June, 2022
Washington — It's been nearly a year since PHEAA announced its departure from federal student loan servicing. The occasion was summed up well on July 9, 2021, by consumer advocates at the Student Borrower Protection Center who celebrated the news but warned of turmoil and difficult challenges ahead for the U.S. Department of Education:
For over a decade, PHEAA made clear that it could not be counted on to deliver borrowers quality servicing or comply with the law. The organization’s exit from federal student loan servicing provides an opportunity for ED to turn the page and enter a new chapter of consumer protection on behalf of millions of student loan borrowers. But doing so will require providing borrowers justice for existing harms, preventing new errors from arising as PHEAA’s loans are passed on to new servicers, demanding transparency at every point in the transition process, and vigilantly watching for mistakes that this transfer reveals or causes.
All this is sadly true. To use the authors' words, let's start meeting the challenges with demanding transparency about what happened well over a decade ago as a part of the effort to enter a new chapter of consumer protection.
The U.S. Department of Education knew as early as 2002 that PHEAA might not be a law-abiding federal contractor when an astute federal employee in Texas, Jerry Wallace, discovered approximately $50 million in what he considered to be questionable federal subsidy claims generated by PHEAA loan servicing software.* After consulting with a colleague in the Office of Postsecondary Education in Washington, DC, who concurred, he wrote a report requiring that taxpayers be reimbursed.
What happened next has long been a matter of conjecture, because the money was never returned. Why not and on whose orders? Not only was the money never returned, PHEAA and others started to grow the false claims in much larger amounts.
The answers lie in a deposition given under oath by Jerry Wallace in 2010. I uncovered a summary of his deposition among papers released this year to me by those who conducted it.
According to the deposition, after a year of back-and-forth between Texas and Washington, the Wallace report was amended to take out any reference that the funds should be returned. Along the way the language "went from finding, to observation, to note of interest" with "no discussion of growth in the note of interest."
Wallace testified that this was the only report he had ever seen where this happened. The potential for "unlimited growth" that "could add up to some real money if all the secondary markets were to start manipulating the system" was not addressed. Texas-based federal officials "got no explanation of how it was legal."
As to who was behind quashing the original report, Wallace said "there was discussion between Sally Stroup and Kristie Hansen" in Washington. Stroup, a former PHEAA employee whose emails show frequent exchanges with PHEAA's lobbyist, Scott Miller, was Assistant Secretary for Postsecondary Education; Hansen was an appointed official in the office of Federal Student Aid. "Conversation between Hansen and Stroup was conveyed back" to Texas officials to make the changes, Wallace stated under oath.
So now we know, finally, after two decades, who gave the orders to look the other way.
Dr. Earl Crisp, head of the federal regional office in Texas at the time, always declined to say from whom he was taking orders to withdraw the Wallace findings, and to explain why he did not stand up for the rule of law when pressed to violate it. Wallace says in his deposition that he wrote the report so Crisp could understand it, and its implications, so he would know what was at stake.
When I first saw the original Wallace report in 2004, a year after I had discovered false subsidy claims myself at other lenders, I recognized it as a model of clarity, compelling in its conclusions. Wallace's work was later validated in subsequent audits of secondary markets by the Inspector General, which became the basis in 2007 for a determination by the Secretary that PHEAA's and others' manipulation of the loan system was, and had always been, illegal.
But PHEAA never suffered any consequences for this at the hands of the Department of Education, which helps explain why it has continued its bad behavior with calamitous outcomes for borrowers as well as taxpayers. And no Department of Education officials have ever been investigated for their roles in this or similar scandals, to my knowledge, despite overwhelming evidence that they colluded with perpetrators, actively or passively.
Is it a surprise that PHEAA went on to be a loan servicer (aka FedLoan and AES Servicing) that has cheated countless borrowers out of their benefits and, perhaps more than any other servicer, thrown the nation's whole student loan operation into chaos? No. The warning signs were apparent for years. I have reviewed PHEAA loan servicing in the period 2013-2022 and find it likewise full of misrepresentation and deception.
As the Department of Education in 2022 tries to make sense of how to move ahead, it must consider suspensions, debarments, and other actions against those who brought the student loan system to its knees and who continue to do so.
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* The discovery was made after a review of subsidy claims by the Iowa Student Loan Liquidity Corportation (ISLLC), which used PHEAA's software, known as COMPASS.
