Attention Iowa: Don't Give Student Loan Agency a Free Pass

A recent report by Iowa's attorney general about misdeeds at the Iowa Student Loan Liquidity Corporation has one major shortcoming: it essentially lets the leadership of the state-affiliated nonprofit lender off the hook.

Don't get us wrong -- the report is not a whitewash. As we noted previously, it provides an illuminating account of how the Iowa loan agency, also known as ISL and Iowa SLLC, pursued a concerted strategy to steer students to its most expensive private student loan products. Among other things, the report found that the agency made improper payments to colleges that recommended its private "Iowa Partnership Loans" to their students; falsely advertised its private loan products as the "lowest cost" options available; and routinely failed to advise students and their families to exhaust their federal student loan eligibility before taking out private loans.

"The future of many Iowa students is burdened by a mountain of student loan debt," Iowa Attorney General Tom Miller (pictured left) wrote in the report. "It appears that ISL unduly elevated the goals of increasing its competitive advantage, market share, and loan portfolio size over its mission of always striving to do the best for its student borrowers."

But, at the same time, the report opens up the possibility that the agency's leaders will not be held accountable for their actions.

"There are no allegations that ISL's management, employees, or board of directors acted with ill-will or bad intentions," the report states. "On the contrary, we believe those connected with ISL are Iowans of good character acting in good faith." This seems like a strange conclusion for the attorney general to reach, considering he recently complained to state legislators that ISL officials exhibited "a stonewalling mentality" during his investigation "that was troubling to us."

Given the attorney general's kind words about their "good character," it's hardly surprising that the loan agency's leaders are attempting to spin the report to their advantage. "The Attorney General's report ‘emphatically' dismissed any allegations or speculation that Iowa Student Loan had engaged in mismanagement, misappropriation of funds or criminal conduct," stated a press release issued late last month by ISL Chief Executive Officer Steve McCullough. The release also thanked state leaders for their "support of Iowa Student Loan's mission."

So let's get this straight. ISL officials were well-intentioned and did not engage in mismanagement when they pushed students to take on greater amounts of expensive loan debt than they needed. We're sure that Iowa students -- who graduate with the highest student loan debt in the nation despite being charged tuition and fees that are close to the national average -- would beg to differ.

The truth is that ISL engaged in an "aggressive, offensive strategy" to achieve "hypergrowth" -- as agency officials revealed in internal e-mails obtained by the Des Moines Register last year. They did this in part by providing kickbacks to colleges to promote their private loan products to students and families, many of whom would have been better off exhausting their federal student loan eligibility first (through Stafford and PLUS loans).

Perhaps Iowa's attorney general would have been less charitable to agency leaders if he had delved into their efforts to bilk taxpayers by engaging in a risky and illegal scheme to improve the agency's competitive position (so risky in fact that agency officials acknowledged in those internal e-mails that the corporation's "viability" would be threatened if it went awry). Engaging in a tactic employed by about a dozen other non-profit lenders (and some for-profit ones too), the Iowa Student Loan agency improperly grew the portfolio of loans that it claimed were eligible for the 9.5 percent subsidy rate in order to gain illegal subsidies from the government. A 2007 audit of the agency, conducted on behalf of the U.S. Department of Education and recently released as part of a freedom of information request, revealed that in 2006 ISL claimed the 9.5 rate on over $300 million of loans not eligible for the subsidies.

What's more, ISL officials continued to pursue this scheme even after Congress expressly prohibited bilking the 9.5 subsidy rate. Their cavalier efforts earned an unusually strong rebuke from Education Department officials, who in January rejected the agency's arguments that they had acted legally because the new law was not clear enough. "By failing to seek and obtain clarification, Iowa SLCC abdicated its responsibilities and cannot now be excused from the consequences," David Dunn, the education secretary's chief of staff at the time, wrote in the Department's official ruling on the case.

Time and again, officials at the Iowa loan agency have put their narrow interests ahead of those of students and taxpayers. The attorney general's report makes this abundantly clear, even as it looked only at part of the evidence. Unfortunately, the report appears only too willing to let agency officials off the hook. Indebted Iowa students deserve better.