June 15, 2007

A ‘Systemic’ Scandal

As the student loan scandal has unfolded in recent months, college financial aid officers and their advocates have repeatedly dismissed the hysteria as a case of a few bad apples in an ethical orchard. But a report released Thursday by Senator Edward M. Kennedy’s (D.-Mass.) office churns some cider out of that argument, naming a large number of colleges that have accepted or even solicited inducements from lenders — often offered with the expectation or explicit agreement that the institution would grant said lender preferential treatment.

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The “Report on Marketing Practices in the Federal Family Education Loan Program” goes so far as to suggest that colleges are regularly accepting inducements provided in violation of federal law (although a lawyer for the national association of financial aid officers, Sheldon E. Steinbach, said that nothing that’s turned up so far seems to be clearly illegal).

“[M]any lenders in the FFEL program,” the report says, “routinely engage in marketing practices that violate the letter and spirit of the inducement prohibition of the Higher Education Act” – which, the report also notes, bars not only “a consummated quid pro quo deal, but the mere offer of such a deal.”

“Schools and financial aid offices often solicit, and lenders provide, various types of in-kind compensation — compensation that could otherwise be used to reduce students’ loan burden,” the report says. It adds that while, “[i]n many cases, these ‘favors’ are not solicited by financial aid offices and have no apparent impact on the advice that financial aid officers provide … [g]iven the crucial ‘gatekeeper’ role played by financial aid officials, solicitation of any benefit not explicitly permitted by existing law creates an appearance of conflict of interest, undermines students’ trust in the process, and magnifies the risk of illegal quid pro quo deals.”

The Kennedy report does document some of the more egregious and well-known alleged conflicts of interest at places like Columbia University, Johns Hopkins University, the University of Southern California and the University of Texas at Austin — at the latter, the report notes, for example, the “office and its leadership prioritized lender treats over competitive pricing and borrower benefits in deciding which lenders would be at the ‘top of the preferred lender list,’ and only allowed lenders access to the top of the list if they provided certain extraordinary personal benefits to the [UT Austin] director and his staff” (including staff happy hours, lunch “and/or” dinner with the former director, Lawrence Burt, parties for Burt’s family and “tequila and wine”).

But beyond such an extraordinary example of a university soliciting inducements, the report considers all sizes of solicitations — everything from the University of Puget Sound requesting “pens, pencils, note pads, magnetic clips or post-it notes” from NorthStar to include in a care package for a business officers’ meeting, to Chaminade University allegedly asking Citibank to host eight receptions for admitted students, at a cost of $2,000 apiece, in exchange for business.

The report includes spreadsheets illustrating the scope of lenders’ marketing expenses, some in the several hundred dollar range but others worth thousands.

To give just a few examples: Chase spent $468 on golf towels for Florida Junior Community College, $1,174 for 405 foldable wallets for Ursuline College and $3,239 on printing costs for DeSales University’s marketing portfolio. Bank of America spent $5,000 to sponsor a Temple University golf tournament, $21,242 to sponsor two University of California at Los Angeles “Regents Scholarship Receptions,” and $300 for a catered lunch at Arkansas State University’s financial aid office. U.S. Bancorp spent $15,000 for direct access marketing to incoming students at Washington State University, College Loan Corporation paid $494 for dinner at a conference with “key target schools,” and NorthStar $450 for “global stress yo-yos” for the Medical College of Ohio.

Beyond that, the report outlines how “lenders routinely offer, and schools solicit” what the report calls “sweeteners,” and what industry calls “value-added services.” For instance, internal documents suggest that lenders offer banking services to colleges as part of a strategy to increase their market share (including, specifically, at historically black colleges and universities), and they “routinely” pay for printed materials, with the Bank of America for instance spending $8,777 for a print job at Mansfield University in December.

At colleges that outsource exit counseling for student borrowers to lenders, the report finds that “lenders frequently use this opportunity to market loan products to students rather than offering unbiased financial advice as the statute and regulations prescribe.” And, on a related note, the report details in great depth the compensation for financial aid directors chosen for loan company advisory boards — who are often selected, the report argues citing internal loan company documents, based “at least in part, on factors having nothing do with their expertise but everything to do with business opportunity.”

