Don’t Put Non-Profit Lenders on a Pedestal

With Congress on the verge of considering legislation to eliminate the Federal Family Education Loan (FFEL) program, it is becoming increasingly clear that lawmakers don’t want to go quite as far as the Obama administration proposed. Members of both parties are pushing Congressional leaders to preserve a role for nonprofit lenders in the federal student loan program.

In their battle for survival, non-profit loan agencies have benefited from lawmakers’ perception that they are more upstanding than their for-profit peers. At a hearing before the House of Representatives Committee on Education and Labor in May, Rep. Carol Shea-Porter (D-NH) expressed this view when she touted the “well-respected and appreciated status” of the New Hampshire Higher Education Assistance Foundation (NHHEAF). “Doesn’t NHHEAF represent exactly the type of services that you would like to retain?” she asked Bob Shireman, the Obama administration’s point person on this proposal.

Lobbyists for non-profit lenders have sought to capitalize on the lawmakers’ goodwill. As we recently reported, the Education Finance Council, the main advocacy group for these agencies, has floated a proposal that would essentially give each and every one of its members a no-bid contract to service the loans of up to at least 100,000 student loan borrowers in their home states.

But to put non-profit loan providers on a pedestal is to ignore recent history. Regular readers of Higher Ed Watch know that these agencies are no stranger to scandal.

Don’t forget that it was a small group of non-profit student loan companies that helped devise the 9.5 student loan scandal — a scheme to bilk taxpayers of hundreds of millions of dollars by overcharging the government on the subsidy payments they receive for making student loans. These lenders carried out this strategy by improperly growing the volume of loans they claimed eligible for the 9.5 percent guarantee available on federal student loans financed through tax-exempt bonds issued before 1993. This was a goldmine for these agencies in the existing low interest rate environment, with borrower interest rates hovering around 3.5 percent at the time.

When the 9.5 student loan scandal first broke in 2004, the news media and policymakers focused mostly on Nelnet, which was created when Nebraska’s nonprofit student loan agency converted to for-profit status. The attention Nelnet received was hardly surprising given that it was the most aggressive participant in the scheme — increasing the amount of loans for which it sought the 9.5 rate from about $380-million in 2002 to $3.3-billion in 2004. But the Nebraska-based lender came late to the game. Some nonprofit loan agencies, like the Pennsylvania Higher Education Assistance Authority (PHEAA), started growing their 9.5 loan volume as early as 2002.

Between 2001 and the end of 2004, the following agencies were among the most active in growing their 9.5 loan holdings, according to the U.S Department of Education:

• The Kentucky Higher Education Student Loan Corporation (KHESLC): increased its 9.5 volume by 559 percent to $1.1 billion during that period of time.

• The Panhandle Plains Student Loan Center (PPSLC) in Texas: increased its 9.5 volume by 202 percent to $548 million.

• PHEAA: increased its 9.5 volume by 162 percent to $2.3 billion.

• The Iowa Student Loan Liquidity Corporation (ISL), increased its 9.5 volume by 81 percent to $684 million.

Congress began putting more effective restrictions on lenders’ 9.5 practices at the end of 2004. But the scandal didn’t come to a stop until January 2007 when Education Secretary Margaret Spellings barred lenders from receiving any further 9.5 payments unless they agreed to submit to an independent financial audit. Fourteen nonprofit loan agencies agreed to be audited. The auditors found that the vast majority of the 9.5 claims these lenders submitted in 2006 were improper. While these lenders claimed to collectively hold $4.3 billion in loans eligible for the 9.5 payments, only $1.2 billion of that total were deemed eligible.

Those totals, however, are incomplete as about a half a dozen loan companies that had benefited from the 9.5 program, like the Kentucky agency, chose not to be audited. A recent report from the U.S. Department of Education’s Inspector General estimates that KHESLC had overcharged the government more than $80 million in subsidy payments between 2004 and the end of 2006. [Officials with the Kentucky loan agency continue to insist that they did nothing wrong, saying that they complied with all of the Education Department’s rules and guidance that were available on 9.5 percent funding at the time.]

Clearly, some non-profit loan companies set out to enrich themselves at the expense of taxpayers and the government. We’ll take a closer look at scandals at individual loan agencies later this week. Stay tuned.