The Revolving Door and the Damage It has Done

article | April 18, 2007

Higher Ed Watch recently revealed that a high-ranking Education Department official held at least $100,000 in stock in a student loan company he was in charge of overseeing. It was unclear to us at the time of the report whether Matteo Fontana, the general manager of the Financial Partners division of the Federal Student Aid office, had properly disclosed his holdings in Student Loan Xpress to his superiors.

Reporters who have been following up on our coverage hoped to find the answer to that question late last Thursday night when Education Department officials released Mr. Fontana's financial-disclosure forms. To the frustration of the journalists, the filings raised more questions than answers.

Mr. Fontana did disclose that he owned stock in the company, but was he upfront about all the shares he owned? Did he buy new stock after initially selling some of it? And why didn't his stock ownership and sizable sale raise any red flags at the Department?

Investigators with the Department's Inspector General's Office and House and Senate education committees will surely demand answers to these questions.

But there is a more fundamental question that needs to be asked: Why was Mr. Fontana, who had worked at Sallie Mae for 11 years before joining the Department, and others with such strong ties to the student loan industry put in charge of overseeing the federal loan programs? And what effect has this revolving door between those that participate in the Federal Family Education Loan (FFEL) program and work in the Department had on the integrity of these programs?

According to a report last week in The Wall Street Journal, at least eight senior Education Department officials during the Bush Administration either came from the loan industry "or have taken lucrative jobs in that arena since leaving the agency." Some received top policy positions. Others took key positions in the Federal Student Aid office (FSA), which is in charge of running and monitoring the student loan programs. The top job went to Terri Shaw, a 20-year veteran of Sallie Mae. In fact, she brought a group of former Sallie Mae executives with her to help lead the aid office, including Mr. Fontana.

In The Wall Street Journal article, Katherine McLane, the Department's spokeswoman, defended the Bush Administration's hiring practices. It made perfect sense for the Department to look to the loan industry to staff the FSA, she said, because they had the expertise to improve the programs' efficiency and provide "better service to students and families." According to the Journal, she noted that "student loan default rates have plummeted on the Administration's watch and that, in 2005, the Government Accountability Office (GAO) removed the department's student aid office from a list of government programs at high risk for 'fraud, waste, abuse, and mismanagement."

But most of the improvements that FSA has made to student aid delivery started under Ms. Shaw's predecessor, Greg Woods, who joined the Department in 1999 and remained there until shortly before he died in 2002. Mr. Woods, whose expertise was in computers, had worked in the private sector before joining the government but never for the loan industry. His staff had much experience in technology, but little in lending.

Ms. McLane is correct that default rates have plunged, but the lionshare of the reduction occurred before the present Administration assumed office. By 2001, the default rate had already dropped to 6.9 percent, 15.5 percentage points less than in 1990, when the rate had peaked at 22.4 percent. Today, the rate is 5.1 percent. And while the GAO did remove the student aid programs from its high-risk list, it did so only under heavy pressure from Department leaders.

What effect has this revolving door had on the integrity of the loan programs? The answer to that question can be found in a little-noticed 34-page audit report that the Department's Inspector General released in September. That report blasts the Financial Partners division of FSA for failing to "provide adequate oversight and consistently enforce FFEL program requirements."

According to the report, the Financial Partners division of FSA:

  • Emphasized partnership over compliance in dealing with guarantee agencies, lenders, and servicers.
  • Significantly overstated the number of program reviews it performed on lenders and failed to assess liabilities for regulatory violations.
  • Lacked adequate policies for conducting program reviews.
  • Failed to follow the procedures it did have when performing reviews.

The report highlights a few instances in which the cozy relations between officials in the Financial Partners office and those in the loan industry were exposed. In one case, a program reviewer suggested accounting methods that a guarantee agency could use to reduce its liability to the government. In another, a Financial Partners Regional Director provided "internal pre-decisional documents" to a non-profit lender, who then tried to use the documents "in an unsuccessful attempt to obtain a Federal court order to block the issuance of" an Inspector General's audit report.

"Collectively, all the deficiencies we found in Financial Partners' management philosophy, policies, procedures, and operations, have created a weak internal control environment for monitoring and oversight," the Inspector General concluded.

When we reported on Mr. Fontana's stock acquisition, we first noted that civil service employees at the Education Department have complained that FSA officials had allowed some lenders -- particularly those that specialize in offering consolidation loans -- to mine the National Student Loan Data System (NSLDS) to collect personal information about borrowers for marketing purposes.

The Education Department has now confirmed our suspicions. In a letter to Senator Edward M. Kennedy (D-MA) (Note: the Higher Ed Watch editor used to work for Kennedy), Education Secretary Margaret Spellings said that the Department would temporarily prohibit lenders from accessing the database while agency officials determined the extent of its "unauthorized usage."

The revolving door has harmed the integrity of the loan programs and has put the privacy of tens of millions of students at risk. Policy makers need to make sure that the door stops spinning, and that the leaders of the Education Department are held accountable for multiple lapses over the last several years.

Editor's Comment: Please note Higher Ed Watch's new "special report" section on the fallout from our student loan investigation, including a news chronology, compilation of investigative stories, and other resources. Let us know what you think.