Again, just a sampling of some of the costs paid by lenders to host advisory board meetings, billed as opportunities for professionals to, of course, advise the industry on practices: According to the report, Citizens Bank spent about $43,000 in 2005 for a three-day meeting in Phoenix, including more than $15,000 on food and $1,500 in spa treatments, Chase spent almost $18,000 on food and beverage alone during a three-day meeting in San Diego in October, while Nelnet even offered to make donations to an advisory council participant’s alma mater or college of choice. The report also details some consulting fees collected by individual financial aid officers, listing for instance thousands of dollars in fees and reimbursed expenses paid by JPMorgan Chase.

A spokeswoman for the National Association of Student Financial Aid Administrators — which, while having backed off a bit from its initial harsh rhetoric criticizing the various federal and state loan investigations, has still generally stuck by its argument that the problems are limited in scope — said that only the president, Dallas Martin, could speak to the report and that he would not be available until next week.

Steinbach, the lawyer who represents the association in its dealings with New York Attorney General Andrew Cuomo (who has led his own national investigation into lending practices), reiterated the “rotten apples in a barrel” argument Thursday. A college that accepted several thousand dollars from a lender for a golf tournament, for example, was acting in a culture where that seemed “perfectly acceptable,” Steinbach said. “Now there isn’t a school in the country that I know of that would accept that kind of gift.”

“It was acceptable at the time,” Steinbach stressed. “The senator has made tremendous impact on the student loan community and colleges and universities and has dramatically altered the moral and ethical standards — along with Attorney General Cuomo — in which gifts and other benefits that were provided to institutions will no longer be accepted in any way, shape or form.”

While not all of the institutions named in the Kennedy report could be reached, a couple of the colleges contacted Thursday took issue with how they were represented in the report. For instance, the report describes a 2005 letter from Texas Tech University to its already selected preferred lenders indicating that the cost to be listed as a preferred lender on the financial aid Web site would be $500 ("Please allow this letter to serve as an invoice").

In a statement Thursday, Texas Tech described the $500 fee as an optional cost for lenders to advertise with a logo on the Web site. “No advertising impacts the ranking of the lenders,” the university said in a statement. “Any lender that opted out of the advertising opportunity was still listed … on Texas Tech’s lender list without a company logo.”

The report from Kennedy, chairman of the Senate Committee on Health, Education, Labor and Pensions, also implies, at least, that Duquesne University accepted free legal services from PNC Bank, although a spokeswoman, Bridget Fare, said that the institution had rejected the bank’s offer.

Others contacted said the report, and its many examples of alleged wrongdoing, was indicative of a need to clarify appropriate activities.

“In general, the university is supportive of the work of this committee, as well as the work of a lot of others who are involved in reviewing current practices around lending activity and who are being thoughtful about how to implement reform,” Sherry Mondou, vice president for finance and administration at the University of Puget Sound (cited in the report for the post-it request), said Thursday. “I do think clarification, conversation around these issues is going to be helpful to a lot of very well-intended financial aid professionals who I think are working for the benefit of students and wanting to do their work with a great deal of integrity.”

“Chairman Kennedy’s report underscores the urgency in Congress [of] passing legislation that will increase transparency and clarity in the federal student loan program,” added Kevin Bruns, executive director of America’s Student Loan Providers, in an e-mail. “It’s important that Congress and the stakeholders work together to pass a bill that both protects the interests of borrowers and strengthens the public’s trust in the financial aid system.”

Also on the always busy student loan front Thursday, Cuomo announced a $1.125 million settlement with Johns Hopkins University, a result of Cuomo’s findings that the university’s former financial aid director, Ellen Frishberg, promoted Student Loan XPress after receiving more than $65,000 in consulting fees and tuition payments. Johns Hopkins agreed to abide by Cuomo’s code of conduct, though indicating in a statement that, under the terms of the agreement, the university explicitly denied violating New York law.

— Elizabeth Redden

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Comments

This is just one big mess. Who cares where the money comes from just as long as students get the aid they need. Rates are not different regardless of where they go. FFEL lenders or Direct it doesn’t matter the rates are regulated the same. Inducements? So what? Everything is an inducement! Just turn on the television or read a magazine or see a bill board. How about the lending program itself? Consolidation is an inducement by fixing rates and getting a reduction. How is the student loan borrower harmed? Sounds like a bunch of nothing. Thank goodness there are plenty of lenders able to assist borrowers with re-payment and interest rate reductions. After school is where the help is needed most. Who cares who does what to give a loan to a needing student, it is still all federal and the rates and terms and conditions are still the same (private loans excluded). Lets worry about the cost of education instead of lenders who want to give the money.

rtp, at 12:10 pm EDT on July 13, 2007

Imagine....

