May 10, 2007

Nearly Unanimous Vote, Divergent Views

It’s hard to tell whether the House of Representatives’ overwhelming passage Wednesday of legislation to toughen federal law governing the student loan industry shows how much the political landscape surrounding the issue has changed — or, in the long run, how little.

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On the one hand, the idea that all but three House Republicans would support a bill that significantly restricts the behavior of lenders would have seemed all but unfathomable a year ago, given the symbiotic relationship that many GOP lawmakers have had with student loan companies in recent years and the Republican-led Congress’s unflagging support for the government’s guaranteed student loan program. In that way, it is clear that the combination of the Democratic takeover of Congress last fall and, more significantly, the spate of revelations and allegations about lender (and college) wrongdoing in recent months have altered the environment.

But while the 414-3 vote in favor of the Student Loan Sunshine Act (H.R. 890) might be seen as indicating that Congressional Democrats and Republicans see eye to eye on the problems in the federal student loan programs and solutions to them, Wednesday’s debate about the bill suggests that the parties still see the underlying issues of the student loan programs very differently, and that big fights are still to come if — as is expected — Congressional Democrats press more significant structural changes to the loan programs down the road.

Two hundred twenty Democrats (with 11 not voting) voted Yes on the student loan bill, as did 194 Republicans, with three GOP lawmakers voting No and four not voting. The legislation had been co-drafted by the chairman of the House Education and Labor Committee, Rep. George Miller (D-Calif.), and by the committee’s senior Republican, Rep. Howard P. (Buck) McKeon (R-Calif.), and the measure reflected a clear compromise between the Student Loan Sunshine Act that Miller and other Democrats introduced last winter, and the Financial Aid Accountability and Transparency Act (H.R 1994) that McKeon introduced last month.

Among other things, the legislation (a copy of which can be viewed here) would:

Ban all gifts from lenders to campus officials, revenue-sharing agreements between lenders and colleges, and college administrators’ participation on lenders’ advisory boards.
Require institutions to disclose all relationships with lenders.
Allow “preferred lender lists” on campuses with strict assurances that the list was created with the students’ best interests in mind.
Prohibit staffing of campus financial aid offices by lenders or their employees.

That McKeon — and even Rep. John Boehner (R-Ohio), who as chairman of the House’s education committee famously told student loan officials in 2005 that he had “all of you in my two trusted hands” — voted for the bill shows in one way how far the ball has been moved by the interlocking investigations conducted by Miller and Sen. Edward M. Kennedy (D-Mass.) in Congress and by Andrew M. Cuomo, New York’s attorney general, among others. (Along those lines, Miller announced Wednesday that his inquiry had uncovered evidence that JPMorgan Chase had hired five campus officials as consultants while they remained on their own institutions’ payrolls. He also criticized a $70,000 cruise around Manhattan to which the lender treated campus aid officials at a meeting of the National Association of Student Financial Aid Administrators.) The steady stream of charges and findings about questionable if not illegal behavior by some lenders and campus financial aid officials have made it politically impossible to oppose the idea that there are problems in the student loan industry that need addressing.

“Some of the lenders have crossed the line or gotten to close to the line, as with some of the financial aid officers,” McKeon said during the very short debate about the bill on the House floor Wednesday. The bill, he said, “is about protecting the interests of millions of young men and women who expect our student aid system to be there for them when they need it.”

But even as McKeon and other Republicans voted to restrict the behavior of lenders, they said it was crucial that Congress not go too far. “As we move forward from here, we must not lose sight of the fact that the federal financial aid system must work for students and colleges alike,” McKeon said. “We must be careful not to overreach, as Congress does all too often, but we do need to reaffirm trust in the system. I believe this bill does just that.”

The implication from McKeon and his colleagues was that the bill passed Wednesday will largely do the trick in cleaning up the student loan programs. And while Miller and other Democrats credited Republicans for embracing the legislation and joined their colleagues across the aisle in praising the measure, they also made clear, in their comments on the House floor, that they viewed it as only the beginning of their efforts to transform the federal student loan programs.

