Higher Ed Roundup: Week of May 19 – May 23

Ed Dept. Unveils Plan for Loan Availability, and Pleases Sallie Mae

Trade School Acted Improperly to Reduce Default Rate, IG Finds

Felonies No Barrier to Entry in FFEL Program

DeVry is Latest For-Profit School Chain Under Investigation

Ed Dept. Unveils Plan for Loan Availability, and Pleases Sallie Mae

The U.S. Department of Education released additional details about its strategy for ensuring student loan availability Wednesday — including a proposal that apparently acquiesced to lender demands by providing low-cost federal financing for student loans. As outlined in a letter sent by Education Secretary Margaret Spellings, the Department will not only buy student loans from lenders, as Congress authorized it to do, but it will also purchase for one year “participation agreements” in pools of new loans, temporarily giving lenders a source of cheap capital with student loans serving as collateral. The Department will charge lenders a rate of commercial paper plus 50 basis points for the agreements. Since all lenders receive special allowance payments that are set at fixed rates, this means participants will have a predetermined return on all new loans.

The federal financing proposal bears a striking resemblance to a plan originally proposed by student-loan giant Sallie Mae Vice Chairman and Chief Financial Officer Jack Remondi. Early in the week, Sallie Mae dropped hints that it was considering leaving the FFEL program, though it withdrew that threat (and saw a healthy spike in its stock price) after the plan’s details were released.

Trade School Acted Improperly to Reduce Default Rate, IG Finds

Concern over a high student loan default rate, and the potential loss of federal financial aid funds, has led at least one for-profit trade school to act illegally to keep its students out of default, according to an audit released this week by the Department of Education’s Inspector General. The audit found that Technical Career Institute (TCI) in New York City had improperly paid off $440,487 worth of federal loans taken out by students who dropped out before completing their first semester. The school then set up its own repayment plans with the students and referred them to collection agencies if they failed to make payments. This arrangement allowed the school to manipulate its official cohort default rate by keeping the percentage of students who failed to repay their loans below the threshold at which the institution would face sanctions. The Inspector General recommended that TCI stop paying off students’ debt, retract negative credit reports, and recalculate its default rates for the past three years. The Inspector General also urged the Department to limit, suspend, or terminate TCI’s eligibility to participate in the federal student aid programs — the ultimate penalty that the agency can exert. Department officials are reviewing the report, and will likely make a final decision later this year.

Felonies No Barrier to Entry in FFEL Program

Felons may not be able to vote in several states, but they can run student loan companies, according to a report last week in the St. Petersburg Times . According to that article, Roger Wayne Morgan, a convicted felon, and Joseph Pursley, who had heavy debts and a police record that included resisting arrest and public drunkenness, both managed to set up and run student loan consolidation companies that between them dealt in over $300 million worth of federal loans. The companies grew to be the 36th and 82nd largest holders of loans through the Federal Family Education Loan (FFEL) program before they collapsed amidst allegations of fraud and abuse. “No one — not the U.S. or Florida Departments of Education, not their backers at the Bank of New York — raised concerns about the men’s criminal backgrounds,” the article states. “And without tighter regulation, experts say, there’s nothing to prevent it from happening again.”

DeVry is Latest For-Profit School Chain Under Investigation

DeVry Inc., a chain of for-profit colleges, is under investigation by the Justice Department for making false statements about its policies on compensating recruiters. The company has been accused of providing bonuses to its admissions officers based upon how many students they enroll — which is illegal under he Higher Education Act. DeVry is just the latest in a long line of publicly-traded for-profit higher education companies to come under scrutiny for its recruiting practices. For instance, the Apollo Group, the parent company of the University of Phoenix, paid $9.8 million to the Department of Education as part of a 2004 settlement surrounding the company’s practice of rewarding and penalizing recruiters based on the number of students they enrolled. Officials with Devry denied any wrongdoing and said they would cooperate with the probe.