....if the lenders used all that money to provide better rates and fair treatment for students instead of using it to bribe college administration with gifts and spas.... The problem of student debt would be on its way to remedy, wouldn’t it?

kgotthardt, at 7:20 am EDT on June 15, 2007

A Mere Pittance

The amount spent on seemingly lavish dinners, pens and Master’s Degrees will utterly pale in comparison to the direct marketing budget lenders will now have to fund if they simply can’t be on a preferred lender list. I’m glad to see the profits going to support the newest pig at the trough: marketers. Gee, I’m sure that certainly will lower interest rates for students and taxpayers....

Ann Doherty, at 8:05 am EDT on June 15, 2007

The past is present

Scene from TV’s “Miami Vice:”

Uniformed cop: “why’d they do it?”

Det. Rico Tubbs: “Simple — m-o-n-e-y.”

One would expect that Mr. Kennedy would understand that. His late father was once one of the richest men in the U.S., of course.

The public’s money demands disclosure and accountability. Period.

Buzz, at 8:55 am EDT on June 15, 2007

Damned if you doo...

Let’s see, if you are an fao and your college president tells you that there will be no increase to your office budget again for the 8th year in a row because congress is railing against “high tuition". And then, congress passes a law that says that colleges must inform students that they are borrowing a loan (an unfunded mandate). Now the fao has to find the money to print 10,000 letters with envelopes and postage and pay staff to sit and fold it all while taking time away from other activities. He or she looks around and see’s a lender profiting mightily from student volume at their college and asks the lender to print the letter and absorb the cost. There are no laws saying that you can’t at the time.

Any MBA program case study would suggest that the fao innovated a way to meet the federal requirement, and did it without adding to the institutions costs. This goes on for 10 or 15 years or so and then the same congress that did not regulate in the first place tells us that we are not really good administrators, instead we are all ethically suspect collaborators in bed with evil profiteers. Hello?!?! I am glad that the congress really only has students best interests at heart. Forgive me if I am just a little incredulous.

Talk about Spin doctors, at 9:45 am EDT on June 15, 2007

Kickbacks

How about this for a kickback: lower my interest rate and dismiss “some” of my student loan debt.

AD Parker, at 10:10 am EDT on June 15, 2007

And when the dust settles and the scandals fall from the headlines, one truth will still remain: students and parents who borrow federal education loans from a private lender pay thousands less than those forced to use the Direct Lending program. This is not an opinion, it’s fact. Lender marketing practices must, and will, change. That’s a given. But don’t lose sight of the forest through the trees. When it comes to providing loans that are in the best interest of the student/parent, Direct Loans are simply not the answer.

BdB, at 10:10 am EDT on June 15, 2007

Business

As I read TK’s report, sounds like business the good ol American way to me. Ok so tax payer money is a part of the fat here. Well how about the money being wasted daily in Washington with our tax dollars. Is TK going to give up any of his lunches, wine, beer, etc while he is convincing his fat belly partners in crime to buy into his DL program; which by the way has nothing for students. If he was so concerned about students and getting what is best for them etc, isn’t this a double standard at best. Why isn’t DL giving students the lowest interst rates right now? Forget borrower benefits lets just give students the lowest possible interest rates possible in DL. You say in one report that lender list are not giving students the truth that they may not be getting the best deal that is out there but at a DL school, they don’t even get ANY such list or choice. There again, double standard. If one more DL person states that it is the best for students I will scream. It is a lie to all students reading this. You have no choice, you have the worst benefit because there isn’t any, and you are forced into a program that gives you nothing back for your investment into borrowing from them.They are saying lenders prey on the poor student when DL isn’t offering the poor student anything better so what the heck are they talking about. Give me a break on the raise in Pell grant. Ok, I will get $100 dollars more a year, if I qualify. Now you have cut into my eligibility for my Stafford Loan and increased what- my eligibility for my alternative loan. Wow, you really did a great job thinking of my best interest as a student; thanks TK. Once again, you didn’t solve one problem other than getting your competitor out of your way. Good Job. Now I would still like to know about your lunches. Since you seem to have pulled emails etc from schools and lenders, we would like to now pull yours.

IHE reader, at 12:25 pm EDT on June 15, 2007

Quid Pro Quo TK

Here, here IHE reader! Couldn’t agree more with you. TK’s anti-lender comments are the ultimate example of the pot calling the kettle black. Yes, let’s see HIS warchest of freebies, comps and honorariums. It would send this lender-school “scandal” to the sideline for sure.

