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Do colleges with high student loan default rates have any responsibility for their former students’ loan repayment problems?

While for-profit college lobbyists and leaders would like us to believe that the answer is “no,” Sallie Mae, the student loan company with the most experience lending to students at these schools in recent years, has a much different story to tell.

As we’ve previously reported, a little less than a decade ago, the student loan giant began forging sweetheart deals with some of the country’s largest chains of for-profit colleges, such as Career Education Corporation, Corinthian Colleges, and ITT Educational Services, among others. Under these arrangements, Sallie Mae agreed to provide high-interest private loans to low-income and working class students at these institutions. The company apparently viewed these loans as “loss leaders,” meaning that it was willing to make these risky loans in exchange for becoming the exclusive provider of federal loans to the hundreds of thousands of students these huge chains collectively serve.

It didn’t take long for these loans to start going bad. For a while, the company, which had put itself up for sale, appears to have tried to hide the rapid deterioration of its “non-traditional” private loan portfolio from investors and potential buyers by pushing as many delinquent borrowers from these schools into forbearance as they could. But after an investor group led by the private equity firm J.C Flowers & Co. dropped its bid to buy the company, Sallie Mae came clean.

In a conference call with investors on January 23, 2008, executives at Sallie Mae announced that the company had sustained more than $1 billion in losses on these loans, and, as a result, would no longer make private loans to financially needy students attending these institutions. Al Lord, the company’s chief executive officer, laid the blame for the losses squarely on the shoulders of the schools with which they had been working:

Last week, we wrote about how for-profit college lobbyists and advocates have been waging a mostly quiet campaign to discredit a Government Accountability Office (GAO) report that had found “fraudulent, deceptive, and otherwise questionable marketing practices” at the 15 for-profit colleges it visited as part of an undercover investigation. Well, that effort came out in full force this week after The Washington Post reported that the GAO had made changes to the report that softened some of its findings.

Lanny Davis, the former Clinton administration lawyer who now serves as the for-profit higher education industry’s chief attack dog, led the charge, accusing the GAO of participating in a conspiracy to demonize the schools that have put him on retainer. “The defective and deceptive GAO study is just the latest in a deeply flawed regulatory process that has been biased against the for-profit college sector at every step,” he said in a press release.

And the industry’s allies on Capitol Hill were only too happy to join in on the flogging. Sen. Mike Enzi (R-WY), the ranking Republican on the Senate Committee of Health, Education, Labor and Pensions, went so far as to as to call on the GAO to withdraw the report, according to the Post.

At Higher Ed Watch, we believe the GAO does deserve some flogging -- because in its rush to publish its original report, it got sloppy and has now given the industry some ammunition to undermine the powerful results of its investigation. Despite what Davis and what other for-profit college lobbyists say, the vast majority of the changes are relatively minor. But there are several that are damaging in that they show some recruiters to have been more honest, or at least less misleading, than originally portrayed.

Back in August when the Government Accountability Office (GAO) revealed that it had found “fraudulent, deceptive, and otherwise questionable marketing practices” at every single one of the 15 for-profit colleges it visited as part of an undercover investigation, career college lobbyists and leaders went into full crisis management mode.

The video the GAO released showing for-profit college recruiters lying to and badgering federal investigators posed as prospective students left advocates for these schools with little choice but to admit that serious recruiting abuses had occurred at some of the country’s largest for-profit higher education companies, including the Apollo Group (owners of the University of Phoenix), Corinthian Colleges, Education Management Corporation, and Kaplan Inc.

While for-profit college lobbyists and leaders mostly tried to pin the blame for these incidents on “rogue” employees at these schools, they generally did acknowledge that the GAO had provided a much-needed “wake-up call” to their institutions. “We have to show that we as an association and we as institutions are changing our behavior,” Harris Miller, the president of the then-Career College Association told Inside Higher Ed at the time. “It means not just saying something different, but doing something different.”

Similarly, in an interview with Dow Jones Newswires, Miller said, “My schools have stopped blaming other people for their troubles. This is a teachable moment.”

Well, the moment appears to have passed. Over the last several months, career college advocates have taken a decidedly different tack towards the GAO report: they have engaged in a campaign to try to discredit it. They have done this mostly on the down low -- with, for example, comments posted on articles and blogs impugning the motives and methods of the GAO officials who conducted the investigation. Typical is a comment that we received from “Rebecca B” on a post we ran earlier this week:

By any measure, last Tuesday was a great day for the for-profit higher education industry.