They also signaled — as if there were any doubt, as Education Secretary Margaret Spellings prepared to testify this morning before the House education committee — that they blamed the Bush administration for letting many of the problems develop.

“The reason we guarantee these loans is to try to drive this money to the students and their families at the lowest possible cost so they can afford to go to college,” Miller said as he spoke with rising passion on the House floor. “That’s the public purpose, and now that public purpose has absolutely been prostituted by the Department of Education, by many of the lenders, by many of the colleges and many of the personnel that work for them.”

Rep. Rahm Emanuel (D-Ill.), chairman of the House Democratic Caucus, said his party is “not done in cleaning up the mess as it relates to the college loan industry,” adding: “This is an industry that needs a whole top-to-bottom cleaning and a washing.”

Various pieces of legislation that Democrats have introduced or promised to introduce since taking control of Congress this year would make much bigger changes to the federal loan programs than restricting the relationships between lenders and colleges and opening the door to federal regulation of the private loan industry, as the measure passed Wednesday would do. They would impose structural changes that could meaningfully affect the profitability of lenders, not just altering how they market their products.

Leaders in the Senate are weighing tens of billions of dollars in cuts to the subsidies that the government pays to lenders, guarantors and other student loan entities, as well as considering proposals that would lead to lenders having to compete at auction for the right to provide federal loans. Some House Democrats, meanwhile, are continuing to promote legislation that Republicans turned away last year that would provide incentives to colleges that leave the Family Federal Education Loan Program (the one populated by lenders) for the government’s competing direct loan program. Democrats and Republicans have sparred frequently over the years about the relative costs and general merits of the two loan programs, with Democrats largely supporting the direct loan program and Republicans championing the lender-based program.

While Democrats did not specifically mention those efforts Wednesday as they talked of more changes to come, Republicans did — in a discouraging way. “This isn’t about us versus the lenders or us versus the financial aid officers, and this isn’t about direct loans versus the market-based FFEL program,” McKeon said during the floor debate, adding, “for the record,” that he continued to support the guaranteed loan program.

Praise for the passage of the House bill — and especially the bipartisan support for it — poured in from many directions, with statements offered by other members of Congress, from New York’s Cuomo, from some college associations and, notably, from groups of lenders.

“America’s Student Loan Providers feels strongly that Congress should act quickly to pass legislation that will help bring more transparency to the financial aid process and that the House’s passage of H.R. 890, the Student Loan Sunshine Act, is an important step by Congress in crafting legislation that will strengthen the public’s trust in federal student loans,” one such group, America’s Student Loan Providers, said in a prepared statement.

“The central tenets of the bill passed today, coupled with initiatives already underway by many of our members, will help guide student loan marketing so that questionable practices are eliminated. We’re hopeful that Congress will work with the student loan community and other stakeholders to perfect the bill so that the transparency it achieves ultimately helps students and parents.”

To some critics of the student loan industry, the fact that lenders liked the bill was proof enough of its flaws, and of the risks that it might undermine bigger changes down the road. “The bill, while a step in the right direction, doesn’t go as far it should,” said Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers. “In that sense, lender support is understandable. Even more important, the lenders would be happy to support any disclosure bill that leaves the excess subsidies hidden in FFEL intact. The main reason for their support of this bill is that they hope its enactment stops the momentum for real reform.”

— Doug Lederman

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Comments

It is still a cost issue

Why are college costs rising faster than inflation? Review Vedder (Ohio U.).

http://collegeaffordability.blogspot.com/

Also Geo. Leek.

http://www.popecenter.org/

The “same ol’, same ol’,” just will not work. That is why the U.S. is in the financial mess it is in. Like this —

http://detnews.com/apps/pbcs.dll/article?AID=/20070510/SCHOOLS/705100442

All this brings new meaning to the term “deadweight loss.”

http://en.wikipedia.org/wiki/Deadweight_loss

L.L., at 7:10 am EDT on May 10, 2007

If you live in a glass house. . . .