And isn’t it ironic that through all of this, we have yet to discover one single borrower who has been harmed??!!?? Unless, that is, you count the hundreds of thousands who are forced into Direct Lending, thus paying more for their loans while being denied the American right to CHOOSE!

It’s time this argument is turned on its head. FFEL is saving borrowers money. Direct Lending is costing borrowers money. How is THAT in the borrower’s best interest???

BdB, at 1:05 pm EDT on June 15, 2007

When will somebody stand up to TK and show the savings students reap from healthy competition? Why are financial aid people so afraid to stand up for themselves? This is ridiculous. We all know that the real issue here is to pitch DL as the best program for students and to fund other self serving initiatives. You need to fight fire with fire. I don’t know about the rest of you, but I am about sick of this unwarranted attack against the average working person who is simply doing their job. If nothing else, don’t vote for these self-serving hypocrites like TK. Don’t forget that we keep voting these people in.

EFS, at 1:50 pm EDT on June 15, 2007

Is This News?

Let’s see. We have a bureuacracy, with those running it having little if any oversight. This isn’t news. Catching them is news, I guess. Kennedy no doubt decided to investigate because he wasn’t getting his share.

Craig C, political pundit at http://blogresponder.blogspot.com, at 8:40 pm EDT on June 15, 2007

Really do something

See lenders have been doing something as you say gotthardt. They lower the interest rates, they lower the principle, and some even forgive the last six months of your loan if you have made all your payments on time and that is for everyone no matter what field you have enter into. It is sad that lenders had to stoop so low to get financial aid to listen that what they had to offer students was really a great deal. Sometimes however getting them to see that was only thru taking them to dinner or a ball game. However, isn’t that the way all business deals are made? What makes you think that any other thing on a college campus is done any other way? From computers, copiers, books, food service, coaches, and the list goes on and on are all done some place with a business meeting lunch, dinner, or golf. Just because the lender provided the FAO with such things, why did it have to be made out to be a bad thing especially when not one student has gotten hurt and in fact has gotten a great opportunity to select from a list of lenders that gave them a benefit for selecting them as their lender. Ok so it is tax payer money helping to support the ability for lenders to do this for students. Is that so bad giving back to students? Isn’t that what this is all about? So like the above, damn if you do and damn if you do and yes I meant to say exactly like that. Talk about the marketing; I have already seen the commercials hitting the air waves, the phone calls are coming in to students, and thus, it has begun. All TK and his DL buddy did was create a brand new market. An aggresive one. Have you seen the latest from My Rich Uncle? Wow, it goes something like, “pass the financial aid office and borrow directly 100% of your education from us” the financial aid office is corrupt in kick backs etc. Well get ready it is coming. Now students are really going to be getting wonderful advice from dietech.com type companies and the rest for sure.

IHE reader, at 11:05 pm EDT on June 15, 2007

A lengthy report but to what end?

It sure sounds like TK’s overly-energetic staff has wasted an awful lot of time discovering details on what everyone already knew. It will probably be very, very difficult to prove that an individual student or parent borrower has been harmed by any of these cash or in-kind payments changing hands. It is the taxpayer that is hurt; this is a government program, people are making deals in part with taxpayer funds. And, without the photogenic Gen Y borrower who can show harm, this is no longer an exciting news story, so it will soon be forgotten; Andy and TK will move on to the next exciting political issue.

It seems coincidental that the 1998 changes in the guaranty-agency federal and operating funds quickly ushered in an era of waiving fees (under the argument that “it’s federal property so why not give it away because if I can’t afford to make my default claim payments to my lenders then there’s no way Washington will allow me to go belly up anyway). Maybe Andy should look into whether the GAs have been redistributing their funds to their client lenders.

Wasn’t improving access to postsec education the original mission of the GSL program? I don’t recall LBJ saying anything about the great American right of the students and schools to Shop Around for Loan Deals. Thus, at the present time, for lack of a better option, direct lending is the best deal for the borrower. As far as so-called price competition, no one can come up with any examples before the existence of direct lending, except perhaps an occasional on-time repayment benefit that Sallie Mae admitted to the Treasury less than 19% of borrowers would ever achieve. Who’s to say whether things would not return to 1994 once direct lending is gone? In any case, it appears that when Washington reduces special allowance, lenders begin competing on price. Almost counterintuitive. But maybe conservative economists are correct that budget cuts can make education lenders and public school systems “leaner,” more competitive, and higher-achieving.

