Those Scandalous Student Loans

In mid-January, a brief item appeared on an inside page of The New York Times, headlined “Student Lender Investigated.” The five sentence article noted that the New York Attorney General’s office was looking into “student loan marketing” by Sallie Mae, “the nation’s largest lender to students.” Attorney General Cuomo had requested information about “preferred lender lists,” i.e. the lenders that colleges and universities recommend to their students. The article also noted that “some loan companies have criticized” such lists, alleging that lenders got onto the list “in exchange for payments or other benefits.”


By April, that little ankle-biting nip at the $85 billion student loan industry had turned into something more: perhaps not quite the grizzly bear embrace of the press going after a hint of impropriety in the Bush administration, but a serious enough scratch to warrant some attention. The NY Times revisited the story again on February 1 and 3, March 16, 23, and 29, each time with more damning details, and each time prompting more and more coverage in other newspapers. Cuomo was prying a local lid off a scandal that had lots of other lids in lots of other states, which soon began bubbling over.
The shape of the oil-slick spreading out from a scandal tells a story of its own. In this instance, the scandal at first seemed to be about a handful of back-office personnel in universities pocketing some freebies for steering students to particular banks. Ho-hum. It took a little while for reporters to grasp that something bigger was at stake: that students and their parents were, in many cases, being steered into more expensive options by corrupt college officials. It took even longer to realize—and many have yet to see the picture clearly—that these practices have something to do with the sky-high cost of education.

How can we make this clear? Try this. In early April six universities, including the University of Pennsylvania, Syracuse University, and New York University, agreed to reimburse students $3.27 million for higher prices students ended up paying for their loans in the last several years because of the universities’ special arrangements with the lenders. That’s six universities out of the 4,236 colleges and universities in the U.S. Are the others untouched? It seems not. Attorneys General in seven other states—California, Missouri, Illinois, Ohio, Minnesota, Connecticut and New Jersey—have launched investigations too.

We don’t yet know how much extra students and their parents have paid or for how long they have been paying it to keep corrupt college administrators living in style, but we can catch glimpses of fairly big-time bribery. Walter Cathie, dean of financial aid at Widener University in Pennsylvania pocketed $80,000 since 2005 from Student Loan Xpress to persuade graduate schools to link up with the company. Who do you suppose ultimately covered that $80,000? My guess would be impecunious graduate students paying excessive interest rates to Student Loan Xpress. Widener University has put Mr. Cathie on leave pending an investigation.

An extra $80,000 would come in handy to most parents seeking to pay tuition bills but we shouldn’t put too much blame on Mr. Cathie. It seems he was far from alone in profiting from the eagerness of Student Loan Xpress to gain privileged access to the student loan market. Matteo Fontana, a U.S. Department of Education official who oversees lenders who participate in the Federal Family Education Loan Program reported selling at least $100,000 in stock in the parent company of Student Loan Xpress—the ownership of which he did not divulge at the time of his appointment. Fontana was placed on leave by Secretary Spellings in mid-April. Student Loan Xpress also snared Ellen Frishberg, director of student financial services at the Johns Hopkins University and—until Spellings fired her—a member of DOE’s Negotiated Rulemaking Committee. Frishberg reportedly received $63,000 from Student Loan Xpress. Lawrence Burt, likewise was ejected from the DOE Advisory Committee on Student Financial Assistance, but is also director of financial aid at the University of Texas at Austin, and richer by some 1,500 shares in Education Lending Group, Inc. the generous folks who own Student Loan Xpress.

You don’t have to work in Secretary Spellings’ Department of Education to get benefits from Student Loan Xpress, though it seems to help. The company’s largess extended to David Charlow, senior associate dean of student affairs at Columbia University and Catherine C. Thomas, director of financial aid at the University of Southern California, each of whom got at least 1,500 shares in Education Lending Group.

