One Last Post on Student Loans, Then...

December, 2017

Washington -- There have been many questions asked of me about how I knew PHEAA's claims were false in the recent case U.S. ex rel. Oberg v. PHEAA. Rather than answer each person individually, I'll post a response to all and hope it suffices before moving on to other topics.

In the spring of 2003, while employed at the U.S. Department of Education's Institute of Education Sciences, I noticed PHEAA's claims for government funds were growing in one particular category: subsidies for student loans funded by tax-exempt bonds created prior to 1993. The total principal balances of these loans were growing when they should have been declining as loans were paid off and the bonds retired or defeased. Ten years earlier, Congress had cut off its special subsidies for such loans (guaranteeing loan holders a 9.5% annual return), grandfathering in only loans from bond estates created before 1993. These balances should not have been growing as they were; the grandfathers were not supposed to have progeny.

I checked the 1993 statue; nothing there explained it. I checked the applicable regulations and found nothing there, either. Loans eligible for the 9.5% return could be created only from a short list of qualifing funding sources, none of which applied to what I was observing. I asked around the Department of Education if anyone could explain PHEAA's growing balances and claims. No one could.

In over four decades of budget and fiscal administration, I had seen my share of money-laundering scams and schemes, so I became suspicious that PHEAA's claims were illegal. It would not be that hard simply to move loans around among new and old bond estates, essentially "washing" loans made with post-1993 money by putting them however temporarily into pre-1993 estates. Or transferring old loans into new estates where they would retain their 9.5 return characteristics, taking the proceeds from that transaction and putting it back into the old estate, then issuing a new loan and claiming it came from an old estate and was also eligible for the 9.5% return.

That, it turns out, is what PHEAA was doing as it grew its portfolio of 9.5% guaranteed loans from under $900 million to over $2.1 billion.

This was hugely lucrative for PHEAA. In the low-interest rate environment of 2002-2005, student borrowers paid rates sufficiently high on the loans that the government paid little or no subsidy on loans that were not guaranteed a 9.5% return.

PHEAA was not the only student-loan entity making false claims through loan and bond manipulations. Others started to emulate PHEAA. One lender's new bond issue was analyzed by a Wall Street rating agency, which made reference to the lender's 9.5% loans. I took off a day from work and called the agency from my home to get more information. The person who answered the phone said what a coincidence that I called, as she had just been talking to their legal department about where all these loans were coming from. Their conclusion was that lenders would have to escrow funds made from false claims from illegally created loans, in preparation for soon paying the claims back to the government. That solidified my view that I knew what PHEAA was doing.

Of course I had emailed PHEAA earlier for an explanation of what they were doing. They dissembled twice and didn't answer the third time.

When a PHEAA official took the stand in the recent trial, he could not identify which of the five qualifying sources of funds PHEAA used to create new 9.5% loans. He looked at the applicable regulation and wrongly offered "all of the above." He finally took a stab at the fourth qualifying source (proceeds of pre-1993 loan sales) but that was a wrong answer because PHEAA itself did not consider the transfers to be sales and had said so in sworn depositions. The correct answer was "none of the above" but PHEAA instead fell back on half an answer, that a Department letter from 1996 provided that transfers of loans from old money estates to new money estates carried the 9.5% guarantee with them. But the letter said absolutely nothing about using the proceeds from the transaction to create yet another 9.5% loan. Any loans created with such proceeds would necessarily be subject to the usual subsidy provisions and have no 9.5% guarantee.

Department of Education officials who paid the false claims were asleep, or thought better of rocking the boat, because former PHEAA people in the Department were their bosses. (Or other people holding stock in banks.) They may have been aware of what happened to me when I raised the matter in late 2003: I was told not to look into it, in a decidedly threatening reply. More than once colleagues told me, "Got to put food on the table," meaning job security was more important than stopping a money-laundering scheme. Only when the Inspector General got around to looking at the whole mess were PHEAA claims finally exposed as false.

Part of the problem at the Department of Education is that few people there have sufficient experience in public finance. I could count them on the fingers of one hand. When I retired in 2005, the director of the National Center for Education Research pleaded with me to stay on because no one there knew anything about postsecodary finance. So hire someone else, I said, but that never happened.

That's the story of how I knew PHEAA's claims were false. In retrospect, I would say it was right out of Money Laundering 101.

Now, on to other topics, such as how the 2018 Farm Bill, unless greatly revised, will hurt rural America as it contributes to the national epidemic of obesity, diabetes, and drug abuse. That may be an even bigger issue than a lost generation of student-loan borrowers, which I bequeath to anyone who wants to take it up, at least for now.

Justice and Mercy

December, 2017

Washington -- A few years ago I attended a speech given in a small Washington auditorium by Nobel laureate Wole Soyinka, who won the great prize in 1986 for literature. After his speech he remained by the podium. Seeing no one else approaching him, I went up to chat and we exchanged a few pleasantries. He asked me what I thought of his speech. Politely I said it was a fine speech, but perhaps there were too many references to "justice." How could that be, he asked. I offered that one person's justice is often another's revenge, in an endless cycle. But if not justice, he asked, what? Mercy, I suggested. We can only strive for justice, but we can grant mercy. He smiled and assured me he would think about that for future speeches.

