August 2, 2007
Education Dept. Criticized as Lax in Policing Loans
By JONATHAN D. GLATER
NY Times, August 2, 2007

The federal Department of Education, after months of criticism for lax oversight of the student loan program, still has no system to detect and uncover misconduct by lenders and protect student borrowers, a new government report said yesterday.

The report, by the Government Accountability Office and released by Congressional Democrats, found that the department had “no oversight tools” to see whether lenders were giving improper incentives to colleges to steer student borrowers their way, and, that since 1989, the department had offered lenders no “comprehensive guidance” on what incentives might be forbidden. In 20 years, the report found, the department has tried to punish only two lenders for violating government rules.

The department does not have a way to find out whether universities are improperly limiting students’ choice of lenders, according to the G.A.O., the government’s main research arm.

The report, the agency’s first since revelations of potential misconduct in student lending this year, said the department’s lack of oversight of federal student loans “may have resulted in some students taking loans with higher interest rates or fewer borrower benefits.” Over all, the report portrays an agency that may at times react to outside complaints, but does not “proactively detect” problems.

In a letter included with the accountability office’s report, the department agreed with many of its findings. In a statement issued yesterday, Katherine McLane, a spokeswoman for the Education Department, said, “Secretary of Education Margaret Spellings takes very seriously the department’s oversight of schools and lenders.” Ms. McLane added, “We have taken a number of steps to tighten our oversight responsibilities of federal student financial aid programs.”

In its letter to the G.A.O., the department outlined the efforts, including creating a “workgroup” to review lender compliance with the law. In June, the department proposed rules banning certain marketing practices by lenders. But the G.A.O. report notes that these rules will not take effect until July 2008, at the earliest, and calls for the department to act sooner.

The student loan industry has faced increasing scrutiny of its business practices as tuition has skyrocketed and more students have been forced into debt to finance their education. Last year, students took out more than $85 billion in federal and private loans to pay for college.

Inquiries by Congress, the news media and various state attorneys general have exposed tangled financial relationships between colleges or individual college officials and student lenders — relationships that the department did not detect, the report said. The investigations have revealed practices by the lenders like paying colleges commissions or bonuses in exchange for business, and giving college officials free trips, meals and other perks to win spots on so-called preferred lender lists, on which students rely when selecting a loan company. They have also found colleges where financial aid administrators held stock in lenders they recommended to students.

In testimony before Congress in May, Ms. Spellings pointed to the removal of federal student aid programs in 2005 from the accountability office’s “high-risk list” for fraud, waste and abuse of as a sign that the Education Department was resolving “financial integrity and management issues.” But the G.A.O. report, requested by members of Congress last year, undermines that earlier conclusion.

The new report puts a harsh light on the internal workings of the Education Department. For example, if the department suspects misconduct by a lender, it has no established procedure on how to respond, the report says. The department may send a company a letter asking it to “cease the activity” that may be questionable. But it does not monitor whether those letters work, the report found.

In addition, before October 2006, the department did not have a centralized system to track external complaints — by consumers, by colleges or even by other lenders — about possible misconduct by lenders. In more than a dozen instances from 2001 to 2006, the department may not have concluded whether specific conduct complied with regulations at all, the report found.

As if to underscore the report’s criticism, the New York attorney general, Andrew M. Cuomo, who in Congressional testimony in April described the department as “asleep at the switch,” announced yesterday that he was expanding his inquiry into the student loan industry.

Mr. Cuomo said his office had sent subpoenas and document requests to dozens of universities around the country, demanding information about arrangements with student loan companies that rewarded college athletic departments with payments for steering students to particular lenders.

The G.A.O. report recommended that the department come up with ways to detect misconduct by lenders — for example, by finding out how colleges choose which loan companies to include on their lender lists. It also recommended giving lenders guidance on what incentives are prohibited, before the new rules take effect next year. And the report called on the department to come up with a way to decide how to respond to violations of rules; by writing a letter, imposing a fine or expelling a lender from the loan program.

Congressional Democrats trumpeted the report as further evidence that the department had failed to protect students and their families.

“This report again underscores that the Department of Education completely defaulted on its responsibilities to protect the nation’s student loan programs,” Representative George Miller, the California Democrat who is chairman of the House Education and Labor Committee, said in a statement yesterday. “There is simply no excuse for this administration ignoring repeated warnings about potential lender abuses, both from independent agencies and even from lenders themselves.”

Senator Edward M. Kennedy, Democrat of Massachusetts and chairman of the Senate Education Committee, said, “Students and families should be deeply concerned that the Department of Education failed to enforce the laws designed to protect them from unscrupulous lender tactics for so long.”

Michael Dannenberg, director of education policy at the New America Foundation, based in Washington, said the report was significant for finding that the department lacked procedures for determining when and how to enforce rules on lenders.

“The processes aren’t there,” Mr. Dannenberg said. “But it’s more than that, because even if the processes were there, there’s evidence that they don’t seem to be taking their enforcement responsibility very seriously.”

