Advice for the Education Department

Dozens of colleges, lenders and higher education groups have weighed in with criticism and/or approbation of Education Department proposals to alter federal rules governing the student loan programs. Virtually all of those who submitted responses by Monday’s deadline for comments on the government’s proposed regulatory changes expressed overarching philosophical agreement with the need for stronger federal oversight of an industry that recent investigations have found to be impaired by real or perceived conflicts of interest. Arguing otherwise could be a risky position these days.

But most of those who took the time to write expressed some form of disapproval with the regulations, citing a mix of procedural and practical objections to various aspects of the government’s preferred approach. Several commenters said they believed it was a mistake for the Education Department to propose new regulations governing preferred lender lists and lenders' "improper inducements" to college officials at a time when Congress is on the verge of approving new legislation that would change federal laws governing those and other aspects of the relationships between colleges and lenders. Congressional passage of the legislation, which could come as early as September, will require the department to issue a new round of regulations to carry out those changes in the law, meaning that the rules the department is proposing now may never take effect, commenters argue.

“I disagree with very little of what the Department is issuing in this [notice of proposed rulemaking],” wrote David Sheridan, dean of enrollment management at Union County College and chair of the federal issues committee of the National Association of Student Financial Aid Administrators. But “issuing proposed regulations before legislative action is improper. The Department’s interpretation of existing statute as a rationale for issuing these proposed regulations – ‘proper administration of the programs’ -- is way too broad, and in light of pending, more specific legislation likely to become law very soon, writing the regulations before there is a law to regulate will undoubtedly create confusing or even conflicting regulations in the near future.” Ironically, department officials have argued that they undertook the effort to change federal rules governing the loan programs precisely because Congress had been slow to act to change the laws.

Beyond those who questioned either the department's authority or wisdom in issuing regulations at this time, commenters offered a diverse range of viewpoints about proposals that they thought went too far in regulating colleges and lenders, or not far enough. Among the issues raised:

• Several groups of colleges and lenders objected to the department's proposal requiring colleges to include at least three student loan providers on the list of lenders they recommend to students, which they argued is arbitrary and would hurt small colleges. Other commenters, meanwhile, suggested that the proposal would not go far enough in ensuring diversity of choice for students, especially if the department does not specifically ensure that the lenders are not affiliated with one another.
• Some university administrators complained that provisions that would restrict student loan providers from donating funds or providing services to colleges -- provisions designed to prevent abuse from lenders seeking to ensure themselves a cut of an institution's loan portfolio -- would unnecessarily "prevent all forms of support for education from lending institutions," including philanthropic efforts, as Michigan State University argued in its comment about the regulations. And student loan officials and a group of financial aid directors from the Western United States suggested that the department ease a proposed rule that would bar lenders from reimbursing college officials for travel expenses to participate on advisory committees that many loan companies have.
• A large number of colleges protested a proposal that would give the education secretary the right to collect (and keep the proceeds from) all defaulted Perkins Loans, authority that colleges can now voluntarily turn over to the department. This "mandatory assignment" of collection rights would cost some larger universities millions of dollars, they complained -- the University of Miami, for instance, said it had $3.7 million at risk.
• Advocates for students argued that the department's proposals to change how disabled students can win the discharge their student loans have once again "overreacted to exaggerated reports of abuse and made the system even more inaccessible for needy borrowers."

Genesis of the Rules Changes

The proposed regulations the Education Department released in June were the product (at least in part) of a process of "negotiated rule making" that the department undertook last summer.

Negotiated rule making is designed to be the process by which federal agencies develop regulations to carry out laws that Congress has passed. The Education Department was obligated to conduct negotiated rule making to carry out changes enacted in student loan and grant programs as part of the budget reconciliation law that President Bush signed in February 2006. But when the negotiations got under way last winter, it became clear that department officials planned to use the deliberations to step up their oversight of the federal student loan programs, which Democratic members of Congress and New York Attorney General Andrew M. Cuomo, among others, had criticized as inadequate. Some student loan officials complained that the department seemed to be overreaching its authority, but advocates for students applauded federal officials for their newfound aggressiveness.

The federal negotiations over proposed loan rules ended in deadlock this spring, but Education Secretary Margaret Spellings created a panel within the Education Department to craft a set of regulatory changes, and its work formed the basis of the proposed regulations that the department released in June. The 225-page proposed regulations dealt with a broad range of loan issues, including such arcane ones as when a photocopy of a death certificate can be used to win a borrower’s discharge from his or her loan obligations. But the guts of the rules are the provisions related to prohibited payments and other inducements from lenders and loan-guarantee agencies to college officials, and limits on colleges’ use of preferred lists of lenders.

Like the draft regulatory language that the department put before the members of the negotiating committee in April, the proposed rules released Friday would require colleges’ lists of preferred lenders to contain at least three providers, and to bar from such lists any lender who has offered financial benefits in exchange for inclusion. The rules also require colleges to disclose the criteria they have used to select lenders on the list, and to make clear that borrowers have a right to select any lender they wish. The rules would also prohibit lenders in the guaranteed loan program from offering payments, interest rate reductions, or other inducements to colleges in exchange for loan volume, and likewise prohibits them from providing benefits, including conference attendance or transportation, to college officials.