And Student Loan Xpress isn’t the only bidder. Drexel University in Philadelphia got $124,000 in “revenue sharing” from Education Finance Partners for designating it “sole preferred private loan provider.” Cuomo’s investigation turned up 60 colleges that had similar revenue-sharing arrangements with Educational Finance partners, but he let the company skate away with a $2.5 million contribution to an education fund—no doubt a small fraction of the company’s gains from successfully undermining the integrity of 60 colleges.

DeVry University, which has 84 campuses around the country, agreed to return $88,122 it received from Citibank for putting it on the University’s “preferred lender list.” New Jersey’s Higher Education Student Assistance Authority received $2.2 million over seven years from Sallie Mae, the nation’s largest student loan provider, to make the old gal its “preferred lender.”

The details will keep spilling out. No doubt many more colleges and universities, many more state agencies, many more federal officials, and many more lenders will be implicated. In the latest phase of the scandal, Cuomo has subpoenaed 90 alumni associations seeking information about their deals with the loan consolidator, Nelnet, based in Lincoln, Nebraska. Nelnet issued a reply on May 3, not only defending its actions but also declaring that it has “led the student loan industry in transparency and disclosure”. Oh dear. Can we expect to see some Congressmen rolled into this scandal before it is finished? I have no doubt that some of our elected officials are indeed involved, but we will have to wait to see if the law can reach them.

But I provide the litany mainly to establish the breadth of the problem. The bribery plainly has increased the cost of education by leading large numbers of students to take loans on less favorable terms than they otherwise could have obtained. It would be good if we could quantify how much, on average, the corruption of individual college administrators and whole institutions has cost students. The average student debt on undergraduate graduation is now over $20,000. Students repay this at varying interest rates and terms, which raise the actual costs much further. How much of that extra cost is the Walter Cathie / Ellen Frishberg / Lawrence Burt / David Charlow / Catherine Thomas tax? $1,000? $5,000? $10,000?

The corruption of student lending is so deep that it has been institutionalized. According to Reuters, the financial aid office at the University of Texas Austin evaluated potential lenders on a list of factors that included, appropriately, student fees and customer service. But UT Austin also rated “visibility,” which was “based on the number of lunches, breakfast and extracurricular functions” for staff of the UT Office of Student Financial Services. Nice that the director of the office was willing to share the loot with his staff.

To the Rescue—or Not

As the scandal has accelerated, various folks have stepped forward to announce repairs. Secretary Spellings has announced a task force to recommend new federal rules—not that the old ones did much good. Spellings has also written to Senator Kennedy in April defending DOE practices and revealing since 2003, DOE has revoked 261 user IDs that permitted access to the National Student Loan Data System. Of those revoked IDs, 246 belonged to student loan companies, holders of loans, guaranty agencies and loan servicers. Imagine what trouble we’d be in if DOE hadn’t been so vigilant!

Cuomo has established a “College Code of Conduct” for best practices in student lending. And numerous colleges and lenders (including Education Finance Partners) are eagerly signing up.

These are welcome steps, but I would like to propose a rather different way of thinking about this scandal. I don’t believe that the problem, deep down, is about rules. It is about leadership—and about how we attempt to govern complex institutions like the university.

I’ve worked with university financial aid administrators for some 25 years. They know the rules. Indeed financial aid is one of the most arcane areas of higher education, encrusted with enough rules to choke a Brussels bureaucrat. Colleges and universities have to qualify to be recipients of federal student loans and grants, and periodically re-qualify. They have to meet substantial disclosure requirements to students and pay mindful attention to the separate regulations governing dozens of federal loan and grant programs.

These complications mean that financial aid officers have to be experts and in their expertise they are largely opaque to the rest of the college or university. Professors of biology, teachers of rhetoric, and post-docs in economics don’t have the time or interest to learn the mechanics of Pell Grants, Stafford Loans, PLUS Loans, Perkins loans, FFEL consolidation loans, and so on. Neither do most college and university administrators. So who oversees financial aid administrators? Usually some vice president for business, and we ought to be wondering about now: where were the auditors? And where were the accreditors?

Large universities all have internal auditors and all colleges and universities are subject to external auditors.

