April 23, 2007

Updates on the Loan Scandal

Another few days, another set of wide-ranging developments regarding student loans: An attorney general in another state got into the act in regulating a lender, fallout continued from the announcement Thursday by New York’s attorney general that he planned to sue Drexel University, and a committee negotiating possible changes in federal regulations governing the student loan programs collapsed in discord. Charges dribbled out about questionable decisions about another university’s choice of lender. And a major newspaper reported on a top Education Department official’s stock holdings in student loan companies — but omitted some fairly crucial information that minimizes the significance of the report.

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On Friday, Nebraska’s attorney general, Jon Bruning, announced that he had reached an agreement in which a lender in his own backyard, the National Education Loan Network, “self-reported” that it had made what Bruning called “very minor” mistakes in its student loan practices — paying $4,800 to one university (identified elsewhere as Western Illinois University) in a revenue sharing agreement, and to giving a plane ticket for a financial aid officer to attend a conference in New York.

As part of the accord, the company, known as Nelnet, agreed to pay $1 million to a national fund aimed at educating students and families about their financial aid options. It also used the opportunity to promulgate its own “code of conduct” to guide lender practices regarding students and colleges, largely mimicking the one that Bruning’s New York counterpart, Andrew M. Cuomo, has been pushing as part of his larger campaign to rein in the student loan industry. Nelnet is among the lenders that Cuomo has been investigating, and despite Friday’s settlement in Nebraska, the New York attorney general said his review of the company would continue.

The Nelnet code is marginally less restrictive than Cuomo’s in a few ways — where the New York attorney general’s proposed code would prohibit a lender’s employees from working in a college financial aid office under any circumstances, for instance, the Nelnet code says that the company “will not provide, without proper disclosure and transparency, staff for an institution of higher education’s financial aid offices at any time where that employee has contact with students other than general debt counseling.”

Nelnet’s president, Jeffrey R. Noordhoek, said the lender would continue to provide outsourced calling centers for colleges under those restrictions.

Bruning, a Republican, credited Nelnet for its “leadership in promoting integrity, choice and competition in this industry,” adding that “as we looked at the scale of mistakes that have been made, Nelnet has been at the very bottom of the scale.”

Bruning and Noordhoek both said that they believed Nelnet’s controversial arrangement with the University of Nebraska — in which the lender committed to giving the university hundreds of thousands of dollars in funds to use for need-based financial aid in exchange for the right to buy the loans the university awards to its graduate and professional students — was fully legal and was not under investigation. The arrangement was done through the federal government’s “school as lender” program, which Congress has put on hold. Nelnet has also been entangled in controversy over its excessive use of (and profits from) a now-banned loophole in federal law.

Bruning said he believed the settlement “closes the book” on Nelnet’s problems, but an official in Cuomo’s office said that would not necessarily be the case.

News From the Cuomo Investigation

In the wake of Attorney General Cuomo’s announcement that he planned to sue Drexel University for its student loan practices, officials of the university and the attorney general’s office engaged in a bit of a war of words over each other’s tactics.

Drexel’s response to the New York official’s announcement said that the university had cooperated with the attorney general’s investigation, and that after responding to his initial inquiry seeking information from the university in February, Drexel did not hear another word from Cuomo’s office until learning from its student newspaper Thursday that it was facing a possible lawsuit.

Representatives of Cuomo’s office challenged the university’s account, saying that Drexel’s initial response failed to contain some of the requested documents; that at least two phone calls to the university in recent weeks went unreturned; and that a copy of the letter announcing the lawsuit was faxed to Drexel’s general counsel’s office before the it was sent to the student newspaper. Drexel officials declined further comment on the situation.

Drexel’s decision to fight New York’s attorney general won plaudits from many financial aid directors and other college officials who have felt beleaguered by what they have portrayed as a seemingly endless (and in their minds unfair) barrage of charges of wrongdoing, and from others who have hoped that someone would challenge the legitimacy of the attorney general’s legal grounds. On a listserv of financial aid directors, one wrote: “Way to go Drexel, way to go (clap clap)! Way to go Drexel, way to go (clap clap)! Way to go Drexel, way to go (clap clap)!”

Drexel is the first of the dozens of colleges that Cuomo has asked (or demanded) to change their policies to say publicly it will not do so, but others have sent a similar message to New York, too. Clemson University last week released a letter sent to Cuomo’s office by the attorney general’s office in its own state, South Carolina, saying that Clemson would not be signing the settlement agreement the New York attorney general had sent.

