Friday, August 24, 2007

The Department of Education's Student Loan Connection

I'm catching up on a backlog of bookmarks I pick up off the various newsfeeds. A few months go, the Washington Post reported on the revolving door between private sector loan officials and the US Department of Education. Is it any wonder the sending a student to college is like offering them up to indentured servitude for life?

From: Warnings On Student Lenders Unheeded, Bush Aides Derailed New Rules in 2001 by Amit R. Paley, Washington Post Staff Writer, Tuesday, May 1, 2007
"The Department of Education has been run as a wholly owned subsidiary of the loan industry under this administration," said Barmak Nassirian, a longtime advocate for industry reform at the American Association of Collegiate Registrars and Admissions Officers. "They are running the federal loan program for the profit of their friends and not for the benefit of students and taxpayers."

Chad Colby, a department spokesman, said he was not aware of the 2001 proposal but noted that a task force was created last week to consider new rules. The department also defended its hiring of loan industry veterans, saying their expertise was invaluable, and pointed to a 2005 decision by the Government Accountability Office to remove federal student financial aid from a list of "high-risk" programs.

"The U.S. Department of Education takes its role as steward of federal financial aid very seriously," Education Secretary Margaret Spellings, who took office in 2005, said in a statement last week.

No one has been charged with any crime in the investigations led by the New York state attorney general's office and other agencies, but in recent weeks there have been a series of revelations about conflicts of interest and financial links among universities, lenders and government officials. Some Bush administration appointees have said they were unaware of the extent of these controversial practices.

But the 2001 policy draft shows that Education Department officials knew of the issue and that at least some saw a need to act. In addition, some industry executives had sought guidelines on what would qualify as prohibited payments, or "inducements," from lenders to financial aid directors, according to current and former department officials. Several of them spoke on condition of anonymity because of the sensitivity of the matter.

"We have been asked to provide guidance on whether certain practices of [private] lenders and guaranty agencies are considered to be prohibited inducements," according to the 2001 draft obtained by The Washington Post. "We are particularly concerned with allegations that some lenders and guaranty agencies have attempted to hide or disguise an impermissible offer."

Such allegations began to draw increasing attention from the department as early as 1999, according to officials.

Although investigators have found several cases in which lenders made payments to schools that steered business their way, it has not been established that those practices violate federal prohibitions on quid pro quo arrangements. The 2001 proposal addressed that challenge by saying the department would presume that a violation has occurred if a lender offers "something of value" to a school at which it has at least 20 percent of the school's loan volume.

The draft policy, known as "subregulatory guidance," was outlined in a letter by John Reeves, a Clinton-era appointee who served as general manager in a unit of the Office of Federal Student Aid and stayed on for part of the Bush administration. The office's chief operating officer, Greg Woods, another Clinton-era appointee, briefed industry groups on the proposal, according to two people who met with him. But Bush appointees quashed the rules.

"We were like, 'No, we're not going to drop a bomb on the lending community with these wacko ideas,' " said Jeffrey R. Andrade, a senior Education Department official at the time who now works for a loan company.

Reeves declined to be interviewed yesterday; Woods died after leaving the government.

Not everyone agrees that the rules would have had a significant impact.

"People who wanted to work around the rules would have found loopholes, unfortunately," said John Dean, special counsel to the Consumer Bankers Association, which represents lenders and took no position on the proposal.

But Andrade, a former deputy assistant secretary in the Office of Postsecondary Education, said the 2001 proposal was "very draconian," so much so that half the schools in the country would have been found in violation of the policy. The department decided to encourage the financial aid community to draft its own voluntary standards, an effort that ultimately collapsed.

It wasn't long before the department's inspector general issued the first of several reports criticizing a lack of oversight from the agency's Office of Federal Student Aid. A 2003 report to Sally L. Stroup, then assistant secretary for postsecondary education and a former lending agency executive, said the office "has never performed reviews of lenders for the specific purpose of reviewing compliance" with federal anti-inducement rules.

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