PricewaterhouseCoopers maintains one of the largest practices in the nation for colleges and universities. John Mattie, principal author of PWHC’s “Summary of Emerging Issues for Colleges and Universities 2007,” however, saw nary a Cuomo-nimbus cloud on the horizon. The danger of self-dealing student loan officers and improper relations between lenders and universities just never came up. The Emerging Issues Task Force did flag “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43,” and raised issues of accounting for deferred compensation, purchase of life insurance, and such matters.
If PricewaterhouseCoopers didn’t see this enormous scandal on the horizon, who did? As it happens, a lot of people who work in university financial aid offices and a lot of people who worked in the financial aid industry. Their stories, however, failed to move the responsible authorities until an unnamed “industry whistleblower” got Cuomo’s attention. Cuomo told the Associated Press that he found that would-be lenders who offered excellent terms were being shut out of the market by colleges that maintained lists of “preferred lenders.”

Higher education has, predictably, rallied to the defense of its own. Terry Hartle, senior vice president for government and public affairs at the American Council on Education (ACE) was ready to defend the payments that Cuomo’s investigation initially turned up. Hartle achieved indignation (“this is inexcusable and indefensible”) only when the bribery with shares of stock became public. But he added, “Student financial aid administrators as a group have the utmost integrity and care enormously about serving the students who attend their institutions.”

It’s a nice thing to say, but does it wash? One has to suspect, at a minimum, that these folks with the “utmost integrity” knew some of what was going on. Even if they didn’t avail themselves of the ready cash and benefits, their “integrity” didn’t reach so far as to make them air public complaints or do anything about the problem.

Then we have the National Association of Student Financial Aid Administrators (NASFA) that has taken the occasion to thunder against Attorney General Cuomo for hurting the reputations of financial aid officers. Like Hartle, NASFA found the sight of shares of loan company stock shoved into the pockets of financial aid officers to be a little beyond the pale. The organization solemnly intoned, “It would be inappropriate for a school to place a lender on a preferred lender list in exchange for shares of stock.”

One is left with the queasy feeling that even now the sweetheart deals between lenders and universities at the expense of the students would pass muster with a fair number of higher education’s watchdogs.

All this is to say that the student financial aid system in the U.S. wasn’t vulnerable for lack of rules or the absence of people who knew how to enforce the rules. It was vulnerable—like Enron, WorldCom, and the other companies brought low by the accounting scandals of a few years ago, and like the Savings & Loans industry before that—because the people in charge had been corrupted and because no one else had the combination of knowledge, interest, and authority to do anything about it. In short, because we Americans end up with institutions that grow larger than our capacity to govern them, and we frequently lack the kind of leaders who can intervene before matters get out of hand.

A word to the honest folks who work in student financial aid: stick with it but don’t go asking for sympathy about how you and all your colleagues have been “unfairly” tainted by the scandal. Students and their parents will be rightly skeptical of your advice for a long time to come. You’ll have to earn their trust, and it won’t be easy.

Among other things, you can expect to be described harshly by politicians. Many Democrats in Congress were skeptical of the for-profit student loan industry prior to the scandal. Senator Kennedy characterized the student loan system as one that “squanders billions each year to provide corporate welfare to big lenders, rather than serving the best interests of our students… It’s time to throw the money-changers out of the temple of higher education.” The Democratic-controlled Congress will seize on the corruption of some—perhaps many—college financial aid officers as further evidence that the for-profit student loan industry should be replaced. Many favor switching to the Direct Loan Program, a single-payer system that currently accounts for about a quarter of federal student loans, and that so far hasn’t been touched by charges of corruption.
The politicization of the scandal is well underway. On April 25, Representative George Miller (D-Calif.) called a hearing titled “Examining Unethical Practices in the Student Loan Industry,” in which Cuomo was invited to sound off. Miller has charged that the federal Education Department under Spellings “has been missing in action.” Cuomo characterized DOE as “asleep at the switch.”