C. Havird Jones Jr., senior assistant attorney general in South Carolina, said in his letter to a Cuomo aide that “Clemson will not be entering into the agreement,” based on “our determination that as to student financial aid, generally, and preferred loans with revenue sharing agreements, specifically, no conflicts of interest existed and no untoward relationships are present.”

The attorney general’s office did say that Clemson had added additional language to its Web site further clarifying the existence of the revenue sharing agreement, and a spokesman for Cuomo, while not commenting on the South Carolina situation specifically, did say that he did not expect the New York attorney general to spend a lot of time and energy picking fights with his peers in other states.

Officials at several other colleges that received the Cuomo settlement offers, including Texas Christian University, said Friday that they had agreed to change their practices in response to the inquiries from New York. Others, including Washington University in St. Louis, said they were still examining the situation.

Federal Rule Making Collapses

Friday also marked the third and final day of the fourth and final session of a federal rule making process chartered by the Education Department and aimed at developing new rules to govern the federal loan programs. The department had proposed tougher rules to govern the relationships between colleges and lenders, and while those rules may have seemed tough several months ago — and are much tougher than current federal rules — they process appeared to have been overtaken to some extent by “events outside the room,” as one department official put it Friday.

So despite what several members of the negotiating panel (which included lenders, financial aid administrators, consumer advocates and federal officials) described as “good faith efforts” and a “cooperative spirit,” the Education Department shut down the process Friday after concluding that it would be impossible for the committee to reach consensus on the entire package of proposals.

Several members of the panel expressed disappointment, believing that they were close to agreement on a proposal that would have required colleges’ lists of preferred lenders to contain at least three lenders, among other possible recommendations. Some of them said they believed the negotiators had (and missed) an opportunity to show that they were willing to impose restrictions on themselves.

Said one: “I’m really disappointed that we couldn’t come to agreement, particularly on [preferred lender lists] and illegal inducements [for college officials and institutions from lenders]. I think it does not speak well of the [higher education] community’s ability to police itself.”

Under federal guidelines, because the negotiating panel failed to reach consensus on the proposals, the Education Department is free to propose whatever changes in rules it wishes in the coming weeks and months.

Decisions Questioned at U. of Wisconsin-Milwaukee

The Milwaukee Journal Sentinel reported Saturday that the University of Wisconsin’s campus there had chosen the controversial lender Student Loan Xpress as its sole preferred provider in 2004 even though other lenders offered better deals to students and over the recommendation of an internal panel.

University officials defended the selection, saying that the company’s rates were the best based on the repayment patterns of Milwaukee’s students, and that its services for the institution were better. University officials said that they had not received any of the stock or cash payments that Student Loan XPress is alleged to have made to some other financial aid officials, but acknowledged that a financial aid director had sat on the company’s advisory board and traveled out of state to company events.

Another Federal Official Accused

Saturday’s Washington Post contained an article with the potent headline: “Federal Overseer of Student Loans Invested in Lenders.” In it, the Post said that Sara Martinez Tucker, the under secretary of education who has spearheaded the department’s higher education efforts since being confirmed late last year, owned stock in five of the six largest providers of student loans.

The article stated that the revelations, which came to light in financial disclosure forms that Tucker had filed and that the department had released to the Post and other publications, followed allegations that another department official, Matteo Fontana, had either received or held (and then sold) at least $100,000 in stock in another lender while directly overseeing the student loan programs.

The Post article noted, too, that department officials said Tucker had not violated any of its ethics rules, “which prohibit employees from working on matters involving a company in which they hold more than $15,000 in stock.”

But the article omitted other information that may further cast the seemingly sexy news in a different light. Tucker’s holdings of slightly more than $10,000 total in the five lenders had been part of an IRA rollover account in her husband’s name from a 401(k) plan from his previous job, according to a department spokeswoman, and the funds were not jointly held by Tucker. In addition, Tucker had sold all of the shares in the lenders in November before she was confirmed as under secretary, and officially took on her federal role, in December.

Looking Ahead

Just in case anyone was hoping for a quiet week on the student loan scandal front, don’t hold your breath. Whatever else might be in store, on Wednesday Cuomo is scheduled to testify at a hearing before the House of Representatives Committee on Education and Labor, whose chairman, Rep. George Miller (D-Calif.), has been ramping up his rhetoric and his own inquiry into the student loan mess in recent days.

So expect the sparks, and the charges, to fly.

— Doug Lederman

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