Whether or not he did, I don't know. But for me the exchange has always been memorable, because I truly am not much of a believer in justice. Look around; too often it doesn't happen. Always be prepared to live with injustice. Think instead of mercy.

So I have gone into ten years worth of lawsuits not optimistic that justice would prevail. The fact that we came out with a 7-1-1 record was a big surprise to me.

Justice in the final case would have resulted in getting back, for taxpayers, the student-loan lender PHEAA's false claims plus damages. I would have received a fraction for my time and expenses and trouble (all significant, I assure you). Anything left over would have gone anonymously to charities, as did quite large sums from earlier settlement victories.

I have permission to mention one of the charities: Veterans Education Success (VES) a charity I have been associated with since its beginning. It does wonderful work to protect veterans and military members from becoming victims of shoddy for-profit schools that target veterans to squeeze their GI Bill benefits from them, often leaving the veterans in debt with no education to show for it. VES does its work on a bi-partisan basis and has several legislative and regulatory victories to show for its hard work. I am a veteran, as readers of this blog likely know, and have taught active duty personnel for many years through public university programs.

Unfortunately, we did not prevail in the final case and there will be fewer funds from my charity for VES and other such organizations in the future. Had we prevailed in the final case, I was also looking forward to paying off the student loans of three borrowers who, trapped in student-loan hell, had turned to me for help in resolving their intractable paperwork problems. When I was at the U.S. Department of Education many years ago, I was able often to solve such problems with a phone call or two. In retirement, I'm not able to do that. In the end, as it turns out, these borrowers will just remain in hell, probably forever, along with thousands of others. Nothing is coming back from PHEAA.

Of course I knew going into the lawsuits that I would personally be targeted by those I sued, and if we got any lenders to trial, their attacks on me would be made publicly to a jury. I was not disappointed; PHEAA told the jury that I brought the case against them because of personal greed. I was not satisfied, PHEAA told the jury, with having success in getting Congress to shut off PHEAA's false claims prospectively, because I did not get a share of that victory. So, according to PHEAA, I filed a false claims suit because that was the only way I could get a share of the proceeds.

That was PHEAA's closing statement to the jury. Earlier in the trial, PHEAA was successful in keeping out evidence of its documented record of self-reward at the expense of its mission to aid students. The jury never saw Pennsylvania Auditor General Jack Wagner's condemnation of PHEAA for the way it used its revenues for extravagent bonuses and executive retirement packages. Those revenues came from the very false claims I had attempted to stop.

Many whistleblowers go into their good causes with the expectation that there will be justice somewhere down the line. Maybe, maybe not. What is almost a certainty in the process is that the whistleblower, sooner or later, will become the defendant. That's the way the world works. Justice is elusive. Whistleblowers, do what you have to do as citizens and patriots. I am with you, but don't expect justice. Think instead of mercy, if it is ever in your power to grant.

Peril, Perjury, and Moral Hazard

December, 2017

Washington -- One of the purposes of the federal False Claims Act is to deter wrong-doing by any entity tempted to make an illegal claim against the U.S. Government. Under the law, if someone discovers that a claim is false, not only does the entity have to pay the amount of the claim back, but also pay damages. False claims against the federal government are a matter of civil fraud, committed at the peril of those making them.

If an individual lies under oath about the existence of a plan at his organization to make the claims in question, whether or not the claims were later determined to be false, it is still perjury. The individual still lied about the existence of the plan under oath.

If the claims turn out to be false, that is civil fraud on top of perjury.

If the claims turn out to be false but the entity says it did not believe they were false when made, then the entity can argue that the False Claims Act does not apply, and indeed it might not. But the False Claims Act does not allow the entity to escape via this argument if the making of the claims was "reckless."

So the issue can boil down to a determination of a jury as to what is reckless. In the recent case against the student loan lender PHEAA (U.S. ex rel. Oberg v. PHEAA), we argued that claims of $116 million without benefit of opinion of counsel as to their legality, claims made without even asking the Department of Education whether they were legal, and hiding the plan (!) to make the claims from the Inspector General during an audit was recklessness, three times over. Not to mention that the claims were indeed false, as determined by the Inspector General's audit. Coupled with the false testimony under oath about the existence of a plan to make the claims – perjury – the preponderance of the evidence clearly pointed to "reckless disregard" of the law (that's the language of the False Claims Act) in making the claims, we argued.

Not so, a jury decided this month, without explanation. We'll never know the jury's thinking. During the trial, PHEAA tried to divert attention away from its own behavior toward that of the Department of Education, which it called "pathetic" and "weak-minded." It even called the Department's decision to cut off PHEAA's false claims a "joke." Perhaps the jury agreed that the government was so incompetent in paying the claims before eventually cutting them off that it didn't deserve to get the money back.* The jury wasn't saying.

But we know that this decision creates a moral hazard for dealings between contractors and the U.S. government, as it undermines the False Claims Act, the primary law combating fraud against the government. A moral hazard is defined as a lack of incentive to protect against risk of consequences. Contractors may learn from this case that the risk bar is so low that there is no peril in making false claims. Why not make false claims if the only risk is to have the claims cut off going forward if the contractor is ever caught, with no requirement to repay the false claims and no damages ever to be paid? Should false claims be integrated into a company's business plan? Why not? How about perjury in business plans? No consequences for that either.