Representative Ruben Hinojosa (D-Texas) compared the college lenders to the companies selling predatory home mortgages.
Elsewhere in the political spectrum, libertarians like Neal McClusky, a policy analyst at the Center for Educational Freedom, have seized the scandal to inveigh against federally-financed student aid itself.

Government aid, argues McClusky, “increases the costs it is meant to defray.” That is, when government subsidizes loans, college officials realize that students can “afford” to pay more, so they increase tuition. As fast as the government subsidies go up, the costs of college increase.

I think that McClusky’s analysis is largely accurate but not likely to change the many minds in Congress, where pouring unaccountable billions into higher education is generally regarded as sound public policy.

Minding the Store

Once the attorney generals have done their part, once the Department of Education has added a new phone-book size body of regulations, once the lenders have all signed a pledge to play by the rules, and once the chastened financial aid officers have decided to abide by “professional ethics,” we will still have a troubled system for providing financial aid to students who need it. That’s because higher education has become a kind of Leviathan. As the free-market types like to emphasize, it is hugely wasteful. But wastefulness isn’t its central characteristic. Mindlessness is.

Higher education in the U.S. today is mass higher education. We have some 16 million students enrolled in U.S. colleges and we send about two-thirds of our high school graduates to college—mostly on the theory that a college degree will magically multiply their life-time earnings. Mass higher education is not something that “just happened.” It is a phenomenon brought about by a series of policy decisions beginning with the 1944 G.I. Bill that brought several million returning World War II vets into American universities. In the 1950s, the G.I. Bill benefits were extended and expanded along with other state and federal incentives for students to attend college, and colleges and universities themselves developed a taste for the resources and the institutional growth that came with these incentives.

I mention this not to recapitulate the last half century of American higher education, but to put the current scandal in a particular historical context. We have been building the pieces of this scandal for a very long time. The Higher Education Act of 1965 consolidated a bunch of federal student loan and grant programs. HEA was written so as to require periodic renewal and every time Congress renewed it, it expanded still further. The student loan industry is the result of this continuing attempt to engineer the university to make it the nation’s premier benefit program for young adults.

Or, to put this in another way, the student loan scandal is a fairly predictable result of a liberal welfare state policy that ballooned a modest-sized institution into a mammoth one with little regard for how that unchecked growth would change the institution itself.

Among the changes it brought were the need for a vast bureaucracy staffed by people who rarely have any real understanding of what’s “higher” about higher education. The bureaucracy is inevitably filled by people who take pride in their expertise and who value what they themselves bring to the university. It the case of financial aid experts, what they bring is a belief in the wholesomeness of “expanded access,” i.e. more government-subsidized loans means more students have access to the unalloyed good of attending college.

In case this sounds like a slightly unfair characterization, let’s hear the voices of some financial aid administrators. The May 2007 issue of The Greentree Gazette has just hit my desk. The Gazette bills itself as “the business magazine for higher education,” and this issue contains an extended section on student loans, replete with sidebar interviews with folks in the field. Jeff Andrade, Executive Vice President of U.S. Education Finance Corporation fondly recalls the campus financial aid office of his alma mater, American University: “The financial aid office came through for me every time—with additional work study, two scholarship boosts as I improved my grades, and always a listening ear. They fit the description of trusted third-party counselor very well.” Jeff looks forward to a time when employers will help pay off debt and he urges debt repayment by payroll deduction. Jeff hits the familiar chord: financial aid officers are the good guys.

That theme is echoed by Tamera Briones, president and CEO of Education Finance Partners, who dismisses the criticism of the student loan industry: “I believe much of the criticism is politically motivated. Campaigning for the 2008 elections has begun… What’s really needed is higher federal loan limits.”

High limits and less fretting. Joe Belew, president of Consumer Banker Association explains that “customer service” is “the highest priority today in the banking industry.” He advises us to chill out on the rising price of college: “The rapid rise of college prices, like housing and health insurance, is a fact of life.”

The classic justifications for all this—accessibility and the pursuit of diversity—are offered by Matthew Johnner, a partner in Global Financial Aid Services. Mr. Johnner observes college presidents and financial aid administrators “agree that affordability barriers perceived by prospective students can be lowered by outreach, financial aid counseling, and a sincere desire to serve a community that is made up of people with a variety of backgrounds.”