Those were the subjects of many of the comments offered by interested parties, who had until yesterday to weigh in on the department's proposed rules, and scores of colleges. Comments came from major lenders like Sallie Mae, groups of student loan providers, from major higher education associations like the National Association of Student Financial Aid Administrators and the National Association of College and University Business Officers, and from dozens of individual colleges and financial aid officials.

At the macro level, several groups questioned the department's timing in regulating on lender-college relationships now, given the legislation that has been passed by the Senate and the House of Representatives that would deal with many of the same issues addressed in the department's proposals.

"Events over the last few months have, in many ways, overtaken the rulemaking process," the business officers' group wrote in its prepared comments. "With Congress now close to finalizing the reauthorization of the Higher Education Act including, in all likelihood, a number of changes governing the relationships and interactions between institutions, lenders, and guaranty agencies, NACUBO urges ED to consider delaying finalization of those parts of these regulations. While the proposed rules are similar in many respects to provisions in the House and Senate bills, we run the risk of confusing all parties by issuing rules that may well be out-of-date before they take effect. In the meantime, we support the approach that the Secretary has taken in urging all parties to voluntarily adhere to the intent of the rules." (Spellings made this request last week.)

Similar pleas came from the National Association of Student Financial Aid Administrators and the United Negro College Fund.

Both of those groups were also among those that objected on more practical grounds to the department's proposed requirement that institutions proffer lists of at least three preferred lenders. "There is no rational basis for requiring a minimum of three preferred lenders on an institution’s preferred or recommended lender list," the UNCF said in comments submitted by its president and CEO, Michael L. Lomax. "Repeated requests by UNCF/HBCU representatives during the negotiated rule making for a factual justification for the 'three-lender rule' were not responded to. UNCF believes that an institution should have the option of selecting and justifying a single or two preferred/recommended lenders in the same way an institution can choose a single Ford Direct Student Loan lender, e.g. the U.S. Department of Education. We believe that if student 'choice' can be obviated when the lender is the department, the same should be true if cost to the student, quality and efficient service to the student, and effective and efficient operation by the institution make a single private lender preferable. A single FFELP lender should be an available option, especially for small, private colleges and universities when cost, efficiency and quality service can be demonstrated."

The Career College Association joined Michigan State University in saying that the department would go too far in assuming (through what it calls a "rebuttable presumption") that any student loan company or nonprofit lender that provides funds to a college -- including by contributing endowment or scholarship funds -- is engaging in an impermissible attempt to snag a share of that institution's loan funds. "Benefits to borrowers, including philanthropic giving by guaranty agencies and lenders, should not be included in any inducement regulations," Reba A. Raffaelli, senior vice president of advocacy & general counsel of the career college group wrote. "In many instances, students incur large amounts of loan debt to achieve their educational goals. Any assistance provided to student borrowers in the form of reduced interest rates or loan forgiveness should be encouraged rather than discouraged, and lenders should be allowed to provide information on these benefits to students at an institution. Additionally, funds provided to institutions to be used to assist the neediest of students should be permitted without a lender or institution having to defend these scholarships under the "guilty until proven innocent" theory of rebuttable presumption."

Richard Eddington-Shipman, director of financial aid at Michigan State, said in his submission that such a restriction would make it impossible for the Michigan State University Federal Credit Union, which donates 20 study abroad scholarships to the university's students every year, to continue to do so if it should ever win a place on Michigan State's list of preferred lenders. (It has tried but failed before, he said.) "Many lending institutions and other agencies support higher education through donations, scholarships and other philanthropic activities unrelated to financial aid and this support is not contingent onbeing a preferred lender," Eddington-Shipman wrote. "The new rules should not be written so narrowly as to prevent all forms of support for education from lending institutions."

While comments were dominated by those who thought the department was going too far in seeking to limit the behavior of lenders and colleges, the alternative view was expressed. Mark Kantrowitz, publisher of Finaid.com, argued that the department's rules did not appear to adequately guard against situations in which one lender on a preferred lender list has agreed in advance to sell its loans to another provider on the list. "Allowing such relationships to count toward the three lender minimum does not provide the prospective borrower with a meaningful choice of lender," Kantrowitz wrote. He suggested that the department should also consider increasing the required minimum to five lenders instead of three, "to ensure that each borrower has a meaningful choice of lenders."

Several dozen colleges of various shapes and sizes, in what appeared to be a coordinated campaign using almost exactly similar language, questioned the department's decision to give itself the authority to recapture Perkins Loans that have been in default for at least seven years, especially at a time when the Bush administration had sought repeatedly to cut off any new funds for the popular loan program. One typical comment read: "Under this modified proposal, Carlow University would stand to lose approximately 76 loans totaling almost $73,323.62.... Considering the skyrocketing cost of higher education during these challenging economic times, Carlow University feels this requirement is harsh and unreasonable and will ultimately punish students by reducing resources available to them to help fund their education."