Is the threat of a whistle-blower putting a contractor through a trial the only thing standing in the way of false claims? It's an unreasonable expectation for the government to rely on whistle-blowers to bear such burdens. Whistle-blowers invariably become the target of counter-attacks against their person; many if not most are ruined as a part of defendants' plans to discredit them and their motives. All whistle-blowers I know personally are good, patriotic citizens. Many have lost everything for their efforts. The government itself needs to clean up its own act with vigorous prosecutions of false claims.

* My explanation for the Department's behavior is less about incompetence and more about corruption. See a previous post about how PHEAA created an "iron triangle" and exploited it to generate an undisputed illegal windfall of $116 million.

The "Portal" Contract Competition

December, 2017

Washington -- Tbe U.S. Department of Education has been holding an on-again, off-again competition for an outside contractor to create a single "portal" for all federal student loan servicing. Whether the contract will be for a portal only, or if the winner will also get to determine who does the servicing, is one of the major questions surrounding the way the competition is being conducted. Congress has weighed in more than once on the competition. The contract at stake is one of the largest in the federal government outside the Department of Defense.

From a public policy standpoint, there are difficult questions that arise about contractor selection. Of the three remaining competitors, two are troubled to the extent that they might not be considered responsive and responsible bidders, if the Department of Education is paying attention.

Navient has been sued by the Consumer Financial Protection Bureau for "failing borrowers at every stage of repayment," and by several state attorneys general as well. Under these conditions, can the contract be given to Navient?

PHEAA has been sued by the Massachusetts attorney general and by many other parties for the same kinds of offenses. The Pennsylvania auditor general once described PHEAA as losing sight of its mission in favor of self-reward.

Additionally, PHEAA holds contempt for the U.S. Department of Education, which it has called "pathetic" and "weak-minded." Just this month one of its top officials, in open court, called Department efforts to curb PHEAA's past illegal claims a "joke." Who could blame the Department of Education from disqualifying this company from the competition?

Perhaps the only responsive and responsible bidder left in the competition is the combined bid of Great Lakes Student Loan Servicing and Nelnet. Great Lakes is a nonprofit servicer with a good reputation, which has not been tainted over the years like other servicers. The addition of Great Lakes to Nelnet's portal bid is a significant plus.

From a public policy standpoint, it might be better for the Department of Education to cancel the whole thing and start over, to allow other bidders with experience in loan servicing in areas such as credit cards and mortgages. Or even to move ahead quickly with a re-design of student loan servicing to emulate other countries' systems, which employ existing tax withholding and payment mechanisms.

Questions on Student Loan Servicing

December, 2017

Washington -- Several times recently I've been asked what I think of the proposed merger between the for-profit student loan servicer Nelnet and its non-profit competitor, Great Lakes Student Loan Servicing. Rather than repeating myself, I'll address the matter in this post for all to see.

I've always thought highly of the Great Lakes leadership; they're among the best around. I have a settlement agreement with Nelnet so I can't say too much about them. It's a standard type of agreement in which Nelnet paid back funds to the Treasury and I dropped my federal False Claims case against them; each side going forward does not discuss or reveal the details of discovery in the case. That's what the federal judge in the case wanted, to avoid a trial in 2010, so that was the outcome. There's nothing in the agreement that precludes me from discussing public policy about student loan servicing, however, so I can say relatively good things about Nelnet regarding its record over the years since the settlement. Nelnet has added good people to its board; it diversified; it has fewer borrower complaints than Navient or PHEAA, servicers with records so bad several state attorneys general are taking legal action against them to protect their citizens. The Consumer Financial Protection Bureau has also taken legal action against Navient (formerly known as Sallie Mae). Of the nation's "big four" student loan servicers, Great Lakes and Nelnet are clearly better than the other two. But the bar for comparison is low.

The question of a merger (actually an acquisition of Great Lakes by Nelnet) has at least two aspects. First, is it wise to continue the movement toward for-profit servicers, as opposed to nonprofits? Second, inasmuch as the servicers are supposed to compete with each other as federal contractors, would this merger lessen the competition to the disadvantage of federal taxpayers, who pay the bills?

The move to for-profit servicers and secondary markets dates to the mid-1990s. Back then, nonprofit Boston-based Nellie Mae persuaded Senator Ted Kennedy that it should be allowed to go for-profit, at which time it would set up a charitable foundation worth tens of millions, representing the value of the tax exemptions and concessions it received as a nonprofit over the years. The new foundation would make grants to education charities. This conversion, however, required a change to the Higher Education Act. Senator Kennedy successfully got an amendment to make the conversion possible, albeit through an unrelated bill that went unnoticed until the next morning when the deed had been done. Secretary of Education Richard Riley opposed the change, as did Donald Feuerstein and the late Tom Wolanin of the Education Department, who understood that the amendment applied not only to Nellie Mae, but to all nonprofits that might want to convert to for-profit. This led to a chain reaction of conversions over the ensuing years on terms favorable to the new for-profits, including the grandfathering of their tax-exempt bond estates for years into the future.

