Case Not Closed: Matteo Fontana’s Resignation Leaves Unanswered Questions

More than 500 days after being placed on paid administrative leave, Matteo Fontana officially resigned from his position at the U.S. Department of Education in early September, according to a report yesterday in The Chronicle of Higher Education. The Department’s political leaders are surely breathing a sigh of relief.

After all, over the past 17 months, they have come under heavy fire (including from us) for the way they have handled the case, which revolves around special shares of stock that Fontana received from a student loan company he was in charge of overseeing.

But if Department leaders think that Fontana’s resignation brings this case to a close, they are kidding themselves. Serious questions remain about Fontana’s actions and about the Department’s response to them.

In April 2007, the Department placed Fontana, the then-general manager of the Financial Partners Division of the U.S. Department of Education’s Federal Student Aid office, on paid leave after Higher Ed Watch revealed that he had held at least $100,000 worth of stock in the company Student Loan Xpress. It is clear that Fontana’s purchase and subsequent sale of the stock represented a substantial conflict of interest — he was, after all, responsible for overseeing the lenders and guaranty agencies that participate in the Federal Family Education Loan (FFEL) program.

At the time he received the stock he was in charge of the National Student Loan Data System (NSLDS), a database that keeps track of the student aid awards of tens of millions of students. Last year, the Department was forced to shut it down temporarily because, as Higher Ed Watch also revealed, student loan companies had been mining it to collect personal information about borrowers for marketing purposes.

What remains unclear is how much the Department knew about the stock holdings. Fontana appears to have disclosed the holdings that initially got him into trouble, but then why didn’t the Department stop what was obviously a conflict of interest? Was the initial disclosure itself a sufficient source of information?

On a related note, did Department leaders know at the time that lenders were getting access to NSLDS to mine data? In the course of its investigation, has the Department come to any conclusions about Fontana’s alleged role in helping loan companies, such as Student Loan Xpress, use NSLDS to market their products to potential borrowers?

While Fontana was on leave, additional questions have arisen about other actions he has taken to help loan providers. The most serious involves a ruling he made in 2004 that essentially cleared the way for Sallie Mae, his former employer, to achieve its long-sought goal of becoming a fully-privatized corporation.

At the time, Sallie Mae’s transition was being held up by the Department’s Inspector General (IG) who had determined that a lucrative arrangement between the company and USA Funds, the country’s largest guaranty agency, violated the law and needed to be severed in order to protect borrowers. The IG argued that the deal effectively put the guarantor under Sallie Mae’s control, creating serious conflicts of interest. Fontana overruled the IG arguing that because the Sallie Mae subsidiaries that helped manage USA Funds had separate tax identification numbers from other parts of the company, they were officially separate entities.

Our question for the Department is why was a former Sallie Mae employee ever allowed to be in the position of ruling on a matter of such importance to the company and its shareholders? Were questions ever raised about whether Fontana was actually making an impartial decision?

Unfortunately, the Fontana case appears to fit the Department’s M.O. of resisting calls for disclosure or transparency — just look at its reluctance to further investigate other loan company scandals. But just because Fontana is no longer receiving his federal paycheck doesn’t mean that this case is closed. The public has a right to know about all the damage the revolving door between the Education Department and the student loan industry has inflicted on the integrity of the federal student loan programs and on financially needy students.