The Casual Acceptance of Fraud and Deception in Federal Student Loans

May, 2022

Washington — What would you make of the following email exchange if you came across it as a federal official who had taken an oath faithfully to uphold the law?  That question once presented itself to federal investigators who became aware of it in the course of subsequent litigation.   

The exchange starts off as a question from one student loan lender, Tennessee-based EdFinancial, to another, the Pennsylvania Higher Education Assistance Agency.  EdFinancial is contemplating moving loans among different trusts to generate more federal taxpayer subsidies for itself.  It asks PHEAA, whose software it uses to make subsidy claims, if such claims would be legal.  PHEAA official Diane Freundel passes along the question to PHEAA's liaison to the federal Education Department, Scott Miller:

"Scott, EdFinancial has asked us some we programmed our system....  Tom Renard made an off-the-record call to Angela Baker at the Dept - she's and we frequently ask her off-the-record questions.  She didn't know the answer....  Since you have the Dept of ED contacts, I said I would run it by you.  Do you know the answers....  If not, would you be willing to run them by [ED] policy as hypothetical questions from one of our clients (EdFinancial doesn't want their name used)? Thanks!"

Miller replied:  "This issue, and some like it, are currently under scrutiny within ED -- they came up in their audit of Iowa's sec. market (which uses our servicing system).  We are currently plotting strategy on this issue....  In the meantime, please don't ask ED for its opinion -- it's likely to be an answer we don't like.  Thanks!"  (emphasis added)

Several obvious red flags should have gone up immediately to subsequent readers of the exchange, which was intended never to be revealed to lawyers and investigators at the Education Department or the Justice Department.  Why didn't the lenders simply ask ED for a determination, or did they have something to hide?  Why is there an established off-the-record system between lenders and ED officials?  Why is strategy being plotted around the subsidy claims?  Is this the way EdFinancial and PHEAA always do business, never to seek answers they "don't like," especially when the higher subsidies in question could amount to hundreds of millions of dollars for them?

In the past year, both EdFinancial and PHEAA got news they undoubtably did not like.  EdFinancial was required by the Consumer Financial Protection Bureau (CFPB) to enter into a consent agreement and pay a million dollar fine for lying to borrowers.  EdFinancial put out a statement that it vehemently disputed the federal agency's action and that it settled only so it could devote more of its efforts to helping borrowers.  (Note to EdFinancial:  no one with knowledge of student loan servicing believes that.)  

PHEAA's too-clever strategies have likewise caught up with them, the denouement coming at a 2021 U.S. Senate hearing when their CEO dissembled under oath.  A few weeks later, PHEAA announced it would no longer be a federal student loan servicer.  There is now a massive federal effort underway to clean up the student loan servicing wreckage left behind by PHEAA.  It may take years.

In view of what has happened, another red flag should now go up with more questions:  When did the above email exchange take place, and what did federal officials do when they learned of it?  

It occurred in 2005.  To the best of my knowledge, federal officials who, upon its discovery, should have investigated it further, did nothing.*  The subsidies in question were reiterated by ED in 2007 to be illegal but most lenders never had to pay any of their false claims back. The experience taught the industry the lesson that, in student loans, no bad deeds ever go punished, so to speak.**    

It's been clear for two decades that borrowers and taxpayers have been exploited by unscrupulous people in the student loan arena.  It's still going on.  The National Association of Student Financial Aid Administrators (NASFAA) last week put out a white paper on needed reforms.  Many of its recommendations are good, but they are heavy on blame of others and light on reining in the exploiters.  This is to be expected, as three of the four "experts" who helped with the white paper are high on the list of people who contributed to the nation's student loan debacle in the first place.  Two of them are former PHEAA officials, including even the aforementioned Scott Miller.  (NASFAA does its own reputation, which has hardly recovered from lender payoff scandals in 2007, no good by giving voice to discredited, long-standing perpetrators of student loan dysfunction.)

It may be too late to take action on scandals that should have been investigated long ago, but not too late to learn lessons from them, particularly that casual acceptance of such dealings often leads to even bigger problems later, as in the sad cases of EdFinancial and PHEAA.  Now is the time for our country to consider major changes in the way we finance higher education, to rid us of the plague of schools, lenders, and loan servicers that have ruined the lives of so many borrowers.  It's time to look at how other countries make higher education affordable without attendant corruption. 