Likewise in the mid-1990s, the government sponsored enterprise (GSE) known as Sallie Mae, the largest student loan servicer and secondary market in the country, also petitioned Congress to allow it to go for-profit. The Clinton Administration did not oppose it, the idea coming in part out of Vice President Gore's "re-inventing government" initiative. The legendary Secretary Riley, named by Time magazine as one of the top ten cabinet members of the post-WWII era, opposed the change unless Sallie Mae made concessions back to the government in recognition of all the benefits that had been bestowed on it as a GSE. Deputy Assistant Secretary Tom Wolanin also opposed the conversion on the basis that the government was getting an extremely bad deal. He resigned in frustration.

We have now seen the results of the conversions. The ability of for-profits to move loans around among taxable and tax-exempt bond estates was a factor in the mischief known as the 9.5% loan scandal. Worse, for-profit Sallie Mae (newly Navient), now boldly states that its operations are to benefit its stockholders, and that it has no obligation to borrowers to provide them with information about what repayment programs might be best for them. This is a federal contractor being paid with taxpayer money, out only for itself with no real regard for the obligations it has to give borrowers correct information and get them into programs appropriate to their situation. It's not really a surprise that the CFPB has sued Navient.

As to the matter of competition between servicers, it is again necessary to look back to the 1990s when Congress created the so-called Direct Loan program. It was an alternative to the bank-based student loan program known as FFEL. Rather than using private bank capital to originate student loans, requiring a subsidy set by Congress to make the loans and their servicing profitable, the DL program used Treasury capital to make the loans and set up a competitive bidding process to hold down the cost of servicing. In 2010, Congress killed the wasteful, fraud-riddled FFEL program (see previous posts) in favor of the DL program going forward. But for the DL program to be successful, there would have to be adequate competition among servicers to let the free market help hold down taxpayer costs.*

So one of the questions now is whether a merger between the two top servicers is in taxpayers' interests. I would be more comfortable with the merger if the other competitors, Navient and PHEAA, were worthy of federal contracts. As long as they are not, a merger does not seem like a good idea. Will a charitable foundation be spun off from Great Lakes, as has been the case with other conversions to for-profit? There is a waiting period required by law before the merger-acquisition takes place. Consumer and taxpayer advocates, take note.

You may ask why the Department of Education limits servicer contract competition only to those with student loan servicing experience. What about companies that do credit card servicing, or mortgage servicing? Good question. The merger would be more palatable if the competition were opened up further.

Then there is the possibility of handling student loan repayments as other countries do, through the tax payment and withholding system. That could make the question of the merger moot.

* Savings from killing the costly FFEL program have been redirected into the Pell Grant program, to benefit low-income students.

PubAd 101/401: "Iron Triangles"

December, 2017

Washington -- The Chronicle of Higher Education has outed me; I'm a "university professor." Which is more or less true, as I have taught many years in the classroom, undergraduate and graduate.

This reminds me of the line uttered by the late Daniel Patrick Moynihan when he was in an election contest for the U.S. Senate. His opponent called him "Professor Moynihan," to which Moynihan replied, "The mud-slinging has begun." (I knew the professor and senator, as I sat behind him for five years in meetings of the Senate Budget Committee.)

All of which gives me occasion to conduct a class discussion, via this blog post, in Public Administration 101, or perhaps 401 if the course is for graduate credit. The topic is "iron triangles."

An iron triangle at either the state or federal level is a lobbying association's dream, always sought and often achieved. One corner is the lobbying group; another is the staff of an elected official in the legislative branch with jurisdiction over the subject area; in the third corner are the officials in the executive branch who administer the relevant government programs.

The goal is to get the lobbying association's own people in charge of all the corners. This is done by means of the "revolving door," through which like-minded people sympathetic to the lobby group fill and then rotate among the corner positions, moving from one to another as opportunities arise.

The Pennsylvania student loan lender and secondary market PHEAA achieved an iron triangle in 2002. Its Washington lobbying association, the Education Finance Council, was led by a former PHEAA employee and governed by a board with PHEAA membership. The House of Representative's authorizing committee with jurisdiction over student loans was chaired by a Pennsylvania congressman through 2001; he had hired former PHEAA employees as staff and they were retained by his successor. One of the committee staff soon went over to the U.S. Department of Education to be an assistant secretary in charge of student loan policy. Already waiting at the Department was an undersecretary (later deputy secretary) who had been a PHEAA board member when he was a Pennsylvania government official.

The iron triangle was therefore established and staffed. The only question remaining was how PHEAA would turn its good fortune into gold, so to speak.

It soon came up with a scheme, outlined by the CFO to its incoming CEO in May of 2002, to move student loans around among different tax-free and taxable bond estates to claim a windfall of extra government subsidies. The scheme would even have the loans wind up in a location where PHEAA could avoid any "excess interest" penalties under U.S. Treasury regulations, so PHEAA could put the money to any purpose it wanted, including big bonuses and retirement packages for its executives. Although the CFO said this too-good-to-be-true scheme was allowed under government regulations, PHEAA never sought opinion of counsel, never asked the Department of Education if it was legal, and in fact internally cautioned against anyone at PHEAA asking the Department if the scheme was proper, for fear of getting an answer that it was not.

