Rewriting History at the Department of Education

Top officials at the U.S. Department of Education continue to repeat the company line that they were ahead of the curve in coming to grips with and confronting the burgeoning “pay for play” student loan scandal — despite all evidence to the contrary.

In an interview with Higher Education Washington Inc, (HEWI) a publication owned and run by a top student loan industry lobbyist, the Education Department’s new Assistant Secretary for Postsecondary Education, Diane Auer Jones, takes issue with those who suggest that Department leaders have not taken their oversight responsibilities seriously when it comes to monitoring the Federal Family Education Loan (FFEL) program. Her comments echo ones that Education Secretary Margaret Spellings made in May when she was called to testify before the House Committee on Education and Labor.

The company line: In the fall of 2006, the Department initiated a process aimed at strengthening and clarifying regulations that forbid student-loan providers from offering illegal inducements to colleges to secure applicants for federal loans. Among other things, these rules, which were finalized last month and go into effect in July 2008, will bar colleges from recommending fewer than three lenders to students who must borrow to pay for college.

“Before there were all of the big headlines about improper inducements, the Secretary had already started the process of negotiated rulemaking, back in 2006,” Jones told HEWI. She then goes on to explain the Department’s thinking at the time:

“We had hoped, through higher ed reauthorization, that we could have a statutory fix to some of these problems. But then when it didn’t come in 2006, the decision was made that we can’t wait any longer. So we started the process of negotiated rulemaking, to more specifically lay out what can and can’t be done, and to more specifically start talking about appropriate vs. inappropriate behavior. We did public hearings, we did rulemaking, we had committees…The point here is that the Secretary recognized there was a problem, and long before there was a single headline, we had started to move forward.”

The Department’s political appointees are right about one thing — the Secretary did start a negotiated-rulemaking process in the second half of 2006. But there is no evidence — at least none that has been made public –to suggest that the Department planned to tackle conflicts of interest between colleges and lenders at the outset. In fact, an August 2006 Federal Register notice that first announced the agency’s intention to hold negotiated rulemaking sessions made no mention of the Secretary’s desire to rewrite rules related to illegal inducements and preferred lender lists. Instead, the Department said that its main priorities were to use the sessions to enact some of the recommendations of the Secretary’s Commission on the Future of Higher Education, which was wrapping up its work at the time, and to revise the rules college must follow to participate in the relatively new Academic Competitiveness and SMART Grant programs.

It was not until late November, only a couple of weeks before the sessions were to begin, that the Department revealed that it planned to use the sessions to alter the rules governing the relationships between colleges and lenders. So what changed between August and the end of November to motivate the Education Secretary to put these issues front and center? The answer is two fold — allegations of improprieties grew louder, and the leadership of Congress changed hands.

MAKING HEADLINES

Jones states that the Department acted before there was a “single headline” on improprieties. If only that were true.

In October 2003, U.S. News & World Report made a huge splash with its cover story “Big Money on Campus” that went into great detail about the ways in which private lenders were “romancing the schools.” The article brought to light some of the most egregious practices lenders were involved in that policymakers are still grappling with today — including the wining and dining of aid administrators, schools’ use of lender employees to staff college call centers providing financial-aid advice to students, and the offering by lenders to colleges of “opportunity loans” — pools of private loan money that institutions can provide to students who otherwise would be ineligible for the loans — to become the primary lender of federal loans on the campuses.

On May 7, 2006, 60 Minutes aired a segment entitled “Sallie Mae’s Success Too Costly,” which dealt in part with accusations that the loan giant was offering “kickbacks” and “cash payments” to colleges to win federal student loan business. [Disclosure: the Editor of Higher Ed Watch appeared on the show, discussing these allegations].

In the summer of 2006, there was a firestorm of controversy kicked up when the loan company MyRichUncle began running full page advertisements in national newspapers, including USA Today and The Wall Street Journal, accusing colleges and aid administrators of taking “kickbacks” and “payola” from the loan companies they were recommending to their students.

In September 2006, we held an event in Washington, DC on “Student Loan Scandals” detailing preferred lender list conflicts and the still ongoing 9.5 percent loan scandal. Later that month, we broke a story about how a loan company owned by prominent D.C. socialite was trying to woo aid administrators by offering them a four day, all-expense-paid junket to the Caribbean. The New York Times followed our lead and The Chronicle of Higher Education provided new details on the types of questionable deals that colleges were forging with lenders. The Caribbean junket story was picked up nationally and the company quickly then canceled the trip. More headlines followed.

All of these allegations of improprieties caught the attention of the New York State Attorney General Eliot Spitzer, who had his office begin investigating lenders’ ties with colleges that October.

But none of these developments may have made any difference had the Democrats not taken control of Congress in November. Democrats had made student loans a major topic on the stump that fall, and Spellings knew they were eager to call the Bush Administration on the carpet for its close ties with the loan industry and its lax oversight over the guaranteed-loan program. What better way to undermine these efforts then to take the bull by the horns and start to move forward with reform efforts first.

Of course, by the time the Department started paying attention to these issues, they were already six years late and more than a little culpable. In 2001, some officials at the Education Department called for major changes to the agency’s rules to crack down on corruption in the loan industry. But Bush Administration political appointees who took charge of the agency squelched those plans and, from then on, looked the other way, as widespread abuses occurred ranging from the “pay for play” scandal to the unconscionable 9.5 percent loan rip-off.

The Education Department turned a blind eye to the problems that their political appointees are now taking credit for confronting. They should know better.