratic presidential candidate Barack Obama has proposed the wholesale elimination of the FFEL program in favor of moving to 100 percent Direct Lending.

The stars appear to be aligning for a renewed debate about which loan program is better for students and cheaper for taxpayers.

Should hostilities be renewed, expect the student loan industry to switch into high gear to try to discredit Office of Management and Budget (OMB) and Congressional Budget Office (CBO) estimates that show that Direct Lending is cheaper for the government to run. In evaluating the loan industry's claims, lawmakers, journalists, and the public should be especially wary of one line of argument that surely will be made. In recent years, the loan industry has put out a number of reports arguing that the private market would assess the costs and risks of the loan programs differently than OMB and CBO (which must abide by government accounting rules) and that this discrepancy explains away any cost advantage Direct Lending is shown to have.

Today, the New America Foundation is releasing an in-depth report examining the lending industry's claims about determining "market costs" for student loans. We have found that trade associations and consulting organizations working on behalf of the student loan industry have twisted a legitimate budgeting concept into a half-truth. In trying to use the market cost concept to discredit government estimates that show subsidizing lenders to make student loans is more expensive than having the government make loans directly, they have made serious errors in their reasoning and methodology, and many of their conclusions are just plain wrong. Making matters worse, the GAO has made similar errors in its own work on the topic.

More than 500 days after being placed on paid administrative leave, Matteo Fontana officially resigned from his position at the U.S. Department of Education in early September, according to a report yesterday in The Chronicle of Higher Education. The Department's political leaders are surely breathing a sigh of relief.

After all, over the past 17 months, they have come under heavy fire (including from us) for the way they have handled the case, which revolves around special shares of stock that Fontana received from a student loan company he was in charge of overseeing.

But if Department leaders think that Fontana's resignation brings this case to a close, they are kidding themselves. Serious questions remain about Fontana's actions and about the Department's response to them.

In April 2007, the Department placed Fontana, the then-general manager of the Financial Partners Division of the U.S. Department of Education's Federal Student Aid office, on paid leave after Higher Ed Watch revealed that he had held at least $100,000 worth of stock in the company Student Loan Xpress. 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.

Higher Ed Watch is pleased to welcome the arrival of its new editor, MaryEllen McGuire. The new director of the Education Policy Program, MaryEllen comes to New America after having served as the Staff Director of the Senate Subcommittee on Children and Families where she wrote and negotiated several pieces of legislation related to higher education. MaryEllen has also worked on education issues at the state level and served as a public school teacher in both urban and suburban schools. Stephen Burd, who has led our award-winning coverage on the student loan conflict of interest scandal, will serve as the managing editor of Higher Ed Watch. Michael Dannenberg, the founding editor of Higher Ed Watch, is now a senior fellow with New America and a continuing contributor to the blog.

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