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.
*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.