With the Republicans regaining control of the House of Representatives, some of the sector’s biggest champions will now be in powerful positions to protect the industry’s interests. None more so than incoming House Speaker John Boehner (R-OH), who as chairman of the House education committee earlier this decade led an effort to weaken, and even eliminate, key consumer protection provisions in federal law that aim to prevent for unscrupulous for-profit schools from taking advantage of financially-needy students.

The turnover in power in the House will make it extremely difficult, if not impossible, for the Obama administration and Senate Democrats to advance legislation designed to rein in the sector. It may also complicate the administration’s plans to finalize and enact the proposed “Gainful Employment” rule, which would cut off federal student aid to for-profit college programs whose students take on the most unmanageable levels of debt (in relation to their expected future earnings) and have the poorest records of repayment.  

The victory, however, was not complete, as the Senate remains in Democratic hands. As a result, Sen. Tom Harkin, the Iowa Democrat in charge of the Health, Education, Labor and Pensions [HELP] Committee, is expected to continue his panel’s scrutiny of the for-profit higher education sector. At the same time, Obama administration officials appear to remain committed to moving forward with the Gainful Employment regulation --  to prevent proprietary schools from leaving students buried in debt and without the training they need to get the types of jobs they were promised.

Still, Rep. John Kline (R-MN), the incoming chairman of the House education panel, will certainly try his best to throw a wrench in any efforts by the Obama administration and Democratic Senators to crack down on the sector. At Higher Ed Watch, we believe that House Republican leaders will consider:

Republicans swept back into control of the House of Representatives this week on a promise of shrinking the federal government and reducing budget deficits. But in terms of higher education policy, are they willing to face the political fallout that would inevitably accompany any plan to roll back the maximum Pell Grant award?

The new House leadership may not have much time to make up its mind. Here’s why: The current Congress has yet to pass any of the 12 separate fiscal year 2011 appropriations bills that will finance about one-third of the U.S. government over the next year. (Fiscal year 2011 began on October 1, 2010.) Instead, Democratic Congressional leaders decided to bring up the bills in a lame-duck session following the mid-term elections. In the meantime, Congress passed a Continuing Resolution through December 3 that is financing all programs and agencies subject to annual appropriations at fiscal year 2010 levels. Democrats may try to take one last crack at getting these bills done while they still control both branches of Congress, but Republicans have already begun to demand that they back down and simply extend the Continuing Resolution into next year.

If this happens, House Republicans will surely be tempted to push the Senate and the Obama administration to keep the resolution in place for the entire year to avoid any spending increases at least in non-defense programs. But maintaining discretionary spending on Pell Grants at its 2010 level of $17.5 billion would force a substantial reduction in the current maximum award of $5,550 – one credible estimate suggests that grant would fall to $4,670. This is because money from the 2009 stimulus programs helped support the Pell award of $5,550 in fiscal year 2010, but that money will all be used up come fiscal year 2011. So to prevent a cut in the grant, Congress will have to come up with the $17.5 billion plus an additional $5.7 billion.

To be fair, Congressional Democrats have not exactly shown leadership on this issue. As Higher Ed Watch contributor Jason Delisle has reported, Democrats in both the House and the Senate have employed all sorts of budget tricks to try to keep the maximum Pell Grant at its current level without having to provide the money through the regular budget and appropriations process.

We assume that House Republican leaders, who have returned to power on the promise of restoring fiscal discipline in Washington, won’t have any appetite for such gimmicks. So that will leave them with two choices: hold their noses and work with the Obama administration and Senate Democrats to find billions of dollars in additional spending for Pell Grants  or decline to do so and instead propose a significant cut in the maximum award.

At Higher Ed Watch, we have written about the massive astroturf lobbying campaign that the for-profit higher education industry waged this summer against regulations that the Obama administration has proposed that would penalize proprietary school programs that saddle students with unmanageable levels of debt.

By overwhelming the U.S. Department of Education with tens of thousands of comments from students, faculty members, and alumni, for-profit college leaders and lobbyists mostly succeeded in getting the White House to delay finalizing the proposed "Gainful Employment" rules -- which appears to have been their goal all along. They are obviously hoping that a Republican landslide in the upcoming mid-term elections will force the administration to back off.

