May 9, 2007

House to Act Fast on Student Loans

The House of Representatives is expected to vote today on compromise legislation, drafted jointly by Democrats and Republicans, that would sharply increase regulation of the student loan industry and severely restrict the relationships between lenders and colleges.

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Among other things, the legislation would bar all gifts from lenders to college officials, prohibit campus administrators from sitting on lender advisory boards and, for the first time, give the U.S. Education Department authority to regulate certain aspects of the private loan market, which has been characterized as the Wild West of the student loan world.

The measure incorporates aspects both of the Student Loan Sunshine Act (H.R. 890) put forward by Rep. George Miller of California and other Democrats, and of the Financial Aid Accountability and Transparency Act (H.R 1994) proposed by Rep. Howard P. (Buck) McKeon, the senior Republican on the Education and Labor Committee. The Democratic and Republican staffs of the Education and Labor Committee worked together on the draft legislation, which the full House could vote on as early as today under House rules aimed at speeding up consideration of legislation.

Committee aides said the leaders of the panel had decided to move ahead aggressively and move some legislation — even if it does not accomplish everything they might wish — because they felt Congress needed to act decisively, given the mounting concerns about the student loan industry.

“With college costs increasing, America’s students and families are relying more than ever on student loans to help pay for a college degree,” a one-page description of the bill says. “Yet ongoing investigations into the student loan industry have revealed that egregious conflicts of interest and corrupt practices among lenders, schools, and public officials are undermining the student loan programs that millions of borrowers have come to depend on. Congressional action is urgently needed to return these programs to their rightful owners: students and parents.”

It is probably not a coincidence that House leaders are moving fast to pass legislation, and show that they are taking concrete steps to fix perceived problems in the loan industry, in advance of Thursday’s hearing at which the Education and Labor Committee is calling Education Secretary Margaret Spellings on the carpet to explain what her department has done (and why it has not done more) on that front. Spellings herself moved Tuesday to show that she is taking action, announcing the resignation of Theresa S. Shaw, chief operating officer of the department’s Federal Student Aid office, with three weeks’ notice (more on that below).

The new legislation, which will keep the Student Loan Sunshine Act name, contains a wide mix of provisions aimed at ending potential conflicts of interest between lenders and college officials and requiring much more disclosure of information to would-be borrowers. Many of the provisions are similar to those contained in the “code of conduct” promulgated by New York’s attorney general, Andrew M. Cuomo, whose own investigation has aligned with those pursued by Miller and Sen. Edward M. Kennedy (D-Mass.), who heads the parallel education panel in the Senate.

Among other things, the House legislation would:

Ban any “educational loan arrangement,” which are defined as deals in which a lender pays a fee or other benefits to the institution. Many such arrangements occur now, and have increasingly been called into question, especially when they give colleges a share of the revenue based on loan volume.
Prohibit lenders from helping to staff campus financial aid offices.
Bar college officials from serving on lender advisory councils or providing any other formal advice.
Ban all gifts from lenders to campus officials and their families.
Continue to allow colleges to use lists of “preferred lenders,” but require institutions to include at least three lenders on such lists, to explain how they chose the lenders, and to show that they put students’ interests first in the selection of lenders.
Ban the use of “opportunity pools,” which are loan funds that some lenders make available to institutions for their high-risk students in exchange for appearing on colleges’ preferred lender lists. The pools have become controversial because critics say the students often aren’t told they have other options, but defenders say they often go to low-income and minority students who have no other way to pay for college.
Call for civil penalties of up to $25,000 for colleges or nonfederal lenders found to have violated the provisions of the law, and for the suspension or termination of participation in federal loan programs for lenders who provide federal loans.
Require institutions to inform would-be borrowers of private loans about their options for receiving federally subsidized and insured loans.
Prohibit colleges from letting providers of private loans use their names, logos or other representations in promoting those loans.

Congressional aides and financial aid experts have been debating in recent weeks how much latitude the Education Department has to regulate the private student loan market; some Republican lawmakers have reportedly discouraged the federal government from getting involved. But while the legislation the House will take up as soon as today would stop far short of restricting the terms of private loans, as some advocates for consumers and students have advocated, it would make at least an initial foray into regulating such loans.

In other developments related to the burgeoning loan scandal Tuesday, the Education Department announced that Shaw would step down. Spellings said that Shaw had made the decision to leave in February, before the loan scandal intensified, and Shaw herself has not been directly implicated in any wrongdoing thus far.

But she is among the top department officials who formerly worked for Sallie Mae, at a time when the department is facing significant criticism for what critics say is its lax regulatory oversight of the student loan industry. Spellings praised Shaw in a note about her departure, which planned for June 1, and department officials insisted the change was unrelated to the loan scandal. But with Spellings under pressure to show that she is getting the department’s house in order, the departure of Shaw is likely to be portrayed as proof that she is doing — or trying to do — something.