The CFO's memo had a note of caution. PHEAA shouldn't do too much of the scheme for fear of "political" ramifications. Meaning, of course, someone might notice. Nevertheless, Richard Willey, soon to be CEO, quickly told his CFO to "maximize" the revenue from the scheme.*

I noticed about a year later that PHEAA's payments were going up rapidly and asked the Office of Inspector Gereral to look into it. A few weeks after that, U.S. News and World Report contacted me about a cover story they were writing, entitled "Big Money on Campus." I told them they had a good story and should check out how excess subsidies were distorting the student loan markets. They did and included the observation in one of their articles.

After the story appeared, the aforementioned assistant secretary, formerly of PHEAA, formerly of the House committee staff, announced from a stage at a student financial aid conference that whatever U.S. News was talking about, "it's all legal." No one seems to remember exactly what the question from the audience was, but her answer was quickly published by the lobbying association's newsletter, published by the former PHEAA person who worked there.

Did the assistant secretary have Departmental clearance to make such an announcement? No, she later testified under oath in a deposition. No matter. Her statement that "it's all legal" circulated throughout the student loan industry, and soon nine other lenders and secondary markets were participating in the scheme. When I alerted the Government Accountability Office (GAO) a few weeks later, GAO wrote a report to Congress that indicated billions of dollars were at stake and that the scheme had to be cut off as soon as possible.

GAO said there were three ways to cut it off: Congressional action; new Department regulations; or simply clarification of existing regulations to make it clear the scheme was never allowed. The third option was one that I had recommended to the Department and the one Secretary Margaret Spellings eventually chose to kill the scheme, after the Department's Inspector General informed her that the scheme had neven been legal. In the meantime, Congress acted to cut off the scheme prospectively.

Eventually the iron triangle collapsed. The deputy secretary was caught holding stock in a bank while regulating it. The assistant secretary was returned by the Secretary to the House staff from which she came, (but only after she passed along information to PHEAA as to how to prepare for the Inspector General's audit). Another government employee with a student loan industry background, who had supervised program reviews that somehow always overlooked legal problems with the scheme, was suspended, convicted, and fined for accepting stock in a student loan lender while supposedly regulating the industry. His boss, who paid the illegal claims for years from taxpayer dollars, was not retained when her appointment expired.

The extra revenue for PHEAA during the heyday of the iron triangle almost sank the company. When the Pennsylvania Auditor General, Jack Wagner, looked at PHEAA, he concluded that spending on perks and bonuses were so excessive that PHEAA had lost sight of its mission, which supposedly was to provide students with financial aid. He recommended changing the PHEAA board structure; Richard Willey resigned as CEO in the face of public outcry.**

All's well that ends well? No. In 2017, through discovery, we found the 2002 PHEAA internal memo that set off the whole scheme. PHEAA had told the OIG during its audit that no such document existed, that it had provided all its records dealing with its claims. PHEAA's CFO gave a deposition under oath that denied the existence of such a plan. The 2017 evidence showed that testimony to be false. No matter. When a jury was asked if PHEAA should return the illegally claimed money, which our expert witnesses put at $116.5 million and PHEAA did not dispute, the jury declined to get it back. Only the jury knows the reasons for its decision, but surely it had to do with the "it's all legal" statement by the assistant secretary as she moved through the iron triangle.

So that's today's class lesson in Public Administration 101/401 from a "university professor." There will not be a test on this material unless you think of this discussion the next time you go to the polls.

Note to my colleagues in academe: feel free to use this example the next time you teach about iron triangles.

* These records, uncovered by legal discovery in 2017, were public evidence at the trial of PHEAA in federal district court, just completed.

** Pennsylvania Auditor General Jack Wagner wrote: "PHEAA was governed and managed within a culture that sometimes allowed self-reward to supersede fiscal prudence. In those instances, PHEAA failed its mission by not using all available resources to benefit Pennsylvania students." Unfortunately, this report was not allowed into evidence in the PHEAA trial and the jury never saw it, but it can be read here.

Highest Praise, Part III

December, 2017

Washington -- This is part three of my "Highest Praise" series of posts, to give credit where credit is due for courageous and selfless actions to expose waste, fraud, and abuse in federal student loan programs. Standing in the shoes of the U.S. government through the False Claims Act, we were able to recover over $70 million of false claims for the U.S. Treasury, succeeding in seven of nine lawsuits. Part I gives credit to the legal team at Wiley Rein; Part II gives credit to the Office of Inspector General at the U.S. Department of Education. Without them, there would have been no chance for success.

Now it is time to give credit to the trade press, especially reporters at The Chronicle of Higher Education, and to dedicated people at the New America Foundation, a Washington think tank.

At the Chronicle, reporters wrote story after story of corruption in the student loan industry. Among those was the story of how lenders and secondary markets made false subsidy claims on loans that guaranteed them a 9.5% return on loans, as opposed to the subsidy rate that by law they were supposed to get, which was much less and at times nothing. The secondary markets did this by moving loans in and out of different tax-exempt and taxable bond estates, a process some of them (behind closed doors) called "washing" and others called "dipping." It was all illegal. The reporters wrote about how the funds illegally claimed were used to create illegal inducements for colleges to push their students into loans offered by favored lenders, all while the Department of Education looked the other way.

