Purposefully Lax or Purposefully Complicit?

December, 2021

Washington — Last week I received sixteen boxes of documents relating to the several lawsuits that I brought in 2007, on behalf of the United States, against student loan lenders.  The documents were released to me by legal counsel after reviews to comply with settlements and court decisions, with several more boxes to follow.  The litigation ended in 2019.

So far, I have looked at only two of the boxes.  They contain many documents new to me that show revealing communications among certain lenders, their interest groups, and officials at the U.S. Department of Education.   They cover a time when there was widespread waste, fraud, and abuse in the federal guaranteed student loan program.  

These documents remain relevant today for several reasons.  They answer many questions about who was involved.  They raise questions about how the abuses led to predatory lending practices (in terms of both quantity and quality), which have contributed much to the current student loan crisis.  Because some of the lenders involved are now servicers of the massive federal student loan portfolio, the documents are helpful in understanding how miscreant organizations that acted lawlessly, as lenders, would do the same as servicers.*  

Which leads to a question of what should be done in fairness to borrowers who have been victimized.  An important dimension of these documents is how they reveal that federal officials at the U.S. Department of Education were not only "purposefully lax" in their dealings with lenders, as described by historian Elizabeth Tandy Shermer, but purposefully complicit.   

Where does the complicity fit into the current discussion about student loan cancellations and modifications?  Often it is not considered, but nothing would be more appropriate than to discuss such complicity in the context of the existing statutory power of the Secretary of Education to compromise and settle loans.

Among the documents' highlights and surprises, so far:

•  Confirmation that PHEAA knew its particular claims for taxpayer subsidies had little basis other than the belief that its connections within the Department of Education would prevail against any challenges.  Its assertions — frequent in these papers, that it did not set out deliberately to manipulate loan movements among bond estates to generate sharply higher subsidies — are undermined by internal emails that show PHEAA initially did not want to make too many claims, so as not to draw attention to what they were doing, and that Deputy Secretary William Hansen would be instrumental in approving their claims.  

•  Emails confirming that PHEAA did not want to turn over such documents to the Inspector General for an audit, under penalty of perjury, and they never did.  That included emails showing the desire of CEO Richard Willey to make aggressive claims.  

•  Revelation of the roles of Federal Student Aid director Terri Shaw and David Dunn, Secretary Margaret Spelling's chief of staff.  When OIG and OGC lawyers challenged the higher subsidies (which could cost taxpayers billions of dollars), PHEAA threatened that they would have Dunn overrule them.  Dunn would later prove to be a disappointment to PHEAA.  On the contrary, Terri Shaw was complicit throughout.  It was under her directorship that FSA sent program review teams to lenders like PHEAA to approve the claims after the fact, the findings of which were not accepted by OIG and OGC.  She eventually resigned rather than face what she knew would be Congressional questioning.   

•  Confirmation of the centrality of Scott Miller, a PHEAA consultant and lobbyist, Steven McCullough of Iowa Student Loan, and Kathleen Smith of the Education Finance Council, a trade group.  Miller is continually contemptuous of those who would try to block the higher subsidy scheme.  McCullough serves as a conduit for Hansen after Hansen left his Deputy Secretary position, passing along suggestions as to how to bring pressure on the department's lawyers to fall into line.  Kathleen Smith wages internecine conflict throughout the loan industry to try to keep the scheme from unravelling.  

•  John Dean, a lawyer for the Consumer Bankers Association, wrote legal opinions for lenders to make higher subsidy claims based on his assessment of confusion in the Education Department and the huge "opportunity" it presented. 

•  Confirmation of dissent within the student loan community, with prescient expressions of concern that false claims could threaten the future of the whole industry. Sallie Mae chided PHEAA over the scheme; Henry Howard, a lender, wrote disparagingly: "A chimp could make money with... the alchemy.... Just incredible." 

These documents help fill in the blanks and corroborate previous accounts of the corruption, especially those written by Stephen Burd and Dan E. Moldea.  Historians should take note of the existence and content of these papers.  The revelations should be of considerable interest to those who are currently assessing the Secretary's powers to compromise and settle student loan debt.   

