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Student Loan Scandals

A New Chapter in the 9.5 Scandal

September 1, 2009

On Monday, a federal court in Virginia unsealed a whistleblower lawsuit filed by Jon Oberg, the U.S. Department of Education researcher who uncovered the 9.5 student loan scandal, against 10 student loan companies that participated in the scheme. The lawsuit, which Oberg filed in 2007 under the federal False Claims Act, seeks the return to the federal government of $1 billion in excess student loan subsidies these lenders improperly obtained.

The roots of the 9.5 student loan case go back to the 1980s when Congress guaranteed non-profit lenders, which use tax-exempt bonds to finance their loans, a minimum rate of return of 9.5 percent on federal student loans made with these bonds. As interest rates on all other student loans fell in the 1990s, policymakers became concerned that these nonprofit student loan providers were making a killing. So in 1993, Congress rescinded that policy, but grandfathered in loans made from the old bonds, believing that the volume of 9.5 loans would decline as they were paid off and the bonds retired.

Instead, beginning in 2002, a small group of lenders devised a strategy to aggressively grow the volume of loans that they claimed were eligible for the 9.5 guarantee. This was a goldmine for lenders in the existing low interest rate environment (at the time, the borrower interest rate on regular loans hovered around 3.5 percent.) They accomplished this scheme by transferring loans that qualified for the 9.5 subsidy payment to other financing vehicles and recycling the proceeds into new loans that they claimed were then eligible for the subsidy. The lenders repeated this process over and over again.

Not So Innocent After All

August 5, 2009

[This is the eighth in the Higher Ed Watch series "Revisiting the 9.5 Student Loan Scandal." The series takes a closer look at the origins of the scandal with the purpose of trying to resolve unanswered questions and dispel lingering myths surrounding it. Links to earlier parts of the series are available here, here, here, here, here, here, and here]

Sallie Mae has long boasted that it did not take part in the 9.5 percent student loan scheme. But a new report from the U.S. Department of Education's Inspector General (IG) refutes that claim.

According to the report, which was released on Monday, Sallie Mae improperly obtained $22.3 million in excess student loan subsidies from the federal government between Oct. 1, 2003 and Sept. 30, 2006. The actual amount that the company over-billed the government is probably substantially higher -- as the IG looked only at how the student loan giant handled the 9.5 loans it obtained through its purchase of Nellie Mae [NLMA], the Massachusetts non-profit student loan agency. Between 2000 and the end of 2004, Sallie Mae bought three other non-profit lenders, including the Arizona-based Southwest Student Services Corporation, which had increased the volume of federal loans that it claimed eligible for the 9.5 percent guarantee by 135 percent in the years immediately preceding the sale.

To be clear, Sallie Mae does not appear to have engaged in the type of loan and bond manipulations that other companies, like Nelnet and the Kentucky Higher Education Student Loan Corporation, did to massively grow their 9.5 loan holdings. Instead, the loan company violated the law by submitting 9.5 claims on loans financed by tax-exempt bonds that had matured and been retired, the IG report states.

More Scare Tactics from the Student Loan Industry and Friends

July 28, 2009

Now that legislation is moving forward that would carry out President Obama's plan to eliminate the Federal Family Education Loan (FFEL) program, the student loan industry and its most hard-line supporters in the financial aid world are doing what they do best: spreading fear about proposed changes to the student loan programs that would be harmful to their interests.

Take, for example, the Consumer Bankers Association (CBA). In a press release last week, the group wrote that the House Education and Labor Committee's approval of the bill was "a setback for students."

Come again? The legislation would use savings from ending FFEL to boost spending on Pell Grants by $40 billion (yes, you read that right -- 40 BILLION DOLLARS) and significantly expand the low-interest Perkins Loan program so that financially needy students can avoid taking out high-cost private student loans.

So how exactly would the bill's passage harm students?

According to the CBA, if the legislation is enacted and student loans are made entirely through the U.S. Department of Education's Direct Loan (DL) program, "students and parents would no longer have a choice of lenders, a right they've had since 1965."

Tighter Controls Needed for Non-Profit Lender Set-Aside

July 21, 2009

The House Education and Labor Committee has taken up a bill today to eliminate the Federal Family Education Loan (FFEL) program and use the savings in part to significantly boost spending on Pell Grants. The legislation includes a provision that would provide a set-aside for all existing non-profit student loan agencies to service the loans of up to 100,000 borrowers in their home states.

Last week, we stated our opposition to this provision, which was crafted by a trade association for non-profit lenders, the Education Finance Council, and shopped behind closed doors on Capitol Hill. But if Democratic leaders insist on keeping it in the bill, they should at least bar lenders found to have deliberately overcharged the government or acted against the best interests of students from participation.

Case in point: The South Carolina Student Loan Corporation. Should the bill become law, it would give the agency, known as SCSLC, a guaranteed direct loan servicing contract in the state. But according to a recent Higher Ed Watch investigation, SCSLC appears to have used its ties to the state student loan guaranty agency to obtain excessive taxpayer subsidies from the federal government. The loan agency has allegedly done this by helping the state guaranty agency exploit an emergency program the government has in place to ensure that all eligible students are able to obtain federal student loans. The U.S. Department of Education is carrying out its own investigation of these allegations and is expected to issue a report soon.

Non-Profit Student Loan Scandals

July 9, 2009

Earlier this week we urged lawmakers not to put non-profit student loan providers on a pedestal. After all, these agencies are no strangers to scandal.

Don't Put Non-Profit Lenders on a Pedestal

July 7, 2009

With Congress on the verge of considering legislation to eliminate the Federal Family Education Loan (FFEL) program, it is becoming increasingly clear that lawmakers don't want to go quite as far as the Obama administration proposed. Members of both parties are pushing Congressional leaders to preserve a role for nonprofit lenders in the federal student loan program.