Lenders and secondary markets did not like the articles and pressed Chronicle editors and management to fire or reassign reporters. Did they succeed? Discovery in my lawsuit against the lender PHEAA sheds light on it all. Discovery documents are now in the process of being sorted and archived to determine if the public can soon have the answers to such questions.*

Meanwhile, authors of the New America Foundation's blog, "Higher Ed Watch," also wrote about corruption in the industry. Steve Burd discovered that lenders offered bribes to college financial aid officers. He took names. He also discovered that an official at the Department of Education responsible for enforcement of statutes and regulations was given stock in a lender. This official was also suspected of giving lenders access to the Department's data bases of borrowers, so that lenders could contact borrowers directly to get them to switch their lucrative loans into the bank-based loan program, FFEL, through loan consolidation. A whole new branch of the student loan industry grew up to take advantage.

In 2010, a Texas lender and secondary market that I sued, Panhandle Plains, subpoenaed New America for its records, to see if there was a connection between me and the foundation. New America at first resisted, but I was pleased to see the prospect of even more documents about the 9.5 scandal come to light, for any and all to see. The head of New America at the time, Steve Coll, a two time winner of the Pulitzer Prize and now the dean of the Graduate School of Journalism at Columbia University, consented to release the papers in question. Several of the emails and notes at issue were introduced in the recent trial of PHEAA as evidence and will soon be available for the public to review. It is my position that the public should be able to see every scrap of paper relating to the 9.5 scandal, although some lender documents unfortunately will never see the light of day because of 2010 settlement agreements requiring their destruction in exchange for the recovery of funds to the Treasury.

The work of the trade press and New America was important to the ultimate success of the lawsuits. I cannot thank those authors enough for standing up to pressure, even at the risk of their careers and reputations.

Although other newspapers are certainly strong enough to protect their reporters, I should also say that long articles by Sam Dillon of the New York Times and John Hechinger and Ann Marie Chaker of the Wall Street Journal, both in 2007, were of great value in telling the story of the false lender claims and the culture of indulgence for them at the Department of Education.

This is a good time to reveal my own sense of relief in 2016 when the lender PHEAA hired the former solicitor general of the U.S., Paul Clement, to represent it for argument in the 4th Circuit (and later the Supreme Court), against us on the issue of PHEAA's claimed sovereign immunity. Not that he wouldn't be a formidable new force in the case, of course, but I was relieved that the lender's enormous resources would be directed to legal talent, not to shadier purposes. (I have seen lenders' loan collectors ruin four generations of a family in one case, unfortunately not unique.) More than once in this lawsuit did friends ask me if I felt in danger personally, with hundreds of millions of dollars at stake. I certainly felt uneasy having the sense of being followed around for ten years when giving talks and lectures (excerpts of which appear in PHEAA's trial evidence, now for all to see, I'm happy to report), and I felt uneasy when meeting consumer advocates or writing on topics of national higher education policy in this blog.

I am of course pleased that my team at Wiley Rein won the battle with Paul Clement and PHEAA over sovereign immunity, purely at the intellectual level. And that any blood spilled was only symbolic, and theirs.

* PHEAA also tried to stop my investigation of their false claims, asking officials at the Department of Education in 2006 if there was any way to stop me from speaking about the investigation. The answer to that from the Department is also in the discovery documents.

Highest Praise, Part II

December, 2017

Washington -- Citizens and taxpayers can sleep better, as a general rule, knowing that each department of the federal government has an independent Office of Inspector General, which audits the respective departments to seek out waste, fraud, and abuse. The Inspector General at the U.S. Department of Education over the years has done some remarkable work, for which the IG and staff should be commended.

Some of this work has to do with the so-called 9.5% loan scandal, in which student loan lenders falsely claimed subsidy returns guaranteeing them a total return of 9.5% on student loans, when in fact, according to the Inspector General, they were legally entitled only to a lower subsidy rate, or none at all.

These excess subsidy payments, growing toward billions of federal taxpayer dollars, worked their way into the whole student loan system. Lenders getting the extra subsidies started paying higher premuims in the student loan secondary markets to banks that originated student loans, driving up loan prices and lender profits all around.

Lenders not making the false claims and paying the loan premiums were disadvantaged. Some lenders and secondary markets held out on grounds that the loan washings between bond estates, used to make the false claims, were illegal. But some of them switched to making the claims, for fear of being driven out of business if they didn't, and were thereby corrupted.

What the Inspector General did:

• While all of this was going on, the IG assisted in looking at who in the Department of Education had conflicts of interest. They found Deputy Secretary Eugene Hickok, who had been required to sell off his stock in student loan lenders Wachovia, Citigroup, Key Bank, and Bank of America while his Department was regulating the student loan system. He was also a former member of the board of PHEAA, a lender and secondary market which, discovery in a lawsuit has since shown, pioneered the way to make the illegal, high-subsidy claims. Hickok did not sell off his BoA stock as required, was fined $50,000 in federal district court, and quietly left government in early 2005 as Margaret Spellings succeeded Rod Paige as Secretary of Education. As he left, Hickok said he would never work in government again, trying to leave the impression that he was disgusted with it, rather than the fact that the government itself was showing him the door.