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*Most of the documents come from discovery at PHEAA, which in 2021 decided not to pursue further federal servicer contracts, apparently in the hope that a retreat would wind down costly litigation and investigations, which intensified after PHEAA lost its sovereign immunity in litigation in 2017.    

More on "Drowning in Debt"

December, 2021

Washington — In the previous post, I offered initial thoughts about Elizabeth Tandy Shermer's book, Indentured Students: How Government-Guaranteed Loans Left Generations Drowning in College Debt.  It is an important work, worthy of further dissection and debate. 

It is the work of an outsider to the student-loan industry, a historian who brings formidable skills to her subject and whose analyses are often a refreshing departure from lesser works by authors who bring hidden and not-so-hidden agendas to their product.  

Conversely, I am a student-loan insider — and political scientist, as opposed to historian — whose observations and experiences sometimes do not line up in quite the same direction as Professor Shermer's analyses.   Let me illustrate with a working paper I wrote while at the U.S. Department of Education in 2003, and then turn to how the findings apply to Shermer's book.   

Using the databases of the National Center for Education Statistics, I looked at student financial aid distributions over time.  Here is some of what I found:

1.  Whether federal Pell grant funding for financially needy students went up or down over time, loans in students' financial aid packages went up, especially to the low-income.  Institutions superimposed their own, often conflicting priorities over federal grant and loan programs. 

2.  Low-income Black students were given the greatest loan burdens in student financial aid packages.  Non-needy students of all races were favored in aid packaging. 

3.  Many colleges placed private loans in student financial aid packages, with less favorable terms that federal guaranteed loans, even for students who had remaining federal eligibility.   

None of this was a big surprise.  I had previously written a peer-reviewed paper in 1997 that demonstrated how grants and loans were fungible in student financial aid packages, so the actual beneficiaries of various types of financial aid might not be those for whom it was intended.*   

More surprising were the reactions to the 2003 working paper.  

From the outset, it was difficult to work with NCES to get the data, as they did not want to see presentations by race by income.  I had been asking for this presentation for some time in NCES reports, but pressure from institutional interests prevented it.  Colleges did not like the idea of showing how grant aid was going to higher income students in general, let alone how bad this appeared from multiple angles when broken out by race.     

Several policy analysts in think tanks and advocacy organizations reviewed the working paper.  Will Marshall at PPI arranged a session to review it, along with other works on student financial aid.  One economist said she agreed with every aspect of the paper and its findings, but that they must not be shared outside the confines of the room because they revealed too much about how student financial aid practices actually worked.  If Congress knew, the thinking went, much of the advocacy work for more student aid funding would be undermined.  

The reactions to the working paper from my connections in the Black policy community were muted.  Analysts and advocates are organized around HBCUs and around TRIO aid programs, not around the issues of the bigger picture.  Sometimes they had been lukewarm to me in other circumstances, such as when I had previously worked in the Office of Legislation and Congressional Affairs and was known for thinking beyond the legislative agendas of those particular, more narrowly focused, interest groups.

The reaction was more positive with regard to the paper's finding that private loans were being placed in the aid packages of students who qualified for loans with better terms.  This was a message I passed along to colleagues in organizations like NASFAA and NACAC.  Within the year, word went out within the financial aid community that this should not be happening.  Private loans lost their luster for a few subsequent years (although they soon made a comeback). 

Which brings the discussion back to Professor Shermer's work and where it may or may not line up well with my own. 

Shermer is on-target in pointing out that "operations is policy" (p. 237).  How programs are operated in practice may be different, even wildly different, from the statutory language and intentions that created them.  However, the context in which she explains this deals with how the Nixon Administration did not implement key 1972 legislation as Congress thought it would.  A better and more consequent illustration is how institutions subsequently came to implement neither version, but established their own, more self-serving operations, through which much of federal aid intended to benefit students has been deployed to serve institutional interests.  It was this that NCES was pressured not to show, and why representatives of institutional interests did not want to discuss research findings outside of friendly confines.  