So leaders in the student financial aid business agree that they serve a worthy purpose. No surprise there. Bland self-approval rules the universe. But we don’t have to accept these conclusions as the final word. We might, for example, consider that more and more college graduates with the same credential often means the credential itself loses value and that a good portion of these students will need to earn graduate degrees—and pile on still more debt—to achieve the same marketability that an undergraduate degree provided a generation earlier. Or that the massive piling on of debt to young adults is a factor in delaying marriage, raising children, and the assumption of other adult responsibilities. Or that a large proportion of these students will not succeed in college and will end up with a lot of debt and no college degree. No, getting as many people into college as possible tends to be the financial aid officer’s and the financial aid provider’s horizon of good public service.

Politically, this scandal looks like a winner for Democrats, but it may be more complicated than that. Yes, Attorney General Cuomo, a liberal, blames President Bush’s Secretary of Education for being “asleep at the switch,” and a Democratic Congress joins in. Yes, generally, Republicans have defended the private-sector student loan industry and impeded the Direct Loan program that Democrats prefer. On the other hand, the massive expansion of university education has been a liberal preoccupation, not a conservative one, and the student loan industry justifies itself primarily in the liberal logic of accessibility, not the conservative logic of individual responsibility. Shake the student loan tree too vigorously and instead of harvesting votes for Direct Lending (and more government control of higher education), you might end up with voters wondering why we spend billions of public funds to send kids to college who refused to learn what was to be had for free in high school.

Colleges and universities have been, for the most part, willing and often enthusiastic collaborators in this government project, and they have grown their own bureaucracies to manage their role as a subsidized provider of a welfare service. But the transformation from the old idea of the university (as an institution devoted to higher learning and to shaping the character of those who are capable of such pursuits) to the new idea of the university (as a government-subsidized credentialing service for young adults regardless of intellectual talent or aspiration) has been uneven. Colleges and universities are generally set up as though they are to be governed by wise men and women who understand in some depth the nature and the nobility of intellectual inquiry. Faculties usually have an important say in policy matters, and college presidents are usually expected to be more than efficiency experts.

I wouldn’t want it otherwise. A university that gave itself over wholly to running the business of Title IV student loans on behalf of politicians who think its good policy to send everyone to college would be a university in name only. The serious calling of devoting one’s life to the search for a little bit more of the truth needs to be sustained. Keeping that conception of higher education alive has always been a challenge, whether the threat has been from kings, churches, totalitarian dictators, the exigencies of poverty, or the temptations of wealth. Keeping the real university alive in the midst of government-subsidized mass higher education is just one more challenge.

But it is a distinct one. I don’t expect faculty members to step up to the task of overseeing their university’s financial aid offices, but I do think that scholars have some responsibility to enunciate the real and legitimate purposes of the university. That’s what is most missing from Leviathan: a mind, and with it a conscience.

To be sure, financial aid offices festoon themselves with claims that they “serve” students and that financial aid officers bashfully admit that, yes, they are responsible for giving the poor and members of minorities a chance to get a good education. This strenuous moral posturing may be due for a reality check, as the public begins to see financial aid officers more as venal middlemen ready to sacrifice the student’s interests for stock options or free vacations—or, more altruistically, to burden the student with a higher interest rate in exchange for “revenue sharing” with the university. Thus an opportunity is at hand to assert some controlling moral authority.

Who speaks for the university? Let’s hope it’s not just the usual apologists like ACE, and not just the financial aid officers attempting to rescue their reputations. Might some college presidents take a break from their all-diversity-all-the-time promotional campaign to explain why they have been presiding obliviously over a cesspool of self-dealing? And, perhaps with a little gentle prompting, just maybe we will hear from the conservators of the real university: the faculty.

Peter Wood

Peter Wood is president of the National Association of Scholars and author of “Diversity: the Invention of a Concept.”

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