• Starting in 2005, the Inspector General started a series of audits of nonprofit secondary markets in New Mexico, Pennsylvania, and Kentucky, and audits of for-profit secondary markets Nelnet, Sallie Mae, and Nellie Mae (which had been bought by Sallie Mae). The IG concluded that none of these entities was entitled to all the subsidies they were claiming, and recommended to Secretary Spellings that she seek the overpayments back. She did not, but chose rather to require independent audits going forward, to sort out legal from illegal claims. One of the IG's audits was given the prestigious Alexander Hamilton award by the Executive Council on Integrity and Efficiency. It was a remarkable audit and the award was richly deserved. Presentation of the award was made by a close personal friend of the President, making clear that the White House was on the side of the IG and did not want to be associated with the scandal of the wrongfully paid subsidies, even as many of the lenders were making political contributions to elected officials to try to overturn the audits of the IG.

• In 2006, at the same time the award-winning audit was released, the Inspector General issued a report critical of the Office of Federal Student Aid (FSA), the office that had paid the claims to which the IG took exception. The report, written by Helen Lew, found the FSA personnel poorly trained and more interested in forming partnerships with financial institutions than in assuring compliance with statutes and regulation. It even discovered an instance of an FSA employee providing a pre-decisional document to a secondary market, which then tried to use the document to get a court injunction against the OIG. When the time came for Secretary Spellings to renew or replace the COO of FSA, which had paid the illegal claims, she understandably chose to replace her.

• In 2007, thanks to the investigative work of the New America Foundation, it was revealed that some lenders were making illegal payments and gifts to college student financial aid officers in order to get their business. The financial aid officers at Columbia University, the University of Texas - Austin, the University of Southern California, and Johns Hopkins University were fired by their institutions. It was also discovered that a Department official, Matteo Fontana, was holding stock in one such lender (Student Loan XPress) while overseeing the staff of program reviewers who were supposed to be checking the lenders for compliance with federal regulations. After a review by the IG, this individual was suspended, charged, and ultimately dismissed from the government with a fine of over $100,000.

• In 2017, in preparation for a false claims lawsuit against PHEAA (see previous posts), Howard Sorensen of the Inspector General's office gave a deposition on the award-winning audit. He gave an award-worthy deposition, as he was involved directly in all the audits. A colleague of his gave testimony at the jury trial of PHEAA, stating under oath that PHEAA had not given up key documents to the IG during its 2006 audit, and had actually denied their existence. It was only through the discovery process in 2017 that the documents ever came to light.

Can citizens and taxpayers sleep better because the Inspector General at the Department of Education is on duty? Yes. But of course there is an epilogue to all of the above. The jury in the PHEAA case delivered a verdict that did not require PHEAA to return funds from its false claims, presumably on grounds that the Department of Education knew all along what PHEAA was doing and paid its claims for years, until the IG's audit. That made it reasonable in the minds of the jury that PHEAA did not know its claims were false, even if PHEAA hid documents.

Stell dir das mal vor!

The fact that PHEAA will not be paying any money back is not the fault of the Office of Inspector General. It did its work, and did it well. If anyone is losing sleep, it is likely to be OIG personnel worried about what is still going on in the rest of the Department.* Waste, fraud, and abuse, even when identified, are hardy perennials, never to be fully rooted out.

* Even as this is being posted, the Department is undermining the so-called gainful employment regulations that are designed to protect consumers from shoddy colleges that have high borrower loan default rates. In a report to Congress, the OIG writes,"On gainful employment, we did not agree with the Department’s decision to delay a provision requiring schools to provide consumer protection disclosures directly to students before they enroll and Federal student aid funds are committed or disbursed." This blow against consumers by the Department will cost taxpayers millions as borrowers go increasingly into student loan default. It will ruin the lives of many students and their families. For the victims of these schools, the outcomes will be nothing short of tragic.

To Borrowers Who Have Contacted Me For Help

December, 2017

Washington -- In case it appears from the last few posts that I am down on all student loan lenders, guarantors, and servicers, let me balance that with a few words of appreciation for good outfits.

There are bad apples and good apples in any business. In the student loan industry, there are several previously good apples that have gone bad, corrupted. Then there are bad apples that somehow miraculously became good. (I am thinking of one in particular that, after a bad experience, put new and credible people on its board, diversified, and is now even bringing a good apple into its business; time will tell if I am right.)

One good apple in the business, I have always felt, is American Student Assistance of Massachusetts. Allesandra Lanza of ASA is a contributor to web pages that give truly useful advice to borrowers. When borrowers are at their wits' end and don't know where to turn for help, she offers good links to explore. She is also brutally honest about the shortcomings of loan servicers when she writes that in the face of

"growing concerns that student loan servicers aren't always looking out for borrowers' best interests, it's never been more important for student loan consumers to stay informed on their rights and protections."

In other words, buyer beware. If you think your loan servicer is being straight with you, as opposed to looking out for how it can make more bucks off you, think again. One servicer, Navient, has even blurted out, “There is no expectation that the servicer will act in the interest of the consumer." Take that, borrowers.