Am I the only one who is sick of the slick comments of Mr. Nassirian and his unending war against the FFEL program? His cynical and ignorant comment that lenders only welcomed passage of the Sunshine bill because of a hope it will discourage what he calls “real reform” is disingenuous and flatly wrong. Lenders want nothing more than an orderly student loan marketplace where they can compete on price and quality of service. The “real reform” Nassirian wants would eliminate the economic ability of lenders to discount loans and promote his real goal—to force all schools into the Direct Loan program.

Interestingly, if you look at the AACRAO website, you will find that the group that employs Mr. Nassirian to have been successful in soliciting corporate sponsorships from dozens of companies. I see a conflict of interest and hypocrisy. Take a look at: http://www.aacrao.org/tech07/exhib_spons.htm

If you live in a glass house. . .

John, at 7:40 am EDT on May 10, 2007

“Ban ... college administrators’ participation on lenders’ advisory boards.

What the hell are they thinking? Are they crazy! Through the entire history of the HEA, there have always been advisory groups, user groups and such. These are necessery to the fundemental business of Financial Aid. So now a lender can’t ask an FAO what they think about the feasability of a new loan product? Or FAO’s cannot meet with their guarantee agency to discuss ways to improve their software. ALL of the advances in the industry over the last 20 plus years that I have been in financial aid have come as the result of these business Meetings. A similar law would be to say that members of congress cannot meet with their PIRG’s or lobbyists. Oh well, it is the obvious, stereotypical kneejerk overreaction from congress that I have come to expect. Now we will have to spend the next several years running each and every possible legitimate scenario past congress for their exception. Why yes, I can see how this has immediately improved the student loan program. Again, any actual violations of the law for which there have been convictions anywhere?

R.F., at 8:35 am EDT on May 10, 2007

Apples and Oranges

In response to John’s comment about what he alleges is hypocrisy on the part of Mr. Nassirian, speaking as a longtime member of both AACRAO and NASFAA, I can say that there is no comparison between the two. Sponsors have far more influence in the financial aid industry than imaging companies or diploma printers have over registrars. The AACRAO sponsors are simply vending, whereas virtually all financial aid conferences are overrun with lenders using their memberships in such groups not for professional development, but for connections to increase their market share and as another avenue to influence legislative and regulatory decisions.

DS, at 8:45 am EDT on May 10, 2007

Most public universities, like public high schools, were established to offer education to their citizens free of charge. Historically, that is how it happened. After all, all of the employees are state workers. Employees of public universities, like employees of public high schools, are government workers. So, indeed, where is this need for ever increasing amounts of money, beyound the rate of inflation?

At the same time, many universities have actually reduced the size of their permanent faculty through the use of adjuncts. So, you might ask, where is the need for all of this money?

If the history of this issue is examined, one finds that tuition, instead of fees, were established in the mid to late sixties at most public universities. There undoubtably was a political dimension to this funding, with the argument being that all of these protesting students should be made to pay financially so that they would understand the value of their education. Once the money pipe was in place, the universities could not help themselves.

Even the widespread admission of foreign students is a financial trojan horse. A major reason that foreign students have been admitted in increasing numbers is that they are charged roughly triple the cost of in-state students. So, for a taxpayer of a particular state, his or her family has the double hit. The costs for their kids is forever rising and, at the same time, more of the limited slots at their state universities are being portioned to foreign students for financial reasons. Now, I understand that other (valid) reasons are given for the admission of so many foreign students, such as diversity of the university and the high achievement of the foreign students. However, there are two responses to those claims. First of all, the high achievement of the foreign students is not uniform across all disciplines, as is witnessed by anybody who has had a foreign Teaching Assistant. I mean, should an American university be a place for a foreign student to be learning English? Surely, given the SAT that American students have to take, these foreign students cannot be attaining a very high score in the verbal and written portions of the SAT. So, just what is the criteria for the admission of foreign students vice ve the American students? I believe that, when you get to the bottom of it, it is the financial consideration that trumps all other considerations in this matter. I hope that you realize that the foreign governments, for the most part, are footing the bill for their exported students.

