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.

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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.