Said Kennedy in response: “The announcement of Terri Shaw’s departure has come during a time of crisis for our student loan system. A number of serious questions have been raised about Federal Student Aid’s ability to ensure the integrity of the student loan system, screen high-level employees for inappropriate entanglements with the lenders they oversee, and protect the privacy of students’ personal data from exploitation by lenders. Secretary Spellings must do all she can to assure Americans that the next director of Federal Student Aid will work aggressively to correct these problems and safeguard the best interests of students and families.”

Also Tuesday, Collegiate Funding Services, part of JPMorgan Chase, said that it would end relationships with more than 100 alumni associations in which the groups receive a share of revenue from the lender for all consolidated loans that they help market to their members. Cuomo took aim at similar arrangements between another lender, the National Education Loan Network, and alumni associations last week, and JPMorgan said it was ending its relationships as part of the agreement it reached with Cuomo in April.

— Doug Lederman

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Comments

ED-OIG is also at fault!

The Inspector General of Education is also at fault for the Student Loan crises. Sure John Higgins now says ED-OIG will look into it, but the Inspector General was already tasked to look at NSLDS and other student loan activities in its workplan, through their ITACCI (information technology audits and computer crimes investigations) Division, but Charles Coe and Kenneth Sardegna both of ITACCI, were too lazy to do so. Now look what’s happened; Theresa Shaw is getting all the blame. To get proof of this, all one needs to do is FOIA request the last few ED-OIG annual workplans. These may be obtained through Nancy Brown202-245-6934, Tara Porter 202-245-6588, or Derrick Franklin 202-245-6912.

Nancy, at 7:40 am EDT on May 9, 2007

plenty of smoke, no fire

We’ve been working on completing Reauthorization of HEA since the Hoover Administration, with no resolution in sight. Mix in one crusading AG, a little window dressing from cowed lenders, a couple of sacrificial lambs and presto, legislation is created.

Never mind that the legislation doesn’t address any of the major problems with financing a college education. Yes, it’s good to get rid of the more egregious practices like opportunity pools. But real assistance for students and parents who genuinely cannot pay for college? Forget it. Real assistance for public 2 and 4 year schools, HBCUs, robust distance learning? Nope.

Just keep wringing wealth from the vast middle class for college, out of all proportion to the value of the education provided. LEGALLY MANDATE a fine-tooth review of the financial details of a family through the FAFSA, just to make sure that no loose change goes unaccounted for.

Really, can anyone think of any other purchase Americans make—including the very mortgages on their homes—that permits the seller (and that’s COLLEGES, folks, not evil banks) such commanding pricing power?

finaidfollies, at 8:00 am EDT on May 9, 2007

Lemmings?

” .. can anyone think of any other purchase Americans make .. that permits the seller (and that’s COLLEGES, folks, not evil banks) such commanding pricing power?”

Exactly! While the aluminum foil hat crowd complain about issues old and absurd — they ignore the 900-lb problem in front of them —

* College has been over-sold (Geo. Leek, R. Vedder), in part by the Duke Power case and relying on past data.

* A college degree does NOT — not, not, not — guarantee anything. Ask Bill Gates, Paul Allen, Steve Jobs, and Michael Dell.

http://www.nytimes.com/2007/05/08...p;en=95de6d8930e03b64&ei=5087%0A

* There are too many colleges, chasing too few students — supported ONLY by taxpayer-subsidized federal loans.

* College costs have been racing above the overall rate of inflation for a decade. Why?

My advice to my nieces: don’t be a lemming. Slow down. Take your time. And do NOT sign any loan documents without outside review — you’ll be “on the hook” for years, a sometimes-painful lesson in discipline.

L.L., at 9:15 am EDT on May 9, 2007

Re the above comment: “College costs have been racing above the overall rate of inflation for a decade. Why?”

Well, some years ago Bill Bowen did a study of tuition increases at Princeton since 1900 and discovered that, on average, they increased at a rate of CPI+2% over virtually a century. Why?

Also, private secondary school tuitions, where there are no government subsidies, are also increasing at the rate of 4-6% and higher more recently. Why?