Now, to all borrowers who have contacted me, hoping I can help them (and I dearly wish I could), let me pass on the suggestions of Allesandra Lanza as to sources of help that you may not have considered. Click on the link in the preceding sentence. Here is what you will see, in part:

• State attorneys general: If your state has not enacted any student loan protections on its own, the attorney general's office is a good place to learn more about your rights as a borrower.

For example, in Massachusetts, Attorney General Maura Healey has established a Student Lending Assistance Unit that provides a hotline and free mediation service to borrowers who are having difficulties with student loans.

• Consumer Financial Protection Bureau: This bureau continuously collects student loan borrowers' complaints, investigates trends and regularly issues reports on its findings. In addition to forwarding complaints about the company handling your loan so that it can hopefully resolve the issue, the CFPB may also use your feedback to inform its rule-making process as it creates and enforces federal consumer financial laws.

• Consumer advocates: A number of consumer advocacy organizations work on behalf of student loan borrowers.

Two prominent ones are the National Consumer Law Center's Student Loan Borrower Assistance Project and the Project on Predatory Student Lending out of Harvard Law School. Both groups offer direct assistance to borrowers, as well as frequently integrate testimony from their clients when they participate in student loan policy discussions and debate.

• Your congressional representatives: Of course, there's always the tried-and-true method of contacting your congressional representatives in Washington, D.C. You can find contact information for the House of Representatives and Senate and then raise your concerns with each representative's office.

Highest Praise, Part I

December, 2017

Washington -- Coming off ten years of lawsuits against student loan lenders in which our overall record is 7-1-1, it's time to give credit where credit is due: mostly to the law firm of Wiley Rein (and, through 2010, the TELG law group). Tens of millions of dollars of repayments of false lender claims have come back to the U.S. Treasury. Students and families themselves now have new opportunities to challenge lenders and servicers for their errors, when often before they had no recourse. And sunshine has broken through to show how the shadowy side of the student loan system really works.

Think of the legal victories:

• Settlements with seven lenders, which not only got many millions back for taxpayers, but sent a strong message that false claims have consequences. False claims can be attempted, but at lenders' peril. The false claims between 2002 and 2006 in these cases obviously played a role in the decision by Congress in 2010 to kill the expensive, bank-based student loan system, FFEL. That freed up savings of over $30 billion for students, over subsequent years, in the form of additional grants, not loans. Think of it, $30 billion for financially needy students!

• A victory at the U.S. Supreme Court level, to confirm a 4th Circuit decision that a tax-exempt lender could not hide behind the doctine of sovereign immunity to deny student loan borrowers their day in court if they had been wronged by the lender. This will be of great assistance to aggrieved borrowers for many years to come. To get this victory, Wiley Rein had to win three separate appeals in the 4th Circuit and have the decision pass muster at the U.S. Supreme Court. This was an incredible achievement that will help borrowers as the sadly mishandled Public Service Loan Forgiveness progam is sorted out.*

• Getting a lender to a jury trial, where finally the sun shed its light on how the lender viewed its federal regulator, the U.S. Department of Education. "Pathetic" and "weak-minded" was the lender view. The lender even called a decison by Secretary Margaret Spellings, to restate Department regulations governing subsidies, a "joke." To get mountains of such evidence into the public realm was indeed one of the main goals of a jury trial. Wiley Rein did this through painstaking discovery over months and years, even while knowing (all too well, as it turned out) that discovery evidence might not make any difference to a jury, which was confronted by the fact that the Department of Education paid the false claims for years without question.** Pursuing truth through discovery for the sake of sunshine was a courageous and selfless act by Wiley Rein on behalf of its client, deserving of the highest acclaim.

• Bringing to light unseemly practices among certain lenders. One trial witness was confronted with the fact that she had set up a consulting company to show a for-profit lender how it could reap huge additional subsidies from the Department of Education, for a two percent share of the extra take for her company. The lender eventually had to pay back a portion of the false claims involved in the scheme, but the consultant walked away with her percentage nevertheless, with no consequences. Citizens and taxpayers, take note of how your tax dollars are spent.

The list could go on and on, and with appropriate curiosity shown by historians, journalists, public policy experts, and ordinary citizens, it will. The final lawsuit is over; Wiley Rein has done extraordinary, incredibly praiseworthy work.

Now: Is there anything to be learned from the ten years of these legal battles? Let's hope so, and let's get to it.

* Not that any aggrieved borrower should or should not actually sue. That the possibility of a successful suit exists should have a salutary effect on servicer performance. After Oberg III was decided by the 4th Circuit and the Supreme Court denied a writ of certiorari on the case in January, 2017, all tax-exempt lenders and servicers that relied on sovereign immunity to turn away borrower suits were put on notice that such a defense might henceforth not work.

** Making it difficult if not impossible to demonstrate to a jury that the lender was without a reasonable basis for its claims, because the Department was paying them, even though the Department later ruled the claims false after audits by the Inspector General. A jury, conversely, could have found that the claims were reckless, given that the lender never sought opinion of counsel, never asked the Department for its approval, and in fact hid its false claims scheme from the Department, as shown by Wiley Rein through discovery. But this jury did not.