As to matters of race, my experience suggests too much attention is paid in the book to HBCUs (thirty-one references in the index), as if "developing institutions" should be in the forefront of the discussion on racial inequities.  I make this observation fully aware that this is the customary approach of many scholars and journalists.  But HBCUs enroll fewer than ten percent of Black students.  Their institutional needs should not dictate policy on matters such as PLUS loans, and their frequent photo-ops with presidents should not mislead any of us into thinking that directing a few billion dollars their way will solve systemic, nation-wide issues in distributing student financial aid more equitably.  

In other words, consideration of Title III of the HEA must not eclipse dealing with longstanding disparities in Title IV operations.  Likewise, Title IV problems should not take a back seat to the idea that inequalities in society at large are responsible for those most in trouble with student loan debt, as suggested in this passage (p.199):  "Only later did researchers uncover that increasing enrollments and opportunities to borrow did not erase longstanding inequalities after graduation."  

Some researchers knew all along that the way Title IV operated, with its "opportunities to borrow" and its troublesome distribution of debt, was leading to big trouble.  Those problems would only be heightened when the Department of Education, already complaisant on the growing problems of student debt, came to be led by appointees from the loan industry itself who encouraged an anything-goes approach to lending in the early 2000s.  

Readers should know that the student financial aid foundation was already cracked well before that corruption-riddled era, with its explosion of dubious lending, commenced.**

Next month, I will participate in a panel with Professor Shermer and others who will have read her book.  I look forward to a good discussion.  

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* See subsequent corroboration and further explanation, including that of "enrollment management," in Stephen Burd's four-part series, Undermining Pell. 

** For an account of the period 2002-2019, see Dan E. Moldea, Money, Politics, and Corruption in U.S. Higher Education, 2020.   

A New Work on Indentured Students

December, 2021

Washington —  Historian Elizabeth Tandy Shermer has written a welcome addition to the literature of the nation's ongoing student debt crisis.  The book, Indentured Students: How Government-Guaranteed Loans Left Generations Drowning in College Debt, looks back through the eras of the New Deal, the GI Bill, Sputnik, and the creation of the student loan industry.  

The book is unusually insightful on topics ranging from hierarchies across higher education sectors, to the relationship of student financial aid to college prices, to inequities by race and sex that have actually been exacerbated by student loans.

What is missing in the book is more development of the "how" in the title, particularly during the tumultuous first decade of the twenty-first century.   While earlier chapters admirably delve into the people who shaped policies for good or ill, the treatment of later eras leaves readers hanging without the same pursuit of who was responsible for what, why, and how.  Example (p.279):  

"With [the 2006] presidential primaries rapidly approaching, and investigations underway of abuses in student lending, the president fired industry insiders from a purposefully lax Education Department."

As someone who watched this happen from both inside the department and from subsequent litigation discovery, I can attest to the accuracy of the statement.  I also admire its perspicacity, as it goes well beyond conventional wisdom and packs the punch of truth.  But the book does not go on to explain how this left students drowning in debt.  Who were these people? What did they do? What investigations?  What abuses?  Readers are left guessing.  

If the Education Department was "purposefully lax" (and it was), what does that mean for borrowers who are now paying the price, as victims of predatory lending?  Does it mean the Department should remediate the damage done?  I believe the answer is yes, and that it can be done under existing statutory authority, namely the "compromise and settlement" provisions of 20 U.S.C. 1082.*  

There is a straight line from the corruption of the early 2000s to the current student loan crisis.**  One of the book's missed opportunities is that it does not illuminate this connection, to fulfill the promise of the book's title.  Otherwise, this is a remarkably insightful book from which we all can learn. 

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* The Biden Administration has an opportunity to offer significant student loan relief by use of the compromise and settlement authority as outlined in a recent work by Claire Torchiana and Winston Berkman-Breen of the Student Borrower Protection Center.  See especially p. 44.  

** Given what the Department of Justice knew about the corruption of the era, it is perplexing that it did not act as it did later in the college admissions scandal "Operation Varsity Blues," when the perpetrators were prosecuted under federal RICO statutes.  The difference, apparently, is that the racketeering in the former case involved federal officials, which was just too hard for DOJ to take on.