These are difficult questions that defy simplistic answers. As Bowen’s work and the secondary school increased demonstrate, there is something about the cost of supplying a quality education that makes it difficult, if not impossible to achieve within the simplistic benchmark of the CPI.

a dc observer

dc observer, at 1:40 pm EDT on May 9, 2007

Shaw’s replacement

Qualifications to run the federal student loan program:

1. Believes only the worst in the business community (possible exceptions being IPods, FedEx and the New York Times) and sees little value in anything it has brung or will bring in the future to the loan program (but will continue to use innovations already introduced)

2. Possesses belief that the government can competently run a loan program four times the size of the direct loan program or is indifferent to the potential deterioration in service and loss of services now provided to schools and students by lenders

3. Owns no stock in any publicy traded company or mutual fund

4. Is neither a member of an alumni association nor has a “dear old alma mater”

5. Has no experience in the financial services industry

6. Has never accepted a coffee cup, calendar, pen, or tee-shirt from a salesperson, let alone attend a baseball game, play golf, or have dinner with a salesperson

7. Can stay up past 11 PM and has a driver’s license

FunnyBone, at 1:45 pm EDT on May 9, 2007

Real-politik

” .. Well, some years ago Bill Bowen did a study of tuition increases at Princeton ..”

Princeton — private Ivy League college with huge endowment.

Yes — the problem of rising costs are in the big, government-owned mega-universities. I stand corrected.

Snooty, ivory-tower Beltway answers fail to answer the immediate crisis: the obvious rising debt load of “Generation Debt.”

http://search.barnesandnoble.com/...?z=y&EAN=9781594489075&itm=2

(BTW: aforementioned author attended an Ivy with a grandparent’s aid. Nice.)

When one is laboring under such a rising debt load — one would be happy to deliver a high-decibel load of curse words to the Beltway crowd’s ears. To wake that crowd up.

Looking forward the Beltway crowd, visiting the heartland to get an earful. The “same ol’, same ol’” and “good enough for government work” are not going to suffice.

L.L., at 2:00 pm EDT on May 9, 2007

Oops

I mean “brought.”

FunnyBone, at 2:35 pm EDT on May 9, 2007

Not much smoke, no fire and no new clothes for the emporer

I will agree with follies about the fact that an oppertunity to discuss the greater picture is passing us by...but then it was never the intent of the clammering politicians in the first place. “Piling on” for political gain is the sport we are playing here folks.

As far as college costs are concerned, well colleges may be the last place the American worker has a shot at making a living wage, and it really p.o.’s many ultraconservative business types that the folly of “at will’ employment can’t be brought to bear in a more draconian fashion aimed at “educated liberals". And right there is the justification for college, high tuition and higher wages. Just ask the unions if they wish they had some of their clout back.

R.F., at 2:35 pm EDT on May 9, 2007

Terry Shaw’s resignation

I think it’s deplorable the way Terri Shaw is being set up as the fall person. I’ve worked with Terry in the past, and she is a solid, hardworking and honest federal official. If we want good people to work in government, we better quickly stop treating people the way Terry Shaw is being treated. The timing of this announcement appears to have been deliberately done to protect the Secretary and to imply that Terry Shaw is to blame, the contents of how the Secretary made the announcement notwithstanding. This is not the way good public servants should have their departure announced.

Richard Jerue, President at Art Institute of Charleston, at 2:35 pm EDT on May 9, 2007

Goodbye lender lists

I’m all for putting an end to the free-for-all that brought about this scrutiny, and had ED been playing its proper role as enforcer rather than protector of the big lenders, it wouldn’t have reached this point. But this piece of legislation is going to have unintended consequences.

Faced with more scrutiny, reporting requirements, additional procedures and potential liabilities, it’s not hard to imagine many colleges throwing their hands up in the air and saying “no more preferred lender lists.” What students will be left with then is a combination of Google searches and unfiltered direct-to-consumer marketing, which will simply make them easy pickings for fly-by-night snake oil salesmen.

Then everyone will blame the colleges for not protecting their students’ interests, and a few years from now, a whole new generation of students will be asking why we can’t provide lists of lenders we recommend.

DS, at 4:20 pm EDT on May 9, 2007

What’s the REAL Problem?

The real problem is that students have easy access to taxpayer-subsidized loans.

And because that money flows so easily, colleges have zero incentive to keep prices down.

So what we have now is students graduating with liberal arts degrees and $30,000 in student loan debt.

Should they feel ripped off? Most definitely.

Is it the lenders fault? No.

The schools are over-charging and under-delivering. And to make matters worse, curriculums are often being dumbed-down to keep admissions as high as possible.

The annual cost of tuition and books should be based on a percentage of what the student can expect to earn with the degree they are pursuing. Imagine that!

Something else to think about:

The personal computer has revolutionized every industry in the world. Sharing information is less expensive and more efficient. Everything takes less time and fewer people are involved in production.

But the cost of higher education hasn’t been affected by modern efficiencies at all. Why not?

With the Internet, email, and PCs, why does college still require four years of study?

With CD-ROMs and Web sites, why do we require students to spend $80 on a math textbook?

The problem here isn’t a funding issue, it’s a cost issue.