Mailbag: A Student Loan Fiasco in Kentucky

June 11, 2009

Last week, we ran a post critiquing The New York Times' coverage of the collapse of a popular student loan forgiveness program in Kentucky that was designed to encourage students to become school teachers. We credited the Times for bringing national attention to the struggles of thousands of newly-minted teachers who were left in the lurch when the Kentucky Higher Education Student Loan Corporation (KHESLC), the state's nonprofit student loan agency, decided to pull the plug on its "Best in Class" program. But we took the newspaper to task for missing the real story: how officials at the Kentucky loan agency had set the program up for failure by financing it with funds it had improperly obtained by engaging in a risky scheme to overcharge the federal government tens of millions of dollars.

Since then, we have been overwhelmed by the responses we have received on the post. Nearly 100 Kentucky teachers have written to us, explaining the hardships they have faced since the loan agency shut down the program. Today, we thought we'd put a human face on the scandal by printing excerpts from comments we received from the teachers.

Drawn to Public Service by a Promise

The stories they tell are remarkably similar -- about how they were drawn to public service by the promise of having their student loans forgiven. Most of these people, many of whom left other lines of work to take part in the program, say that they never would have been able to consider entering such a low-paying field without the help that the Kentucky loan agency [also known as the Student Loan People (SLP)] offered them:

The Inspector General Weighs in Again on the 9.5 Student Loan Scandal

June 3, 2009

[This is the seventh in the Higher Ed Watch series "Revisiting the 9.5 Student Loan Scandal." The series takes a closer look at the origins of the scandal with the purpose of trying to resolve unanswered questions and dispel lingering myths surrounding it. Links to earlier parts of the series are available here, here, here, here, here and here.]

A new report that the U.S. Department of Education's Inspector General (IG) released on Friday about the Kentucky Higher Education Student Loan Corporation (KHESLC) should put to rest, once and for all, a key argument that lenders have been using to defend their involvement in a scheme to gain windfall profits at the government's and taxpayers' expense. The IG rejects the loan companies' claims that their actions were lawful because several officials at a key office within the Education Department had approved them.

In January 2007, then-Education Secretary Margaret Spellings put a stop to what has become known as the 9.5 scandal, in which a group of lenders were improperly growing the volume of federal student loans that they claimed were eligible for the 9.5 guarantee available on loans financed through tax-exempt bonds issued before 1993.

But, as Higher Ed Watch first revealed last month, the Financial Partners division of the Department's Federal Student Aid (FSA) office carried out a controversial series of program reviews from the fall of 2005 through the summer of 2006 that signed off on these student loan companies' 9.5 billing practices. In some cases, the program reviewers even showed the lenders how they could take greater advantage of these inflated subsidies (at the time the borrower interest rate on regular federal student loans hovered around 3.5 percent).

The New York Times Misses the Story

June 2, 2009

Last week, The New York Times brought national attention to the struggles of thousands of newly-minted teachers in Kentucky who were left in the lurch when a popular loan forgiveness program designed to encourage students to become educators ran out of money. The Times certainly deserves credit for putting the spotlight on these teachers who have been left heavily indebted with student loans that they took out in good faith -- with the promise that they would have help paying them off in exchange for their public service.

But unfortunately, the Times didn't tell the whole story and instead left its readers in the dark about the real reasons for the loan forgiveness program's collapse. We fear that this omission could lead policymakers and the public to learn the wrong lessons from this debacle.

Ever since the Kentucky Higher Education Student Loan Corporation (KHESLC), the state's nonprofit student loan agency, pulled the plug on its "Best in Class" student loan forgiveness program, agency officials have tried to shift the blame on to the federal government. They have argued that the Democratic-controlled Congress effectively killed the program in 2007, when it approved the College Cost Reduction and Access Act, which cut lender subsidies to pay for increased spending on student aid.

The Times appears to have accepted this line of argument without question. In two articles it ran last week (here and here), the newspaper placed the blame for the program's demise squarely on the subsidy cuts and the credit crunch, which made it difficult for the loan agency to raise funds to make new loans. Undoubtedly, last year's crash in the financial markets was the final straw in the agency's decision to cut the program. But that certainly does not explain how the Kentucky student loan agency got itself into this mess to begin with.

Mixed Signals from Congress Lead to Misguided Proposals on Private Loans

May 21, 2009

By Ben Miller and Stephen Burd

The Federal Reserve Board has proposed regulations that could significantly weaken a federal law that aims to protect students from being misled into taking out high cost private student loans. In a notice in the Federal Register on March 24, the agency said that it is considering including exemptions, or "safe harbors," to a provision Congress added to the Higher Education Act last year that prohibits lenders from using a college's name, mascot, logo, or emblem to market private loans to students.

Under the Federal Reserve's proposal, a lender would be able to continue engaging in these practices as long as it disclosed "in a clear and prominent way" that the college it is referring to "does not endorse the creditor's loans, and that the creditor is not affiliated with the educational institution." The agency says that this "safe harbor approach" is needed because a lender "may at times have legitimate reasons for using the name of a covered educational institution" in its marketing materials.

The Federal Reserve also proposes widening this exemption even further for private student loan providers that appear on a college's preferred lender list. In those cases, the agency says, it "would be misleading" for a lender to state that a school has not endorsed its loan products. Instead, it would simply require that the lender "clearly and conspicuously disclose that the loan is not being offered or made by the educational institution."

At Higher Ed Watch, we believe that these proposals would completely undermine both the letter of the law and its intent. But we don't believe that the fault for offering these misguided proposals rests entirely with the Federal Reserve. Congress is also to blame for sending mixed signals to the agency about how this provision should be enacted.

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