March 5, 2007

Lender/University Entanglements

Three years ago, the University of Nebraska’s Board of Regents, eager to find more funds for undergraduate need-based financial aid for students at its flagship campus in Lincoln, struck a deal in which the National Education Loan Network, would provide loan funds that the university would administer to its graduate and professional students. As part of the arrangement, authorized through a process known as “school as lender,” Nelnet, as the Lincoln-based lender is known, would give the institution more than 6 percent of the profits to use for need-based aid.

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The agreement represented a major shift for the university, which had been a leading and unflagging supporter of the federal government’s direct loan program. But campus officials insisted that the arrangement — reached through an open bidding process in which Nelnet, an Omaha-based lender, outbid four competitors — offered not only the best loan terms for Nebraska’s grad students, but significant new need-based funds for its undergraduates.

In this, its first year, the Nelnet contract provided Nebraska with nearly $500,000 in new aid funds, making it a win-win situation for the university, says Harvey Perlman, chancellor of Nebraska-Lincoln.

It appears to have been a win-win-win situation for the university, actually. The student newspaper at Nebraska reported last month that at the time the university’s regents approved the deal with Nelnet, the University of Nebraska Foundation, which supports the institution financially but is independently controlled, owned more than 840,000 shares of Nelnet stock (some of which the foundation sold the following year, at a significantly higher price). That fact was not revealed to the regents, nor did the one regent who was also a trustee of the foundation, James McClurg, disclose it under state contracting rules.

There is no evidence to date that the arrangement at Nebraska involved anything illegal or unethical. But the entanglements between Nelnet, the university and its fund raising foundation have raised eyebrows at a time that the Democratically controlled Congress, state officials in New York and elsewhere, and the Education Department (through its negotiated rule making process) are cranking up their scrutiny of the relationships between colleges and lenders.

“Why is this a big deal?” Higher Ed Watch, a blog produced by the New America Foundation, said last month. “The Nelnet-NU Foundation-University of Nebraska love triangle demonstrates how, behind the scenes, universities can have multiple financial relationships with student loan providers that may undermine the integrity of their role as informed intermediaries between banks and students.”

Nebraska officials bristle at the suggestion that the university did anything other than strike the best deal for its students. “It’s preposterous to think this is a conflict of interest,” said Perlman, the chancellor. “The selection of Nelnet as our student loan provider was done through a public bidding process, in which five companies responded and Nelnet provided the best deal to the university. The only reason you care about a conflict is if you’re perceived to be making a decision on the basis of that conflict. In a public bidding process, that’s not possible.”

Added Chuck Hassebrook, a Nebraka regent: “This decision needed to be made on the basis of what was best for our students. For me, I made that decision based on what was best in particular for low and moderate income students, for whom access to education is most difficult. Nelnet offered us the most help for those students.” Of the fact that it also benefited the foundation directly, and the university indirectly, he said: “It doesn’t make it a bad thing that it benefits us in two ways.”

That doesn’t mean Hassebrook was a fan of the Nelnet arrangement at the time the regents approved it. He still fumes about the fact that federal law, through the school as lender program, allows colleges and universities to make federally guaranteed loans to their graduate and professional students and then recoup funds for student aid by selling the loans back to a lender — but doesn’t offer a similar arrangement through the government’s direct loan program.

“This situation is about bad federal policy, which forced us to choose between doing what was best for our low income students or using the loan system that we believe is more efficient,” Hassebrook said.

The school as lender program has grown controversial amid concerns that by letting colleges share in lender profits, it gives institutions a financial incentive to increase their students’ loan burden. Amid those and other concerns, Congress has cooled on the program, voting last year not to let any more colleges enter into such arrangements, though allowing existing programs to continue, at least for now.

More generally, federal and state officials are looking more closely at whether college financial aid officers or other university administrators have incentives to direct their business to certain lenders over others. And it is in that context — including a letter that New York’s attorney general sent to Nebraska and several dozen other colleges this winter — that the Daily Nebraskan reexamined the university’s 2004 deal with Nelnet and discovered the Nebraska foundation’s stock ownership.

The foundation’s ownership of Nelnet stock was not revealed to regents at the time, and McClurg, who as both a regent and a Nebraska foundation trustee, acknowledged knowing about the foundation’s Nelnet stock, told the Daily Nebraskan that he had been advised by the university’s lawyers that he did not need to reveal the information in state conflict of interest forms. McClurg did not return telephone calls seeking comment for this article.

Frank Daley, executive director of Nebraska’s Accountability and Disclosure Commission, said he could not comment directly on the potential interrelationship between the foundation, the university and Nelnet. But he said that state conflict of interest and/or contract law “generally require that when a public official has an interest in a contract or other matter before a governing body, there are certain procedures that have to be followed, which include a disclosure of that interest.”

That would apply not only to someone’s personal interests (like his or her ownership of stock as an individual), but also to the interests of family members or a “business” with which he or she is affiliated, Daley said. And the state’s definition of an individual’s business interests, he added, would apply to a nonprofit group or foundation as well as a corporation or partnership.

“It’s hard not to find the conflict of interest,” wrote Michael Dannenberg of the Higher Ed Watch blog last month. “UNL is a direct beneficiary of the Nebraska University Foundation, and thus has an undeniable stake in its financial health. Choosing Nelnet as its partner in 2004 (over four other student loan providers) was a profitable choice for UNL for reasons outside of the actual arrangement.”

Perlman, the chancellor, and Hassebrook, the regent, both insist that the foundation’s ownership of Nelnet stock was not and could not have been a factor in the university’s selection of Nelnet.

“If the university had engaged in a secret deal, chosen outside the public process, then I can understand the potential relevance here,” said Perlman. But in this situation, “we put out [a request for proposals], the documents were all public, the responses to the bid were all public, it was clear that Nelnet provided the most advantageous offer, and we selected them. But we selected them only because Nelnet was the best bidder on the contract.”

Hassebrook said he was definitely not aware of the foundation’s ownership of Nelnet stock. “Should it have been disclosed? Maybe.” But, he argues, the fact that it wasn’t known by the regents could be seen as ensuring a fair process. “It almost would have been interjecting information that would have skewed the decision inappropriately,” he said. “It could have been, ‘Oh, and by the way, it’s going to help us because of this other reason.’ It might have been interjecting the wrong consideration.’ “

Even as he flatly rejects suggestions that Nebraska engaged in any conflict of interest in its deal with Nelnet, Perlman recognizes that the growing consternation over lender-college relationships may ultimately undermine arrangements like this one. “There are a lot of issues about whether school as lender is an appropriate vehicle, and if [members of Congress] want to take it away, it’s their business,” he said.

Perlman offers up an interesting fact as evidence that the university would not have been swayed by the foundation’s ownership of Nelnet stock: that the foundation owned stock in 2004 in one of the other four companies that it was choosing among.

What that also shows, though, is that government officials looking to untangle the relationships between colleges and lenders have their work cut out for them.

— Doug Lederman

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