Education Department, on the Case

For months, leaders at the U.S. Education Department have battled the impression, fostered by Democratic members of Congress and New York Attorney General Andrew M. Cuomo, that the Bush administration did far too little to regulate the behavior of lenders and colleges until its hand was forced by the burgeoning scandal in the student loan industry.

Margaret Spellings challenged that view in May testimony before a House of Representatives committee. And on Monday, department officials delivered their latest defense during a session in which they briefed members of the National Association of Student Financial Aid Administrators about their recent activities on a range of fronts.

Not only did the administration officials look to the past -- suggesting that the department had actually been out in front of Congress and Cuomo in trying to crack down on preferred lender lists and improper inducements from lenders to colleges -- but they also signaled that they are getting more aggressive in their oversight of the loan programs. The overall message from department officials – which seemed aimed as much at the representatives of Cuomo’s office in the audience as at the financial aid administrators themselves -- was, “We’re on the case.”

Jeff Baker, who directs the policy liaison and implementation staff in the Education Department's Federal Student Aid office, said at Monday's session at the NASFAA annual conference that the department had sent letters late last month (a sample of which is available here) to more than 900 colleges where at least 80 percent of the institution's federal student loan volume is held by one lender.

Critics have argued that a single lender’s domination of a college’s loan volume (often a lender on its list of “preferred lenders”) raises a red flag, suggesting that the institution is directing prospective borrowers to that lender and raising questions about why. Many of the institutions that have been found to have revenue sharing agreements with lenders, for instance, had directed much of their loan volume to those lenders, with the implication that they were doing so to get a cut of the loan funds.

Baker said the department had identified the 921 colleges that received the letters during a review of data from the National Student Loan Data System. He characterized the June 29 letters less as a warning than as a "friendly" reminder that colleges and universities are obliged to ensure that students know that they are free to choose any lender they wish, and to encourage them to review their practices to make sure that they are following federal rules and laws. The letter, he noted, mostly mirrored a message that the department relayed to all colleges in a Dear Colleague letter in late March.

“We weren’t out to get anybody,” said Baker, noting that the department did not plan to follow up with the colleges involved. But he added that the letter was meant to imply that “if you had 80 percent [going to one lender], maybe you weren’t right with the spirit of the regulations.”

Asked if the June 29 letter represented an uptick in the department’s oversight of the loan programs, Baker said: “It’s our obligation to make sure our schools are in compliance. This is what we do.”

It's what they're supposed to do, but not necessarily what they've done sufficiently, as critics see it. Department officials have been bashed repeatedly in recent months as revelations have poured out of investigations by Cuomo’s office and those of U.S. Sen. Edward M. Kennedy and U.S. Rep. George Miller, revealing questionable practices (including payments from lenders to college officials, in the extreme) that, the critics say, might have been uncovered had the department met its obligations to oversee the loan programs.

“I agree with New York Attorney General Andrew Cuomo, who testified before this committee last month and said that the Department has been ‘asleep at the switch’ when it comes to overseeing the federal student loan programs,” Miller said at the May hearing at which Spellings testified.

Spellings said then -- and Baker and other department officials reiterated the argument at the NASFAA meeting Monday -- that the department had actually jumpstarted scrutiny of the loan programs by initiating a federal rule making process last August that, among other things, examined improper inducements by lenders to college officials and the practices colleges use in putting together their preferred lender lists.

That was long before the investigations by Cuomo, Kennedy and Miller began cranking out almost daily findings of real or perceived conflicts of interest and other questionable behavior by some lenders and student aid officials, which have prompted legislation at the state and federal level in recent months, Baker and Dan Madzelan, another department official, said Monday. Madzelan described the "sea change" that has occurred in recent months in scrutiny of the loan programs, and “the world caught up to what we were concerned about and what we were trying to address in negotiated rule making,” he said.

The suggestion that federal officials had led the way in cracking down on improper behavior in the loan programs brought a swift negative response from the department’s critics.

Melissa Wagoner, a spokeswoman for Kennedy, said that while the senator did not formally introduce his loan reform bill, the Student Loan Sunshine Act, until November, the legislation was drafted in August, the same month in which the department announced that it was beginning its rule making process. And more importantly, Wagoner said, “systemic reform of the student loan industry … is a topic Senator Kennedy has talked about for many, many years.”

Michael Dannenberg, director of the education policy program at the New America Foundation, characterized the department’s scrutiny of colleges with one dominant lender as a “positive sign,” but said the Department of Education “still has a long way to go when it comes to oversight of the student loan program…. We’ve had scores of critical news stories, multiple investigations, firings and resignations of financial aid officials, reports of kickbacks, stock options, cash payments, and luxury gifts being offered by lenders to college officials and yet not one lender has been disciplined by the Department of Education. Why has Student Loan Xpress, which gave insider stock to leading college and federal officials, not been disciplined by the U.S. Department of Education?”

The loan programs aren’t the only area in which the Education Department seems to be ramping up its oversight. Also on Monday, Baker said that the department had sent letters to about 300 college presidents and chancellors, noting that their institutions had fallen short of the requirement that at least 7 percent of their federal work study funds go to students participating in community service.

“This is serious stuff here,” Baker said, noting that there are the “possibility of sanctions,” and that “we are obligated to enforce [the requirement], and we will.”

Quote of the Day: “We may all lose a few pounds on the Cuomo Code of Ethics diet.” -- Pat Watkins, director of financial aid at Eckerd College, suggesting during a conference session Monday -- after a colleague urged financial aid directors to oppose restrictions on their relationships with lenders -- that giving up a lender-paid meal here and there isn't such a big price to pay for an improved public image.

Coverage of the NASFAA meeting will continue tomorrow.