Big Pennsylvania Non-Profit Salaries Linked to Student Loan Scandal
Blog Post
Oct. 2, 2006
Last month, opinion leaders in Pennsylvania took aim at big bonuses doled out to the top executives of the Pennsylvania Higher Education Assistance Agency (PHEAA). First, Governor Rendell questioned why the bonuses should be so large - over $400,000 in one case alone - when PHEAA funds ought to be going to students to help pay tuition. Rendell was joined by newspaper editorial writers who asked the same question. PHEAA's mission is managing public money to help people afford an education. All of the profit this nonprofit agency produces should go back into its product, writes one editorial.
But there is an unasked question in Pennsylvania. Did PHEAA executives earn their big bonuses because of their good management or because of something else extraordinary? Those condemning the bonuses have praised the executives work. But are they aware that the high returns PHEAA achieved in recent years are primarily the result of a reverse money laundering scheme that Congress, national media, and now the U.S. Department of Education's Inspector General have all criticized, with the latter calling the scheme illegal?
Here's how PHEAA has been ripping-off the public fisc:
When a Pennsylvania student borrows money for college, typically his or her financial aid office funnels the student to PHEAA or a private, for-profit lender like Nelnet or Sallie Mae. The government guarantees the students loan against default and provides the lender with a subsidy on top of the students interest payments. Congress legislates the amount of that subsidy a process subject to heavy lobbying.
Back in the 1980s, Congress wrote a subsidy amount into law that guaranteed lenders like PHEAA a 9.5% rate of return. That made sense in the high-interest-rate years of the early 1980s. But by 1993, the subsidy was clearly too high and Congress ended the 9.5% guarantee.
Or so it thought.
Nelnet and PHEAA recycled borrower payments from pre-1993 student loans and used the money to make new, post-1993 loans to new students. The lenders then claimed that the old 9.5% guarantee applied to new loans. The government went on paying the subsidy without asking questions.
But between 2002 and 2004, Nelnet and PHEAA went one step further, dramatically growing by over $1 billion the amount in new loans they continue to claim are entitled to a taxpayer-guaranateed 9.5% rate of return. Given that some student loans went for as little as 3.5% in 2004, PHEAA made a killing.
A whistleblower brought the scheme to the attention of Senator Edward M. Kennedy and the Inspector General. In response, Congress shut down the method for new loans issued after 2004 and the Inspector General began investigating the legality of the scheme prior to that date. Last week, the Inspector General called on Nelnet to give back its past claimed subsidy money.
What is going to happen when the Inspector General comes knocking on PHEAA's door? Higher Ed Watch predicts that some of that executive bonus money will be returned, future PHEAA billings to the U.S. Treasury will slow if not stop, and some executives might lose their jobs as well. At least they should. PHEAA's bilking of taxpayers ought not be tolerated.