*Other discovered emails at PHEAA showed a scheme, begun in 2002, to claim higher federal subsidies, but not so great as to draw attention to them.  The scheme was known to political appointees at ED who provided PHEAA with inside information as to how to avoid adverse findings by Inspector General audits.  See Dan E. Moldea, Money, Politics, and Corruption in U.S. Higher Education (2020), pp. 128-129.   

**Worth noting: the one lender that had to pay back a significant amount went on to make changes in its board of directors and instituted a code of ethics.  It is now ranked higher as a servicer than entities that were not required to repay any of their false claims.


Don't Overlook These Student Loan Cancellation Basics

May, 2022

Washington — President Biden has signaled that he is considering cancellation of federal student loans for certain borrowers in amounts yet undetermined.  Which has become the subject of many news articles, op-eds, and cartoons, but an understanding of the issues involved (especially costs to taxpayers) has not been a prerequisite for much of the commentary.  

Here are points to keep in mind:

1.  Millions of borrowers have been the victims of unscrupulous loan servicers, which have channeled borrowers into repayment choices that aided their own bottom lines at the expense of the borrowers'.  Cancelling these amounts, which have ballooned borrowers' balances, constitutes a removal of deceptive and improper* charges, not a cost to taxpayers.    

2.  Borrowers' interest rates and origination fees have always been set well above the government's cost of money, to have borrowers themselves pay for the program's administration, including estimated write-offs.  The federal student loan program has actually been making money for the government for many years before the Covid-related repayment pause.    

3.  Many Americans who attended public colleges in the past paid relatively low tuition, heavily subsidized by taxpayers.  In recent decades, taxpayers have benefited as the cost of postsecondary education has been shifted onto students and their parents, most of whom have had to cover the costs with student loans.   If there are taxpayer costs for the President's student loan cancellations above and beyond the considerations identified above, it is tribute toward generational equity.  

4.  Much student loan debt has been incurred by those who attended schools that should never have been approved by the federal government for participation in federal student loan programs.  The victims of these schools —overwhelmingly low-income — are unlikely ever to be able to repay their debts, so it is best to cancel the loans to relieve an unjust burden from the already  disadvantaged.  A simultaneous purge of low quality schools from continued eligibility must accompany the loan cancellations, for substantial out-year taxpayer savings.** 

5.  For debt that is not cancelled (the President wants to target the relief), borrowers should have bankruptcy protection restored, to treat student loan debt the same as other debt.  Some have argued that student loan borrower benefits, such as income based repayment options, remove the need for bankruptcy protections, but that obviously has not worked out because loan servicers have steered unwitting borrowers away from taking advantage of such benefits.  

The Secretary of Education has broad powers under current statutes to carry out student loan cancellations, remediations, and loan compromises.  It is hard to estimate with precision how much can be done at no net taxpayer cost, but it is much more than is commonly acknowledged by critics of cancellation, many of whom are unaware of the basics of student loan finance.  To the extent any cancellations would begin to cost taxpayers, the expenditures should be considered a bargain if they lead to borrower victims getting back to being productive members of society and an overdue crackdown on substandard schools.  These factors should be scored by CBO and OMB over ten years to determine taxpayer impacts on both revenues and expenditures. 

What is still lacking is more attention to fixing accountability for how we got into the federal student loan mess in the first place, which is necessary so that we do not repeat the same mistakes.  Under law, the Secretary of Education is responsible for "sound management and accountability" in the loan programs.  Better management seems to be in the works; more accountability must follow. 


* Example:  “EdFinancial’s failure to tell the full truth to borrowers, so it could pad its bottom line, highlights a systemic problem with loan servicing,” CFPB Director Rohit Chopra said.... “When student loan companies lie about cancellation and repayment programs for borrowers, they are breaking the law.”

** Unfortuntately for borrowers and taxpayers alike, many of those in Congress who oppose student loan cancellation support federal subsidies for substandard schools.