Even a cursory review of the comments posted on regulations.gov make abundantly clear the extent to which these responses were manufactured by the colleges and lobbying groups themselves. Hundreds, if not thousands, of the comments repeat the same talking points ad nauseam, with only slight alterations to make them appear more genuine.

But some of the comments are even more revealing, as they don't even try to mask their origins. Today, for your viewing pleasure, we present two such comments that the organization formerly known as the Career College Association submitted last month to Jessica Finkel of the Education Department on behalf of a for-profit college employee named Hugh and a student named Farnaz. These responses to the proposed rules are some of our personal favorites, as they remind us of those old Mad Libs books we used to find so entertaining:

On December 12, 2007, Sallie Mae announced that the extremely lucrative buy-out deal that it had reached earlier in the year with an investor group led by the private equity firm J.C. Flowers & Co. had gone up in smoke. A week later, Sallie Mae executives began to acknowledge the rapidly deteriorating state of the company's private loan portfolio, particularly among those high-risk loans it had made to sub-prime borrowers at some of the largest chains of for-profit colleges in the country.

Was the timing a coincidence? Or had the student loan giant's leaders engaged in a deliberate scheme to mask the company’s true financial condition to make sure the deal -- which promised to bring great riches to its board members, including chairman Al Lord, who was set to rake in $225 million -- was consummated?

Those questions are at the center of a class action shareholder lawsuit (click here for part 1 of the complaint and here for part 2) that a federal judge in Manhattan has allowed to proceed against Sallie Mae [SLM]. Late last month, William Pauley of the Federal District Court in Southern New York rejected a motion by Sallie Mae to dismiss the lawsuit, saying that the investors suing the company had provided sufficient evidence of possible wrongdoing to allow the litigation to move forward.

The case dates back to the fall of 2006 when Sallie Mae put itself up for sale. In the immediate years preceding, the loan company had forged sweetheart deals with some of the largest chains of for-profit colleges in the country, including Career Education Corporation, Corinthian Colleges, and ITT Educational Services, as Higher Ed Watch has previously reported. Under these arrangements, Sallie Mae agreed to provide funds for private student loans, with interest rates and fees totaling more than 20 percent per year, to low-income and working class students at these schools who normally wouldn’t qualify for them because of their poor credit records. Sallie Mae apparently viewed these loans as “loss leaders,” meaning that the company was willing to make these loans, many of which were likely to go into default, in exchange for becoming the exclusive provider of federal loans to the hundreds of thousands of students these huge chains collectively serve.

As they started to shop the company around, Sallie Mae executives, the lawsuit says, decided to double down on this risky strategy. "Defendents sought to increase short-term profits in an effort to negotiate a sale to the Flowers group (or another buyer) at an attractive premium and convince investors that an acquisition on favorable terms was likely,” the complaint states. “The scheme consisted of writing billions of dollars in private loans to high-risk borrowers, recording increased income from these loans (as a result of increased loan volume and higher rates of interest SLM was entitled to receive on the loans" as compared to federal loans), and "underreporting expected losses.” From June 2006 to December 2007, Sallie Mae’s private loan portfolio “more than doubled,” from $7 billion to $15.8 billion.

To make the strategy work, Sallie Mae officials needed to find a way to mask the amount of risk the company was taking on. Their aim was to keep delinquency and default rates on these high-cost loans artificially low while the buy-out deal was pending, the lawsuit says. Otherwise, they would have had to significantly raise the amount of money they held in reserve to cover possible losses on these loans -- which would have “reduced reported income and earnings” and ultimately the company’s value. 

According to the lawsuit, Sallie Mae officials found an easy solution: pretend that the problems with the portfolio didn't exist by pushing delinquent borrowers into forbearance. By manipulating the company's forbearance, they could ensure that delinquent borrowers would not default on their loans until after the buy-out deal was completed and ownership had changed hands.

In the annals of small victories, this may be among the smallest. But that won’t stop us from bringing it up.

Nearly a month after we took The Washington Post to task for failing to disclose its ownership stake in the for-profit higher education company Corinthian Colleges, the newspaper finally did. In an article on a rally that for-profit colleges held on Capitol Hill yesterday, the Post acknowledged that it “owns more than 8 percent of the stock of Corinthian Colleges, which has about 110,000 students.”

