May 11, 2007

Sparring With the Secretary

Defiant where others might have been contrite, Margaret Spellings largely defended the Education Department’s handling in recent years of perceived wrongdoing in the federal student loan programs at a House of Representatives hearing on Thursday. Her defense did not go over well with the House panel’s Democratic leaders, who subjected the education secretary to intense and sometimes hostile questioning.

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It’s possible that nothing Spellings might have said could have produced a different outcome; the chairman of the House Education and Labor Committee, Rep. George Miller (D-Calif.), has been stepping up his criticism of the department’s oversight of the loan programs in recent weeks, and his opening statement — written, obviously, before Spellings uttered a word — asked whether the department’s “monumental ... oversight failures” represented “simply laziness,” “incompetence,” “a deliberate decision to look the other way,” or “a failing more sinister than that?” Not exactly a tone suggesting that Miller and other Democrats were looking for a way to make nice with the secretary.

Even so, Spellings’s stance — vowing to work with lawmakers to fix the problems going forward, but insisting that the department had done pretty much all it could in the past — almost seemed designed to turn up the antagonism level in the room. It certainly had that effect.

Spellings’s own opening statement noted that rather than doing nothing about possible conflicts of interest and other misdeeds, as Miller implied, she had initiated a process last fall aimed at crafting new federal rules on lender-college behavior, and that she had done so after Congressional leaders themselves had discouraged her from doing so. “I invited this committee and its counterpart in the Senate to suggest people to join in this process,” Spellings said. “At that time, Mr. Chairman, you and other members of this committee sent me a letter requesting that I delay further action until Congress could act.... [I]n the absence of completed Congressional action, it’s been my duty to expedite reform.”

The secretary’s implication: I stepped in because you had not. Spellings noted that although participants in that rule making process had failed to reach agreement on new restrictions on the relationships between lenders and colleges, she planned by month’s end to propose new federal rules that would ban lender gifts to financial aid officers, limit deceptive marketing by lenders, require colleges’ lists of preferred lenders to contain at least three providers, and “ensure that every borrower has the right to choose any lender.” Those changes, which could be in place by November under the secretary’s rule making approach, are similar to reforms that would result from (Miller-led) legislation the House passed Wednesday, which will become law only if the Senate eventually passes a comparable measure.

Spellings said her decision to begin the rule making process will have “jump-started the regulatory process.” Spellings also noted that she was convening the heads of other federal agencies (like the Federal Trade Commission and the Federal Deposit Insurance Corp.) to look into how the government might better regulate the private student loan market, and for that moment, at least, she argued somewhat persuasively that the department had taken meaningful steps to attack the student loan industry’s problems.

The moment did not last, though. Under the questioning that followed, Miller turned back the clock, asking what steps Spellings (who joined the department in early 2005) and other department officials had taken in response to an August 1, 2003 memo in which the department’s assistant inspector general discussed allegations that Sallie Mae and other lenders had offered possibly illegal “inducements” to colleges in exchange for their student loan business.

The memo said that the inspector general’s review had concluded that “there are bargaining practices between schools and lenders for [Family Federal Education Loan Program] preerred lender status and private loan volume that should be addressed through statutory and regulatory changes or further department guidance.” The auditor encouraged the department’s political leaders to consider proposing a toughening of federal law governing such inducements and to consider whether existing laws and rules applied to the rapidly growing private loan market.

Instead, Miller said, documents his office had collected show that department officials decided to monitor “the higher education and lending communities’ efforts to reach an agreement on lender inducements” and, pressed further by the inspector general, to review agreements between lenders and colleges to “determine to what extent they are inconsistent” with federal laws and regulations.

If the department engaged in any kind of serious monitoring, Miller said, “I just don’t quite understand ... how it was that they didn’t pick up any of these activities” that recent investigations by Congressional leaders and state attorneys general, most notably New York’s Andrew M. Cuomo, have shown to be occurring between lenders and colleges. “Who was auditing? Did they have blinders on?” Miller asked pointedly.

At that point, Spellings got legalistic. Much of the alleged wrongdoing that Cuomo and others have pinpointed — which Spellings said troubled her — had occurred in the private loan program, over which federal law does not give the Education Department authority to regulate, she said. Other federal agencies — the FTC and the FDIC — might have authority over those loans, she said, but not the education agency.

