Report Criticizes USA Funds and ECMC
Guarantee agencies have fallen away from their public missions, says the Century Foundation, which called on the feds to push for the agencies’ $5 billion in assets to be spent helping struggling student borrowers.
Student loan guarantee agencies too often have abandoned their public-interest missions, the Century Foundation says in a new report, which calls on the U.S. Department of Education to make sure the agencies’ collective $5 billion in assets are being spent productively.
The bulk of guarantors’ money came from the federal government or from fees charged to former students who defaulted on their loans, the report said.
“Many of those defaults, it turns out, were the result of predatory colleges convincing students to enroll in programs that were of poor quality, failing to meet students’ needs and leading to debts rather than a degree or a job,” according to the report. “Given the source of the money, an appropriate way to use it would be to repair the damage done by some participants in the federal student loan program and to prevent further hardship. For example, support is sorely needed, now, to provide counseling and legal aid to distressed borrowers.”
Bob Shireman, a senior fellow at the foundation, and Tariq Habash, a policy associate there, co-wrote the report. Shireman is a former Education Department official who is advising Hillary Clinton’s presidential campaign and appears likely to join the campaign or a possible Clinton administration in an official capacity.
Shireman and Habash’s call for the feds to push guarantee agencies on how they spend their money faces a serious regulatory barrier, said experts on federal financial aid and the National Council of Higher Education Resources, a group that represents the sector.
The report “ignores a clear reading of the Higher Education Act -- that each guarantee agency’s operating fund is the property of the agency and that the funds shall be used for specific activities selected by the agency,” the council said in a written statement. “All guarantee agencies are committed to doing what they can to fulfill their nonprofit missions and to support students and borrowers within their areas of service, and they do so using the resources in their operating funds. The Century Foundation report fails to acknowledge the many important services provided by these organizations.”
The agencies provide financial awareness and outreach services to students, families, schools and community organizations, according to the council. They also help borrowers take advantage of federal repayment and rehabilitation programs.
Habash said the foundation recognizes the spending authority the U.S. Congress granted to guarantee agencies through the Higher Education Act -- the law that oversees federal financial aid.
The report doesn’t advocate for the department to use authority it doesn’t have, Habash said. “We are simply asking these guarantee agencies to act like the charities they are claiming to be.”
The agencies, which are required to be nonprofits or part of state governments, lost their core function in 2010, when the federal government ended federally backed private lending. While it will take decades, the business of insuring bank loans will dry up under direct federal lending.
Yet guarantors continue to earn revenue off the $280 billion in outstanding private loan principal. They collect a standard federal fee of 1 percent of the balance of first-time past-due loans for working to prevent defaults, as well as fees for collection and account maintenance.
As a result, guarantee agencies have been branching out in efforts to diversify both their revenue and how they spend money. Most focus on college completion and financial advising. But one, United States Aid Funds, or USA Funds, has distributed grants aimed at closing the skills gap. Another, Education Credit Management Corporation (ECMC), in 2014 bought 56 campuses from the collapsing Corinthian Colleges, a for-profit chain.
The report aims its harshest criticism at USA Funds and ECMC, which, along with the Great Lakes Higher Education Corporation, are the three largest guarantee agencies. The two nonprofits followed an “empire-building script,” according to the foundation, creating subsidiaries and failing to use their coffers to help borrowers struggling with student loans.
Both agencies fired back with written statements saying the report provides an unbalanced and erroneous view of the organizations and their activities.
“The Century Foundation report grossly misrepresents the activities of USA Funds, which has opened the doors to college for millions of Americans and saved former students and taxpayers hundreds of billions of dollars in potential loan costs,” USA Funds said. “Furthermore, the report utterly ignores USA Funds’ role as a major philanthropic force for improving student success rates in college while better connecting graduates to rewarding careers, the most important determinants of whether former students successfully manage their college debt.”
One of the report’s key findings, which it says bolsters arguments that the agencies often are not acting in the public interest, is that USA Funds and ECMC pay the members of their governing boards, a practice frowned on by experts (except for reimbursing board members for limited, direct expenses).
In 2014, USA Funds paid its 11 board members between $43,000 and $95,000 in annual compensation, according to the report. ECMC paid its nine directors between $76,000 and $142,000 for their service to the board, according to a federal tax filing.
Few nonprofits pay their board members substantial sums. And the payments received by ECMC’s and USA Funds’ boards appear to violate at least the spirit of nonprofit governance rules.
“Charities should generally not compensate persons for service on the board of directors except to reimburse direct expenses of such service,” the National Council of Nonprofits said on its website.
ECMC’s written response to the report included a section on the board’s pay. It said the directors’ time commitment is “at or near the very top” of their peer group among nonprofits. ECMC said those roles have increased -- meaning the necessary level of experience, expertise and engagement -- as the guarantee agency’s revenue grew to $783 million last year, up from $48.5 million in 2005.
An independent firm and legal counsel have reviewed ECMC’s board pay on annual basis, the agency said, making sure it is reasonable under laws and regulations.
“The Century Foundation’s publication of false and misleading information is highly regrettable and does a disservice to enhancing the public’s understanding of the critical contributions ECMC has made since its inception,” the agency said. “Further, we stand behind the transparency, accuracy and compliance of our IRS filing. We are as committed now as ever to fulfilling our mission of helping students succeed.”
Both ECMC and USA Funds listed their charitable contributions in recent years, which they said the report failed to capture. For example, ECMC spent $345 million on California’s Cal Grant, a state aid program for low-income students. The agency also forgave $480 million in debt held by former Corinthian students.
The Century Foundation report questions ECMC’s purchase of Corinthian’s campuses and programs, which the agency runs through a new subsidiary, Zenith Education Group. The report asks whether ECMC “made a noble if misguided attempt to transform a corrupt enterprise,” or if the purchase is “just a corporate board seeing if they can make a buck.”
If the latter, ECMC hasn’t been successful -- it’s spent $300 million so far on Zenith, which has hemorrhaged students as fast as money. The nonprofit career college chain lost $100 million last year, and now enrolls just 10,000 students at 24 campuses, having consolidated, closed or begun teaching-out the remaining campuses.
Even so, Shireman and Habash would rather see ECMC’s resources going more directly to students.
Yesterday Senator Elizabeth Warren, a Massachusetts Democrat, criticized the department for collecting on the student debt held by 80,000 former Corinthian students. Money from guarantee agencies could be used to help those borrowers, Habash said in a tweet.
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