Iron Triangles VI

April, 2018

Washington -- Fifty Massachusetts state senators and representatives asked the Massachusetts Education Finance Authority (MEFA) a good question. Why is the state agency MEFA paying dues to the National Council of Higher Education Resouces (NCHER), when NCHER is working in Washington to undermine consumer protections for Massachusetts' student loan borrowers?

MEFA quickly dropped out of NCHER. The state senator who first posed the question was gratified with the response and expressed the hope that MEFA's action would create a cascading effect across the country. Indeed, why are these state-associated agencies, created ostensibly to help students, so intent on undermining state consumer protection efforts?

The letter to MEFA and its attachments have to be read to be believed. Hats off to the teacher organization that defended the interests of former students, now teachers, who are being victimized by sloppy if not fraudulent student grant and loan servicing in the federal TEACH program. I'd not call NCHER a secretive organization of "zombies," as the AFT did, but if that's what it takes to make the point that thousands of teachers' lives and careers are being disrupted, so be it. Click on this report from National Public Radio to get a sense of how teachers have been betrayed. The Washington Post has also noted the problem, with a good explanation of the financial motivations involved.

To observers of Iron Triangle behavior, however, this development is no surprise. See previous Iron Triangle posts, Parts I - V. NCHER is an arm of the student loan industry. Its president, James Bergeron, has been in the revolving door of government and industry for many years, coming to the organization after working in another corner of the triangle, committee staff in the House of Representatives. Bergeron's letter to the Department of Education on behalf of NCHER, proposing to do away with state consumer protection for student loan borrowers, was sent to Kathleen Smith, who has had a career in all three triangle corners.

The Bergeron letter is of special note because it reprises a tactic used once before by its predecessor organization, NCHELP, to great industry advantage. It attempts to leverage the Department's Office of General Counsel into its cause, without actually having any determination that Department counsel agrees with the industry position.

In the 1990s, the Department of Education made a decision that student loans transferred by loan holders from one bond estate to another would retain the same federal taxpayer subsidy it earned when originally funded. This was done to prevent gaming of subsidies by moving loans around among different funding sources. At the time of the determination, interest rates were fairly high. The Department's concern was that lower subsidy loans might be moved to bond issues with higher loan subsidies, resulting in a big windfall for the loan holder if the old subsidy rate didn't accompany the loan. An NCHELP representative, Sheila Ryan, raised a question with OGC about what would happen in a low interest environment if older, higher subsidy loans were moved to new funding sources but retained the same subsidies, and the proceeds of such transactions were used to refill the old, high subsidy funding source and to fund yet more high subsidy loans. She said the Department should write rules anticipating that scenario or, preferably from NCHELP's viewpoint, drop the attempt to stop loan holders from moving loans around among bonds.

The Department did not take such action, because it did not have to. Existing rules already covered the situation: proceeds of such transfers were not qualifying sources under the law for the higher subsidies. Nevertheless, Sheila Ryan took her experience of having merely discussed the issue with OGC as license to advance a scheme to make money at federal taxpayers' expense. When interest rates plunged after 9/11, she teamed with Lawrence O'Toole, a former colleague, to form Aurora Consulting. They offered their consulting services to a for-profit lender in South Dakota, Student Loan Finance Corporation (SLFC), with the condition that if the lender would move loans around among bonds as they prescribed, Aurora Consulting would get a kick-back percentage of the additional taxpayer subsidies.

Sheila Ryan-Macie, under oath in a trial in December, 2017, confirmed that she had no document from the Department of Education indicating that it agreed with her that there was any shortcoming in the regulations. In fact, in 2007, the Department's OIG and OGC had determined that the Aurora Consulting scheme, like that of several other student loan holders, was simply illegal. SLFC repaid some of its ill-gotten gains in 2012 in a settlement, but the re-payment represented only a relatively small percentage of the millions of dollars it took illegally from taxpayers. Aurora Consulting repaid nothing.

Sheila Ryan-Macie is now chief of staff at Navient, a for-profit student loan servicer that has been sued by the U.S. Consumer Financial Protection Bureau for failing to protect the interests of student loan borrowers at every step of the lending and collection process. She is responsible for company strategy.

As for NCHER, it is going back to the same playbook, hoping for another outcome that is not based on law but what it would like the law to be. A 2016 OGC determination, attached to the Massachusetts legislators' letter to MEFA, confirmed the longstanding rule that student loan servicers must comply with state as well as federal law. NCHER's action represents a shameless exploitation of borrowers and taxpayers made possible by the recent emergence of another Iron Triangle at the Department of Education. It may work: the 2016 OGC letter is apparently being ignored or circumvented*, as was the law when Aurora Consulting and others were making their money in the previous decade. When an Iron Triangle is in place, mere law does not stop the victimizing of borrowers and taxpayers.

Two recent lawsuits brought by student loan borrowers have alleged racketeering under RICO, the Racketeer Influenced and Corrupt Organizations act. One was settled without dealing with the racketeering charge, the other was denied for "lack of particularity" as to racketeering.

Someone's not looking hard enough.

* Secretary of Education Betsy DeVos is attempting to preempt state law. See previous posts. Twenty-six state attorneys general, Democrats and Republicans, have challenged the move. Massachusetts Attorney General Maura Healey reacted: “Secretary DeVos can write as many love letters to the loan servicing industry as she wants, I won’t be shutting down my investigations or stand by while these companies rip off students and families."