Higher Ed Watch

[Editor's Note: The U.S. Department of Education recently asked higher education stakeholders to suggest "issues that should be considered for action" during the agency's upcoming negotiated rule-making sessions. Today at Higher Ed Watch, consumer lawyer Deanne Loonin calls on the Department to focus the sessions in part on providing relief to student loan borrowers who have fallen victim to schools that have engaged in fraudulent practices. The post is adapted from comments that Loonin submitted to the Department and from an earlier blog post she wrote for us on this subject.]

By Deanne Loonin

The Department of Education has taken numerous actions over the past few years to restore integrity to the financial aid system. These changes should help prevent future students from attending schools that provide them with nothing but insurmountable debt. However, our experience at the Student Loan Borrower Assistance Project unfortunately has shown that there will always be some schools that try to take advantage of borrowers. In addition, there are countless borrowers who have already been harmed by abusive practices and are subject to the government's draconian collection powers.

The problems are particularly prevalent in the for-profit higher education sector where all too often schools prey on vulnerable students' dreams of betterment through education. As a result, the financial assistance that was intended to help these students does little more than bury them in debt. The efforts to date to rein in abuse have done nothing to provide relief for those harmed by these practices. This should be the focus of this round of rulemaking.

The recent decision by the U.S. Justice Department (DOJ) to join a whistleblower lawsuit accusing a major for-profit higher education company of deliberately violating the federal incentive compensation ban is an extremely welcome development -- but only if federal prosecutors stand firm and refuse to settle the case.

At issue is a False Claims lawsuit brought by two former Education Management Corporation (EDMC) employees that accuses the country’s second largest for-profit school chain of defrauding the government of financial aid funds by defying a federal law prohibiting colleges from compensating recruiters based on their success in enrolling students. “In direct violation of the ban on incentive compensation, Defendants created a ‘boiler room’ style sales culture, in which they not only pay incentive compensation, but they make the recruitment of students to their schools the sole focus of their compensation regime,” the lawsuit states.

As a result, the whistleblowers allege, the company puts a tremendous amount of pressure on its recruiters to get students in the door and signed up for classes and financial aid, even if they know full well that many of these individuals have little chance of succeeding. Unsurprisingly, EDMC officials deny these allegations, saying that the case is “unwarranted and without merit.”

If this case sounds familiar, that’s because in recent years similar lawsuits have been filed against many of the nation’s largest for-profit higher education companies. But none of these lawsuits have ever gone to trial and been heard by a jury. Many, in fact, have ended in settlement agreements, in which the companies agree to pay a fine but do not have to admit any wrongdoing.

The in-school interest subsidy on federal student loans for graduate students has been on the chopping block before. But college lobbyists and student advocacy groups have always managed to save it.

This year, though, with all the budget cutting fervor on Capitol Hill, the question no longer seems to be whether this popular benefit for financially needy students will be eliminated but how the money saved from doing so will be spent. Will it go to shoring up the Pell Grant program, as President Obama has proposed, or to deficit reduction, as House Republican budget cutters are advocating?

This question is coming to a head as the White House and Congress seek to come to agreement on a deficit-reduction package that could potentially be passed in tandem with an increase in the national debt ceiling. As we reported on Friday, House Budget Committee Chairman Paul Ryan (R-WI) told reporters last week that ending the in-school interest subsidy for graduate students is “on the menu” of proposals being considered in these budget talks.

It’s difficult to believe, however, that that Obama administration would agree to include this in the deficit-reduction package, considering how pivotal this proposal is to the president’s plan for maintaining the maximum Pell Grant at its current level of $5,550.

Since Congress passed the American Recovery and Reinvestment Act (ARRA) in 2009, many policy researchers and the media have focused their attention on the law’s funding for K-12 education. As a result, much of the reporting and analysis on the ARRA has overlooked the significant funding that the law provided for higher education. In response to this lack of coverage, the New America Foundation's Federal Education Budget Project recently released an issue brief titled The State Fiscal Stabilization Fund and Higher Education Spending in the States, Part 2 that explores how states chose to divide their ARRA State Fiscal Stabilization Funds between K-12 and higher education.

The ARRA was intended to stimulate the economy with $862 billion in new spending and tax cuts. The law included nearly $100 billion in one-time funding for new and existing education programs, a historic sum given that annual appropriations for federal education programs were approximately $60 billion in fiscal year 2009. The largest single education program included in the law was the State Fiscal Stabilization Fund (SFSF), a new $48.6 billion program that provided direct grant aid to state governments in 2009 and 2010. The program was designed to help states maintain support for both K-12 and higher education that they might have otherwise cut in response to budget shortfalls brought on by the economic downturn.