At Higher Ed Watch, we would like to applaud the Post for coming clean. In recent months, the newspaper has come under much-deserved criticism for lobbying on both its news and editorial pages against regulations the Obama administration has proposed that would penalize for-profit colleges for saddling students with unmanageable levels of debt. Post executives and editors have defended themselves by saying that the newspaper has been fully up-front about its ties to Kaplan Inc., one of the largest publicly-traded chains of for-profit colleges in the country. Considering that Kaplan accounts for about 60 percent of the newspaper company’s total revenue, we don’t see how they had any other choice.

But in reality, the newspaper has not been completely transparent. Time and again, it has failed to mention the substantial stake it has in Corinthian Colleges, a giant for-profit higher education company that doesn’t exactly have a stellar reputation, even among those within the industry. By most accounts, Corinthian appears to be one of the companies most in jeopardy if the administration moves forward with its proposed “Gainful Employment” regulations because of the substantial amount of debt its students take on and their poor record of paying it back.

As part of its on-going investigation into the for-profit higher education industry, the Senate Health, Education, Labor and Pensions (HELP) Committee will be hearing on Thursday from a career counselor at Education Management Corporation who has accused the company of misleading prospective students, accrediting agencies, and policymakers about its record in placing graduates into jobs.

Kathleen Bittel, a career service advisor in the online division of EDMC’s Art Institute of Pittsburgh, will be one of four witnesses who will be testifying at Thursday’s hearing, entitled “The Federal Investment in For-Profit Education: Are Students Succeeding?” Bittel came to the committee’s attention earlier this month when she sent a letter to the panel’s chairman, Sen. Tom Harkin of Iowa, and five other Senators outlining the tricks that EDMC, the second largest for-profit higher education company in the country, allegedly uses to inflate its official job placement numbers.

“I am currently employed by EDMC and it was a tough decision to put my livelihood on the line in this current economic situation,” she wrote in the letter, a copy of which Higher Ed Watch has obtained (neither from the committee nor from Bittel). “But my conscience will not allow me to remain quiet about what I know.”

According to the letter, Bittel first joined EDMC in 2007 as an admissions counselor. But alarmed by the tactics that the university was using to enroll students, she decided to become a career counselor. “I took a huge pay cut to take on this new role because I looked at it as an act of ‘penance’ in that I could then help the graduates I talked into the program by helping them find employment when they completed the program,” she wrote. “What I found in Career Services was even more deceptive than the recruiting practices.”

Steve Burd, editor of the non-profit, non-partisan New America Foundation's “Higher Ed” education policy blog, said that there is a difference in the ...

In recent weeks, The Washington Post has come under much-deserved criticism for using both its news and editorial pages to lobby against regulations the Obama administration has proposed that would strengthen the government’s oversight over for-profit colleges.

In defending themselves, Post executives and editors say that the newspaper has been fully upfront about its ties to Kaplan Inc., one of the largest publicly-traded chains of for-profit colleges in the country. Kaplan, in fact, accounts for about 60 percent of the newspaper company’s total revenue.  As a result, any crackdown on the proprietary school sector could be a significant blow to the newspaper’s bottom line (which would explain why Donald Graham, the Post’s chairman and CEO, has been making the rounds on Capitol Hill -- a fact first reported by Inside Higher Ed.)

This line of defense recently received the backing from, of all people, the newspaper’s ethical cop -- the ombudsman Andrew Alexander. In a column last month entitled “From Kaplan to Buffet, Post gets it right on transparency,” Alexander defended the Post, saying that the newspaper “has consistently disclosed the Kaplan connection.”

“I've often criticized The Post for insufficient transparency on everything from news sources to refusing to share its ethics policies with readers,” he wrote. “But on its commitment to disclose self-interest, praise is deserved.”

With all due respect, we at Higher Ed Watch have to disagree. The Washington Post has not, in fact, been completely transparent about its ties to the for-profit higher education industry. The newspaper has time and again failed to disclose the substantial stake it has in Corinthian Colleges, a giant for-profit higher education company that doesn’t exactly have a stellar reputation, even among those in the industry. By all indications, Corinthian, which serves nearly 70,000 students at more than 100 colleges in the United States and Canada, appears to be one of the companies most in jeopardy if the administration moves forward with its proposed “Gainful Employment” regulations because of the substantial amount of debt its students take on.