Unfortunately, that angle is being ignored.

Jim, at 4:35 pm EDT on May 9, 2007

Here’s a simple yet powerful explanation as to why tuition is skyrocketing at a rate greater than inflation: Demand. Every year, applications rise at these same colleges and universities who are raising their prices at near-insane rates. And every year, more people are willing to pay for it. Student loans make students both willing AND able to attend school, so don’t expect tuition to drop anytime soon.

It would be interesting to see how these calls for government intervention on this would actually be possible and, if possible, how popular would a measure of control like that be in the eyes of the American public? Market forces are a huge factor when considering students’ needs for federal education loans, and those market forces are difficult to ignore.

Allen, at 5:50 pm EDT on May 9, 2007

Rick Jerue

I second his comment. If it weren’t for dedicated professionals like Ms. Shaw and certainly others, the student loan program might very well be on the GAO’s and OMB’s high risk list. Cohort default rates could still be in the teens.

adwhite, at 5:50 pm EDT on May 9, 2007

P.S.

” .. Just ask the unions if they wish they had some of their clout back .. “

Does that include the union members who voted for Ronald Reagan? Remember: he was president of the Screen Actors Guild.

Why are college costs rising faster than inflation? Read Vedder (Ohio U.).

http://collegeaffordability.blogspot.com/

Also Geo. Leek.

http://www.popecenter.org/

Again: the “same ol’, same ol’,” just will not work. That is why the U.S. is in the financial mess it is in. Like this —

http://detnews.com/apps/pbcs.dll/article?AID=/20070510/SCHOOLS/705100442

L.L., at 7:00 am EDT on May 10, 2007

I would hope that readers have enough sense to know that the Education Department and its programs have been a partisan tetherball since its inception. This is just the latest act in a long running kabuki dance. I find it absurd that there is suddenly outrage and mystification about widely known industry practices.

One other thing, Theresa Shaw is an honorable person, whose integrity is beyond reproach. I applaud her track record and public service.

Mark Carney

Mark Carney, at 7:52 am EDT on May 10, 2007

OUTRAGE

What is so outrageous to me is that congress can take litteraly a couple weeks to act on something like this but years to get people into a home from Hurricane Katrina. There are still 100’s of empty trailers sitting in a lot that have not been cleared for people to live in because of some stupid loop hole in government system. And they say they are worried about the poor? They are worried that one private loan is one less loan for the government program sounds like to me. With all of the things missing in this country, of all of the problems with the hungry and the poor, and children in hopeless situations, we could be as quick to move as we are in something that isn’t actually hurting anyone at all is so outrageous to me. Millions of my tax dollars have went to hurricane victims but very little has gotten to them. Millions of my tax dollars has went to subsidized student loans and I am thankful that people are able to get something from that and hopefully be a contributing citizen to our great country of choice and freedom. I would rather live in this country and have my tax dollars subsidize loan programs than a country that as a woman I cannot even go to school. We are nothing more than a bunch of spoiled rotten American’s without one thought of how much we have to be greatful for. Schools that use the government programs, thank you for even having a program. Schools that have private programs, thank you for all my opportunities also. If it weren’t for student loans, I would not have my degree because I would not have been able to pay for it. If I did not live in a country of freedom, I may not have even been able to attend college. I do have a roof over my head; I am not living in fear of bombs dropping on my house; I am not fearful of being able to feed my children their next meal let alone a meal for the day or even week; My child is not in foster care because I am strung out on drugs because where I came from I very well could have been that kind of mother.

I have so much to be thankful for. Come on people, why can Washington move so fast on something like this and yet so stupidly slow in every other area where tax dollars are involved? I just have to conclude that the only reason they have moved this fast on something can only be for one reason and that is their own agenda. I am sorry but that is the way it seems to me as I read all this stuff you all are writing. I as an outsider am reading between the lines. Governments have been using big banks for “kickbacks” or as someone else said “donations” for years. This has to be about a conflict of interest here. There is no way they are concerned about students and parents. No way! If they were so concerned about people, those trailers sitting in that lot in NO, would be full of families of people instead of families of spiders and mice.

Katrina, at 1:15 pm EDT on May 14, 2007

nothing “honorable” about those leaches

It was said that no one guarantees you a job when you get a college degree. What happens if you can’t find a job or get a disability? The good old corrupt DoE says it doesn’t matter, you still have to pay the loan back.I have been disabled for 15 years. I can’t work, my original $10000 loan has had dubious fees and interest attached to it. and is now $27000. My disability payments and social security are garnished. What was the name of that “honorable” employee of the corrupt DoE? “Mud".

see www.studentloanjustice.org

Nicholas, Mr. at Broward Community College, at 10:10 am EDT on May 29, 2007

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