There have been a lot of Freudian slips about who is getting the better deal from the loan programs. As just one example, wouldn’t the vast majority of borrowers wanting to consolidate have been better off with the immediate 80 basis point reduction that Direct Loan consolidation loan offered for one year (until lenders sued to terminate the feature)? And do lenders really shirk the interests of shareholders to perform charity full-time by using their own money for borrower benefits? If not, then the so-called deals that some schools and borrowers are getting in 2007 is actually taxpayers’ money redistributed partially away from some borrowers and towards others. Or else it simply means that there is too much of the taxpayers’ loose change rattling around, and those who have argued that the special allowance rate is too high, including the Administration, are spot on correct. If a million borrowers were receiving phone calls, mailings, e-mailings, pop-up internet ads, etc., from DL consolidation instead of from consolidation marketers then the shoe would be on the other foot. There would be a lot of calls to Congressmen about The Parity Issue.

Most people believe they can “beat the market.” This is why only a minority of mutual fund investors choose indexed funds. In the case of the student loan programs, they are using taxpayer funds in part to indulge this aim. Shouldn’t we be concerned that one student got one deal while the one next door received a different deal? Is this now the top priority of a loan program originally set up to improve access to postsecondary education? And it was interesting how quickly The Community fought in 1995 to successfully repeal the $10-per-loan payment that direct lending was originally able to give schools to help defray their administrative costs. Why should lenders now be able to give even one penny of assistance to schools, one minute of telephone time or any free software? Level playing field, anyone?

CraigieH, at 6:20 am EDT on June 16, 2007

TK: prove it

“Trust us” just doesn’t work anymore, Teddy. The public doesn’t trust GWB — or you. That has been a serious outcome over trying to control illegal immigration. The public now expects PROOF that something will work.

Just letting DL be run by bureaucrats in state colleges makes about as much sense as turning over IRS and garbage collection duties to them. Colleges need to stick to their mission — education. NOT running loan businesses, housing departments, psych services, etc.

As for private lending for college, let’s be clear: only with co-signers. That is, another set of eyes, to review the matter.

That would probably stop 80% of that lending. Because after calculating the cost vs. the benefit, most would decide they can make more money, fixing cars than making lattes with an English degree.

Buzz, at 8:20 pm EDT on June 16, 2007

Student Loans

If the Direct Loan Program was so wonderful, why is it only 25% of schools are in the program? In addition, when calculating the cost of DL vs Ford, the administrative costs are always left out. I agree with the comment re MRU. However, since parents of most students are the major decision makers regarding higher ed financing, I don’t think they will really make vast inroads. However, the financial aid community and the banks should work hard to counter the false immage that the whole system is corrupt. As to TK and AC, remember the one about people who live in glass houses!

rita, at 12:10 pm EDT on June 18, 2007

Used to be 40% and climbing

DL had, I believe, close to a 40% market share until the lenders decided to woo and court schools back to FFEL since they saw their profits slowly draining away. I’m still not sure why anyone truly believes all of the crapp FFEL does for schools is somehow magically free and for altruistic reasons. It’s a business with shareholders out to make a profit and why that model is running a social program is also still way beyond me.

Ann Doherty, at 8:55 am EDT on June 19, 2007

Admin costs

Since the late 1990s, all the administrative costs of the student aid programs, including FFEL, have been billed to DL. FFEL is such a larger program that there are actually more full-time USDE employees and contract dollars supporting FFEL than DL. Even if DL regained market share, it would not make a difference in administrative costs. It would be like a small bank that manages $100 billion hiring (or, more likely, re-deploying) 10 or 20 staff. A drop in the bucket. USDE student aid employs a few hundred people; Sallie Mae alone is 6000.

Because the interest and fees for direct lending go to the Treasury rather than to banks, the so-called administrative costs of DL contractors and employees are almost irrelevant to the “cost comparison"; those expenses, as well as defaults, would have to be 3x FFELP rates to even it out.

Finally, “DL Administration” has been a convenient way to fund the administration of FAFSA, Pell delivery, campus based delivery, school & lender reviews, nslds, and most other fed’l student aid administration. Ever since the so-called Deficit Reduction Act of 2006, school groups are back in the pre-1993 mode of marching up to Capital Hill to make sure there are enough resources for the govt to get through another FAFSA year. That admin funding is no longer mandatory.

S.S., at 7:35 am EDT on June 20, 2007

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