The sad fact is that this generation of American students is burdened beyond belief in comparison to both students in other countries and American students from the recent past. Some years ago, in the late 1980’s, the Board of Trustees at a large public university in the east (Connecticut) had just voted another large tuition hike. There was some student grumbling, enough to make a few headlines. When interviewed, one of the Board members conceded that the students might have a point, because, he said, when he attended the very same university, there was no tuition.

Just to put the issue into a final, clearer perspective, since the time of that comment, the state of Connecticut has instituted a state income tax and has had the revenues of two of the largests casinos in the world added to their state coffers. The state of Connecticut is literally rolling in money in comparison to that time in the late 1980’s.

My point is, the larger issue of tuition is a matter of political imagination and political will. Unfortunately, neither seem in large supply these days.

Dr. Gerard Coutu, at 10:20 am EDT on May 10, 2007

re: glass houses

The student-loan industry — particularly Sallie Mae — hates Barmak because he actually understands what is going on. So sorry he doesn’t just accept everything you write in your press releases...

IHE reader, at 10:45 am EDT on May 10, 2007

Comments of AACRAO Spokesperson

The comments of American Association of Collegiate Registrars and Admissions Officers’ Barmak Nassirian bring to mind advice George Marshall once gave: Never question a person’s motives. It’s regrettable that Nassirian would take our statement expressing support for congressional action generally, but certainly not entirely, along the lines of HR 890, and concoct that we’re angling to avoid “real reform.”

While from time to time we have our differences with the bill’s sponsors, they like us believe their bill would achieve meaningful reform. Additionally, does anyone really think our calibrated support for the bill will affect what Congress does in other areas of the program?

“Excess subsidies” are in the eye of the beholder. Moody’s, Standard & Poor’s, Morningstar and others have said that earnings on federal student loans are narrow. Query whether Nassirian would find any level of subsidies not excessive and, if not, what are his motives. But then George Marshall would not want me to go there.

Kevin Bruns, America’s Student Loan Providers, at 12:15 pm EDT on May 10, 2007

Costs, Pt II

” .. Connecticut is .. rolling in money in comparison .. in the late 1980’s. My point is, the .. issue of tuition is a matter of political imagination and .. will .. neither seem in large supply these days.”

Still doesn’t address overall issue of college costs rising faster than general costs. Look up “deadweight loss” — that will be insightful.

Also: more than one-third of U.S. citizens decide, of their own accord, not to attend college.

Tuition subsidies were reduced because it appeared unfair to allow non-users to subsidize beer parties, football tailgates, marijuana bongs, pity parties, rock-climbing walls, etc.

Example: those in the U.S. health care field (e.g., physicians, administrators, malpractice attorneys) are the highest-paid in the world.

Why should their future lifestyles be subsidized by the working class?

L.L., at 4:10 pm EDT on May 10, 2007

Cleaning up the mess

I was not at all surprised that this passed and am utterly stunned by the silence by my colleagues over the last months. The head of lending at the DOE is gone—shocking, the supeonas are being sent by the AG’s office—shocking and it’s going to be a dirty fight. No one in NASFAA was asked their opinion by Congress. Shocking!