And for the department to prove that some kind of payment or other inducement was illegal, Spellings said, there is a very high “hurdle that must be cleared” to show that there is a “quid pro quo relationship between the awarding of a particular loan and a cruise on New York harbor,” citing one high-profile example of a lender-financed benefit for college financial aid officers that Miller has cited in recent days. (Spellings said there had been a handful of cases, about which she did not provide details, in which the department had pursued legal action against lenders for allegedly offering inducements.)

That argument set off Miller, who said that just because the department might not have been able to prove that illegal activity took place doesn’t mean that its officials shouldn’t have been sounding the alarm about the practices in some other way — at least through the bully pulpit.

It’s not about “proving that in a court of law,” Miller said. How come “nobody from the Department of Education showed up at the front door” of colleges or lenders that might be engaging in behavior that the department thought might be unethical, even if it couldn’t be proved illegal? he wondered. Did department officials contact the trade commission or the Securities and Exchange Commission if its officials thought private lenders were acting badly?

Can the department really claim, he continued, that it has no authority to look into the activities of private lenders when many of them are also participants in the federal loan programs? And, Miller added, when some of the inducements — he especially cited loan funds, known as “opportunity pools,” that Sallie Mae and other lenders had allegedly provided to colleges for their high-risk students — were offered in part to get them to leave the government’s direct student loan program, over which the department clearly has authority?

“Why no Dear Colleague letter, no phone call” to warn colleges or lenders about their possibly inappropriate practices? Miller asked with increasing agitation. “How come nowhere in five years of monitoring did anybody make an effort to call a halt to these practices?”

Miller’s rhetoric seemed to be getting tougher by the minute, but Spellings was saved by the bell. With votes pending on the House floor, the investigative hearing broke up at that point for 45 minutes, and by the time the session reconvened, Miller’s 20-minute question period was almost over. He began a new line of questioning over the department’s decision last year to let the National Education Loan Network keep $278 million in subsidies it had gained improperly through a loophole in federal law, a settlement Spellings said she had reached because she feared the department might face a lawsuit from the lender that could cost it more than $1 billion in additional funds.

“As a matter of prudence, I mitigated against the $1 billion that might have been incurred had we lost that lawsuit,” Spellings said. Miller closed his questioning by saying that the Department of Justice was looking into the Education Department’s decision to settle that case, and at that point, Spellings faced a much friendlier line of questioning from the panel’s top Republican, Rep. Howard P (Buck) McKeon, who asked her, among other things, if she had ever imagined that “you were expected to be the ethics police” for the nation’s colleges and lenders?

“I think the academy has a role to play here, and in fact should be playing here,” Spellings said. “I frankly have found the silence in some cases to be a little deafening.”

Other lawmakers from both parties took their turns questioning Spellings, with Democrats generally bashing her for the department’s perceived pro-lender decisions (among other things, including the department’s oversight of the Reading First program, which was supposed to be a co-topic of discussion but was overwhelmed by the loan scandal), and Republicans alternately taking shots at what they described as Cuomo’s headline-grabbing tendencies and taking pains to point out that abuses in the student loan programs almost certainly had their roots in earlier administrations, notably the Clinton era.

But while the hearing churned on into the early afternoon, most of the day’s drama had occurred in the initial interchange between Spellings and Miller. It seemed unlikely to be their last tangle.

Cuomo’s Latest

At one point in Thursday’s hearing, Miller, who praised New York’s Cuomo at several points, announced that the New York official had added to the list of accomplishments in his ever-expanding student loan inquiry. Cuomo announced Thursday that he had reached an agreement with the CIT Group, parent company of Student Loan Xpress, which had been accused of making payments and grants of stock to student aid administrators at several colleges that have the company on their lists of preferred lenders.

Under the agreement, the loan company agreed to pay $3 million to a fund Cuomo has established to educate potential borrowers about their loan options, and, importantly, to cooperate with Cuomo’s continuing investigation into possible wrongdoing by student aid and Education Department officials.

— Doug Lederman

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