Iron Triangles, Part II

December, 2017

Washington -- It's time once again to visit the subject of "iron triangles," self-serving arrangements among lobbying groups, legislative staff, and government agency administrators that lead to waste, fraud, abuse, and corruption in government.

A previous post identified an iron triangle that was created in 2002 involving officials at the U.S. Department of Education, the lobbying organization Education Finance Council (EFC), and Congressional staff. It resulted in illegal payments in the hundreds of millions of dollars to student-loan lenders; it compromised the integrity of loan servicers, which continues to this day. Current lawsuits by state attorneys general and the Consumer Financial Protection Bureau against two of the nation's largest servicers, Navient (formerly Sallie Mae) and PHEAA (also known as American Education Services or Fed Loan Servicing), are part of this dubious heritage.

Another iron triangle has formed in 2017 between the for-profit college lobby group Career Education Colleges and Universities (CECU), officials at the U.S. Department of Education, and Congressional staff in both the House and Senate. Its goal is to increase the flow of federal dollars to for-profit colleges, institutions with often dismal records when it comes to students but wonderful institutions when it comes to making money for owners, administrators, and stock-holders at the expense of federal taxpayers.

The goal is being achieved by repealing regulations on the for-profit colleges that require them to provide training that leads to gainful employment; by making GI Bill recipients (veterans) special recruiting targets for such schools despite their poor records with veterans; and by moving student-loan fee money through non-profit organizations to support the for-profit purposes of the colleges. Accomplishment of the goal will be abusive of taxpayers and tragic for students and families whose lives may be ruined by excessive and unpayable student loans.

As is customary with iron triangles, there is a revolving door between the industry, the government agency, and the legislative staff. In the latest case, upon being named Secretary of Education, Betsy DeVos* soon employed advisors and administrators from the for-profit colleges.

Three in particular stand out: Taylor Hansen (directly from CECU), Robert Eitel (directly from troubled Bridgepoint Education and before that from Career Education Corporation, a school chain repeatedly under investigation from the FTC, SEC, and multiple state attorneys general for defrauding students), and Julian Schmoke (formerly of DeVry University, which in 2016 paid $100 million in fines for cheating students and taxpayers).

Congressional staff with 2017 oversight responsibility over the Department of Education are employed by Congresswoman Virginia Foxx of North Carolina and Senator Lamar Alexander of Tennessee, both of whom have been supported in election contests by large political contributions from the for-profit college sector. Key staff have been in the revolving door for years, having served in the Department of Education previously as well as in the college interest groups. The head of the lobbying organization CECU, Steve Gunderson, is himself a former congressman who served on the House committee with oversight responsibility.

Especially noteworthy are the connections between the 2017 iron triangle and its 2002 predecessor, which broke up in 2005 (with considerable help from the Inspector General):

• Bill Hansen, Deputy Secretary of Education from 2001 to 2002 and a key revolving door figure in the creation of the earlier iron triangle, was also instrumental in setting up the right conditions for creation of the 2017 triangle. In 2002, he led an effort to relax regulations on for-profit colleges through the creation of so-called safe-harbors. The safe-harbors were ways that for-profit colleges could get around the probibition against paying recruiters based on how many students they enrolled (college-ready or not) and how the colleges could avoid being kicked out of federal programs by paying small fines for any transgressions (creating a moral hazard in favor of wrongdoing by minimizing the consequences).

• Sally Stroup, a key figure in the 2002 iron triangle, was employed for several years by ex-Congressman Gunderson at the for-profit school lobbying association. In between, she returned to the House Committee staff after leaving the Department of Education as Assistant Secretary, then worked for Bill Hansen as counsel for a company he headed, Scantron.

• Taylor Hansen, brought on quickly to advise Secretary DeVos in her transition to Secretary, is the son of Bill Hansen. The elder Hansen, by 2016 the head of a student-loan guaranty agency known as Strada (formerly USA Funds), had recently lost a Supreme Court decision** over the issue of charging borrowers excessive fees. Coincidently with the son's being hired by DeVos, the new Secretary reinterpreted the regulation offensive to the father, mooting the Supreme Court decision. Although several Senators quickly demanded an explanation from DeVos about the Hansen connection, the son just as quickly left his Department of Education post after the deed was done.

The connections don't stop there. The excess fees collected at Strada, a non-profit, were used in part to fund contributions over the years to other "non-profit" entities, like Steve Gunderson's lobbying organization, an association working to enhance the fortunes of those operating for-profit schools. Strada's very highly paid executives are in a revolving door with for-profit institutions, Senate staff, and the Department of Education.

The 2002 iron triangle resulted in illegal payments of federal taxpayer dollars to student-loan lenders. It was finally brought under control after many years with a net loss to taxpayers of around $600 million. But are any of the activities of the 2017 triangle actually illegal, as were those of the 2002 triangle? The 2017 triangle may smell rotten, with an ugly provenance, and it certainly looks corrupt, but so far no one has done anything about challenging the legality of the 2017 triangle's activities.

(In the case of the class action suit against USA Funds, the plaintiff charged racketeering under RICO, the Racketeer Influenced and Corrupt Organizations Act. She and other were awarded $23 million in a 2016 settlement, but USA Funds has maintained that there was no wrongdoing on its part and the racketeering charge has disappeared.)

Breaking up the 2017 iron triangle should be an objective for the reauthorization of the Higher Education Act in 2018. Congress could move student loan servicing out of the triangle-vulnerable Department of Education, which cares little about borrower abuse, in favor of collecting loan repayments through the IRS at Treasury, following the successful model of several other countries. Congress could also recall funds from loan guaranty agencies, as it did in the reauthorization of 1998, to prevent them from being misused as in the Strada example. By all means, Congress must eliminate the fiction that GI Bill funds are not federal funds under the so-called 90-10 rule, so as to protect veterans from exploitation by sub-par schools. Congress should also put more of its student financial aid resouces into "cooperative federalism" programs, where states and institutions have more of an interest in policing student financial aid, because it is partly their money. Some in Congress talk boldly about requiring states and institutions to have more "skin in the game," but the action Congress has taken so far is in the other direction, killing Perkins Loans and threatening to kill SEOG, both cooperative federalism programs that require skin in the game.

In view of the fact that twice in this century the Department of Education has been captured by interest groups it is supposed to regulate, Congress needs to rethink its student financial aid programs to make it more difficult to establish iron triangles. There are many ways to do this if Congress has the will, and if voters are paying sufficient attention to what its elected officials are up to.

* Not coincidentally, stock prices of for-profit colleges went up with the naming of Betsy DeVos as Secretary.
**On May 16, 2017,the Supreme Court denied certiorari.