The fallout from our fear of commenting is going to be tremendous. I have heard the first of the “we won’t have a list” cries of despair and “what about my poor students” comments. I say to my colleagues: be prepared. The direct marketers for loans are chomping at the bit to fight for the market share directly and have pretty good info since they were scouring the NSLDS (shocking!) for leads. The quickest way for the default rate to skrocket is encouraging the “search the net for student loan” mentality every year being encouraged now. Could this have all been avoided considering all we got from the professional organizationsupposedly representing all that’s good with FA’s did something better than the “write your Senator with these talking points?” The talking points were pretty much how to save the lenders. Considering the lenders pay for most of the organization it was fitting we led the fight to preseve this ridiculous system to fund a higher education social program riddled with questionable, albeit not illegal, practices.

These charges did not happen in a vacuum overnight: need I mention the “School as Lender” scheme of late? I have heard my colleagues brag at how much money they made off their students at conferences. I have even heard colleagues pontificate about how they are DL schools when the real fact of the matter was all of their other grad schools were School as Lender since Congress was “smart” enough to not allow it at the undergrad level. Shocking! Or the “our process for listing lenders is open” with the caveat of you needed to use a specific guarantor in whatever state. Shocking! Or even “we have a list of 20″ but negect to mention several are basically storefronts who sell to one lender on the list. Shocking! The hypocrisy is incredible.

The last conference I went to was pretty much lender run and supported— there was supposed to be a session on schools and lenders which I naively thought would be a good discussion about the pending legislation. Boy was I wrong! It was 2 lenders asking us all what they could do better for us— how could they make the operation easier for us— there was not much mention of students. I attempted to pose the question about the legislation which was never addressed as the discussion again turned to the “what wil you do for me at my school.” It was no different than Kraft asking me if the Mac and Cheese was too salty. I have to say I was utterly disapointed at the end of the session and pretty outraged. I met one colleague who was willing to admit he was outraged as well but only one.

Anyone in my profession knows the value of a lender of a FFEL lender and the power of the preferred lender list. The first call I made to an alternative lender with a $10,000 cap on their alternative loan to increase the cap told me it could only be increased at my school if I made them #1 on my preferred lender list for alternative loans. Shcking! I declined, which should not shock anyone reading this or my other posts. I would like to note that the student appreciated the fact I wasn’t willing to sell out the school for a larger cap— he even thought it sleezy when I explained the preferred lender list and did find a competitor offerning the same without the “deal” from me.

So I ask: what lender in there right mind would not realize the value of asking me to serve on a board? As far as I’m concerned it’s not much more than a way for them to gain credibility— I use them, they use me... I’ve declined every offer since I personally don’t believe lenders ever cared what I thought beyond the “how can we improve our product to sell more” and then wanted me to tell them how over a pandery lunch where the schmoozing is so thick it was revolting. I stopped doing lunch with lenders.

Frankly I didn’t think FA’s were on the take through stock deals, degrees etc— it never entered my mind that someone would be so brazen to “skirt” the law this way and be so “stupid” they didn’t realize this was wrong?

Finally, speaking of the law: did it have to be illegal for it not to happen? Why wasn’t immoral enough? The law may not have expressly prohibited payments from lenders but how did it pass the “sleezy” test?

In closing, I attended an FA symposium last week and 60% were lenders, servicers, guarantors and 40% actual FA folks. I’m interested to see how the NASFAA conference goes this year in DC of all places. How fitting.

Ann Doherty, at 8:50 pm EDT on May 10, 2007

ann’s on target

I can’t add anything to the accurate industry lay of the land that Ann Doherty ably provides. The aid community, sadly, has no shortage of hypocrisy and self-serving rationalization in every sector.

Barmak has leveled dead-on criticisms of the Direct program as well as of FFELP. Really, if you were Barmak, don’t you think you could scrape up a couple (dozen) major problems with the program? One of the amusing aspects of the current circus is the community’s willingness to shoot the messenger, be (s)he Cuomo, Barmak, anyone who breaks ranks from the circled wagons.

