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Higher Ed Watch

A Blog from New America's Higher Education Initiative

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Advice for Obama: Stop the Revolving Door

Published:  November 12, 2008

It hasn't taken long for media and bloggers everywhere to shift their attention to potential candidates for the next education secretary. But rather than indulging in games of name-dropping, we have one piece of advice for the transition team in choosing a secretary as well as candidates for other high-level positions: End the revolving door between the Department of Education and student loan companies.

For the past eight years, the Bush administration has employed the revolving door as a common method of filling its most important higher education posts in the Department of Education. According to the Wall Street Journal, at least eight top Department officials came from the student loan industry, including a deputy education secretary, an assistant secretary of postsecondary education, and a chief operating officer of the Federal Student Aid office (FSA).

With so many foxes watching the hen house, is it any surprise that the Department consistently looked the other way as widespread abuses occurred in the Federal Family Education Loan (FFEL) program? While some simply turned a blind eye, there is compelling evidence to suggest that others used their powerful positions to benefit their former employers far more than taxpayers and students

Take Matteo Fontana, the former Sallie Mae official who was in charge of overseeing the lenders and guarantors that participate in the FFEL program. Under his watch, Fontana overturned an Inspector General decision that had prevented the nation's largest student loan company, and his former employer, to ostensibly take control of the nations' biggest guarantor, USA Funds. Allowing the contract to go through helped Sallie Mae become a fully privatized corporation while negating any claim that the guarantor was properly exercising its oversight role. Allowing Sallie Mae to basically run USA Funds also created twisted incentives that allowed the lender to reap huge profits by growing its borrowers' debt to unmanageable levels.

The Department also put Fontana in charge of the National Student Loan Data System (NSLDS), a central repository of all borrowers in either federal student loan program. The result? Fontana and other Education Department officials looked the other way as loan companies mined the database, harvesting students' personal information for marketing purposes.

Nearly every major loan scandal in the past eight years has had a revolving door official at the center of the Department's involvement. Bush administration officials with lender ties looked the other way as loan companies engaged in "pay for play" scandals, providing illegal inducements to financial aid officers in exchange for a spot on preferred lender lists. The officials did the same thing during the 9.5 scandal, in which lenders bilked taxpayers out of an estimated $600 million by repackaging decade-old loans to collect a high guaranteed subsidy rate. And those are just the scandals we know about.

Bush administration officials and senior Republican leaders have defended the hiring practices, saying they have to hire industry officials because they understand the loan programs better than anyone else. But if this is the case, wouldn't it make more sense to reform and simplify the programs so that the Department isn't beholden to former loan industry staff for key oversight and policy decisions?

After nearly a decade of letting lenders oversee themselves, the Obama administration needs to select Education Department officials who will put the bite back into its oversight role. This means not just picking individuals free from controversy, but experienced and knowledgeable people that will be able to critically examine the federal student loan programs for instances of illicit behavior. One way to begin this process is making sure the revolving door is sealed once and for all.

(Image used under a Creative Commons license from Flickr user kblackout)

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