Senate panel alleges student lender abuses
Thu Jun 14, 2007 5:04PM EDT
By Kevin Drawbaugh and Paritosh Bansal
Reuters

WASHINGTON/NEW YORK (Reuters) - A Senate panel on Thursday issued a report making new allegations of misconduct by student-aid lenders and colleges, while Johns Hopkins University separately agreed to pay $1.125 million to settle an investigation of its student-loan practices.

Johns Hopkins reached the settlement with New York Attorney General Andrew Cuomo. Twenty-six schools and seven lenders, including Sallie Mae, JPMorgan Chase and Bank of America, have sealed similar pacts with Cuomo.

The report by the Senate education committee -- which raised questions about relationships between lenders and Texas Tech, UCLA and William and Mary, among many others -- added to previous investigative findings in a scandal that has engulfed the $85 billion student-loan business.

The report was released as Democrats in Congress and President George W. Bush are recommending cutting government subsidies paid to some lenders in the troubled industry.

The report said investigators for committee Chairman Edward Kennedy, a Massachusetts Democrat, found several cases of loan firms offering, or college financial aid officials seeking, compensation for placing firms on preferred lender lists shown to students considering federally guaranteed student loans.

"Evidence uncovered by the chairman's investigation demonstrates that many ... lenders routinely engage in marketing practices that violate the letter and spirit" of laws prohibiting such transactions, the report said.

"The problem is systemic and cannot be isolated to a few 'problem' schools," it concluded.

In one example, committee investigators cited a violation "involving cash payments by Texas Tech University."

A March 29, 2005 letter from Texas Tech told some lenders they had been chosen for its 2005-2006 academic-year list of preferred lenders, the report said. The letter said lenders "will have the opportunity to purchase space as a preferred lender on the TTU Financial Aid website" for $500.

In the Johns Hopkins case, Cuomo's investigators said they found Ellen Frishberg, the school's director of student financial services, was improperly promoting a lender, Student Loan Xpress, after the company paid her more than $65,000 in consulting fees and other payments.

Student Loan Xpress is now a unit of CIT Group Inc..

In a statement, Johns Hopkins said the payments by Student Loan Xpress, from 2002 to 2006, had not been disclosed to it. The school said that under the settlement, it has specifically denied violating New York law.

Frishberg was placed on administrative leave on April 9 and resigned on May 18, the university said. A lawyer for Frishberg could not be reached immediately for comment.

The Kennedy report alleged some top student-loan companies spent generously on gifts, food and travel for colleges.

For instance, the committee said, Bank of America in 2006 spent $21,242 sponsoring two receptions for the University of California-Los Angeles, and $11,414 on a luncheon for the College of William and Mary.

In another example, the committee said, the student-loan unit of JP Morgan Chase in 2006 spent $2,247 on 500 T-shirts for Dillard University and $468 for golf towels for an event at Florida Junior Community College.

"Internal documents show that lenders consider these expenditures to be an investment that will pay off in increased market share," the committee report said.

The U.S. Education Department prohibits lenders from offering "inducements" to curry favor with college aid officers and win placement on preferred lender lists.

Tuesday, May 15, 2007
ENZI INTRODUCES BILL TO PROTECT PRIVATE INFORMATION
OF STUDENT BORROWERS

Washington D.C. – U.S. Senator Mike Enzi, R-WY, Ranking Member of the Senate Health, Education, Labor and Pensions Committee (HELP Committee), today introduced legislation to protect student borrowers and their families by establishing clear, standard operating procedures to manage access to private student financial information.
Under current law, students must complete a financial application and disclose private information to receive financial aid.
“In the same way that banks protect the privacy of their customers, so too must the Department of Education protect the personal financial information of students and their parents who receive federal financial assistance,” Enzi said. “Action is needed to restore faith in the ability of the Department to protect students and families from bad actors who would misuse private, financial data.”
The “Student Financial Aid Data Privacy Protection Act” requires the Department of Education to establish protocols for limiting and restoring access to the National
Student Loan Data System (NSLDS), a database that contains personal financial
information about student borrowers and their families and is used by students, schools,
lenders, and guarantee agencies.
The “Student Financial Aid Data Privacy Protection Act” is co-sponsored by Senator Lamar Alexander (R-TN), Senator Richard Burr (R-NC), Senator Johnny Isakson (R-GA), Senator Pat Roberts (R-KS), and Senator Wayne Allard (R-CO).
Key provisions of the bill include:
• Requiring the Department of Education to establish protocols for limiting access
to the database when there are suspicions that the system is being used
inappropriately, and specific steps to be taken in order to restore access;
• Requiring the Department to conduct a data security assessment of NSLDS to test
the adequacy of the new protocols;
• Requiring the Department of Education, lenders and guaranty agencies to assist
students and parents in better understanding how their sensitive, financial
information is entered into the National Student Loan Data System and then
accessed by thousands of lenders, consolidators and guaranty agencies across the
country;
• Prohibiting nongovernmental researchers and policy analysts from accessing
sensitive borrower-specific information; and,
• Directing the Secretary of Education to explore ways to help students and parents
control which lenders are accessing their sensitive, financial information.
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