If the aid community doesn’t start speaking out, AND holding NASFAA responsible for more than the CYA stance it’s struck throughout the circus time, then the Sunshine Act is going to be all we’ve got to show for all this hoopla. Instead of getting real reform, we’ll get another mess to live with until the next spasm of political righteousness, lender demurral, and schools’ cases of the vapors that their integrity is being impugned.

finaidfollies, at 8:50 am EDT on May 11, 2007

Thank you, Finaidfollies

I emailed a posting to my semi-discipline specific listserve something akin to what I posted yesterday about a month ago and then listened to the crickets chirp. Not even one comment— talk about disappointed.

Anyway, tell all your students to keep thier eyes out for the 100’s of flyer being sent from My Rich Uncle who are circling for the kill.

Ann Doherty, at 8:35 pm EDT on May 11, 2007

Studen Loan “Reform”

I also want to know of any inditements or actual proof that students were defrauded in som way! As a friend who is not in the business said, “Isn’t this business about student loans overblown?”

RB, at 12:40 pm EDT on May 14, 2007

Indictments

I’m not sure if the accusations are worthy of an indictment but I will say that for 99% of students the words “preferred lender” is always interpeted as “the best rate” and NOT the best service. I know this from asking pretty much every student who comes from a FFEL school. Is it a crime? Not exactly but if I am recommending one lender over another or linking you to a homepage to have you sign a loan note in order to get cleared for registratiion, it’s a bit misleading to say the least.

if you choose and sign, we’ll let you register... Once a kid is faced with a problem at registration they are quite willing ot sign just about anything ASAP.

Is making your school the preferred lender and then selling the loans after they are funded to receive a cash payment based on the total of the loan illegal? If it isn’t, it sure should be. The students who borrowed from that school are totally convinced they got a better rate, owed their college only to find out there loan was with some bank. The lucky ones are at schools where the loans annually go to the same bank but schools change their partners. I feel even more for those kids..

Like my previous posting said: I’m not sure why sleezy wasn’t enough. It’s pretty much the conclusion my students had when I described it to them.

Ann Doherty, at 7:50 pm EDT on May 14, 2007

Opinions

I am wondering for the lack of a better way to say this, is using a “preferred lender list” any different than using a preferred lender? When you use a list of preferred lenders, or you don’t use a list of a preferred lenders because you only have one lender therefore not needing a list, aren’t you still promoting a preferred lender but without the list? I don’t know, it just seems that way to me. why is it okay to say you don’t use a list because you are DL and that schools that use a list called “preferred” means they are promoting some sort of scam to the borrower but you can’t be referred to as using a preferred lender list because you use your preferred lender called DL? I don’t know but sure seems to me that it is all about the pot calling the kettle black here to me. Just kind of doing some of the smell test that some others have suggested.

IHE reader

Candy Apple, at 4:20 pm EDT on May 16, 2007

Disappointed not one churp

I just wondered why there wasn’t any churp to the question from Candy? Can’t give a good response to that I suppose? I just thought it was a great question from an reader and have been waiting for some responses. Maybe it was such a great observation that no argument could be made. As an advocate of ffelp I thought it was a brilliant observation.

Little Bird, at 8:05 pm EDT on May 17, 2007

Oops

Little Bird can’t spell, I meant “chirp” chirp!!

Little Bird oops, at 6:15 am EDT on May 18, 2007

Competition, Disclosure & Responsibility

Absent 2,000-word diatribes — solutions are obtainable.

* Competition — proven across the world — except by the French Socialist Party, Chinese Communist Party, and Democrat Party — to increase quality and contain costs.

* Disclosure — this is how Andy Cuomo got the target colleges and lenders.

With criminal perjury charges as a weapon, Andy asked basic questions. So should everyone. And if you CANNOT get an answer — be suspicious — very suspicious.

* Responsibility: the loan agreement signer has the responsibility (with the taxpayers) for the loan — not the college, not the FAO, not the loan sales rep (yes, they are selling).

SO — any doubts on loan — do NOT sign. Period.

L.L., at 9:20 am EDT on May 20, 2007

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