Higher Ed Watch

President Obama announced on Wednesday that the U.S. Department of Education will encourage millions of student loan borrowers to convert loans they borrowed through the Federal Family Education Loan (FFEL) program into direct lending. At Higher Ed Watch, we are pleased that the administration is moving ahead with this plan, which aims to help borrowers who are stuck with student loans under both the FFEL and Direct Loan programs.

The initiative, which will get underway in January, will provide some savings to borrowers who take advantage of it by providing them with up to a 0.5 percent interest rate reduction on their federal loans. But the administration's primary purpose is to simplify the repayment process for borrowers who currently have to make payments on their federal student loans to multiple loan servicers each month.

As readers of Higher Ed Watch know, the Democratically-controlled Congress last year eliminated the FFEL program and shifted to 100 percent direct lending. While the transition has gone remarkably smoothly, nearly six million borrowers have found themselves with loans in both programs, creating an administrative burden for these individuals, as well as for colleges and the federal government.

[This is the third and final part of our Higher Ed Watch series looking at what's gone wrong at the for-profit college giant Education Management Corporation. To read the first two posts, click here and here.]

For nearly 40 years, Robert Knutson, the founder of Education Management Corporation (EDMC), built up a for-profit higher education company that was focused on doing “everything we can to ensure that students are successful, and our education process is oriented to the needs of our students,” as he told the Wall Street Corporate Reporter in 2002.

But after Goldman Sachs and two other private equity firms acquired Education Management in 2006 for $3.4 billion, they set an entirely different mission for the company: achieving hypergrowth.

To accomplish this goal, the company’s new owners hired a group of executives from the Apollo Group who had been instrumental in the massive expansion of the University of Phoenix earlier in the decade but had run afoul of federal regulators over the tactics they used to achieve that growth. Despite these troubles, the former Apollo officials brought nearly the exact same playbook to EDMC, according to former Education Management employees, the U.S. Department of Justice, and other press reports.

As the Huffington Post reported last week, this new leadership team created a “cut-throat sales culture” that was “laser focused on hitting mandated enrollment targets.” These executives hired thousands of new recruiters and made sure that they knew that their jobs depended on getting students in the door and signed up for loans, even if they knew full well that the students were unqualified for the work and had little chance of succeeding.

"The drive for numbers has created a recruiting staff that could care less about the well-being or success of the students” they bring in, a recruiter for EDMC's South University told the Huffington Post, in the online publication's words. “They’re wolves; they’re hunters,” the recruiter said. “They have one objective: They’re there to make money and get students.”

In retrospect, what’s happened at EDMC should not have come as a surprise. As Goldie Blumenstyk of the Chronicle of Higher Education wrote soon after Goldman’s purchase of EDMC, “When private equity funds do the buying, they do so with an overriding strategy in mind: Acquire the college or company, often with a lot of borrowed money, find ways to make it bigger and more profitable, and sell it at a higher price, either to other private investors or through a public offering."

“Since most private-equity funds are organized as limited partnerships with 10-year lifespans,” she added, “they hope to pull off these sales in five to seven years.”

In other words, firms that do these types of deals are not invested in the long-term health and well-being of the corporations they purchase. Instead, their mission is to build the companies up as fast as they can so they can sell them off and make a killing.

By Leo Kornfeld

The Department of Education recently announced that the national student loan default rate has risen to over 8 percent and we know that this measure provides only a limited view of the troubles that borrowers are having repaying their student loan debt. In the current economy, we can only expect things to get worse unless the Education Department tackles this problem head-on.

Among the defaulters are a large percentage of unemployed college students. It’s bad enough to be unemployed; however, when you add to this difficulty with being classified as a defaulter, you are really in trouble. Defaulting on federal student loans results in a lifetime of financial purgatory -- it destroys your credit, making it impossible to obtain a credit card, car loan, and home loan, and it puts you at risk of having your wages garnished, and your tax refunds intercepted by the IRS.

This disaster however can be avoided because there are options available for low income, unemployed college students and others to avoid going into default on federal loans. However, the Education Department has not done nearly enough to communicate these options so that the borrowers, who are already suffering in this difficult economy, fully understand they have alternatives to facing the lifetime punishment of being classified as a defaulter.

The investment banking industry – and its friends in Congress – have cooked up a scheme they are pitching to the “supercommittee” that they say would reduce the federal debt and cut federal spending. Supposedly, the plan would take the government’s $555 billion direct student loan holdings off of its books. In reality, the plan, which would allow the bankers to earn fees on a $555 billion deal, plus $100 billion more every year, would not reduce the debt or cut spending. But that hasn’t stopped Wall Street from trying.

A proposal that could only have been be cooked up by investment bankers is circulating on Capitol Hill. It would refinance the $555 billion direct student loan portfolio with new debt backed 100 percent by the federal government. But this new debt would not be called U.S. Treasury debt, despite the 100 percent guarantee, and therefore not counted as part of the national debt. In other words, the new debt would be used to pay off the old debt (Treasury bonds) that the government issues to finance direct student loans. To be sure, the mechanics of the proposal are more complicated than that, but the effect of the proposal would be to move all outstanding and future student loans from bonds backed 100 percent by taxpayers to another set of bonds backed 100 percent by taxpayers but not counted as part of the national debt.

That wouldn’t be quite so ridiculous of a proposal if it didn’t also increase spending and increase the annual budget deficit. In other words, the phony debt reduction that the proposal is based on would come at a significant cost to taxpayers compared to the status quo.