Non-Profit Student Loan Scandals

Earlier this week we urged lawmakers not to put non-profit student loan providers on a pedestal. After all, these agencies are no strangers to scandal.

In our earlier post, we wrote about the central role a group of these nonprofit lenders played in devising and carrying out the 9.5 student loan scandal. Today, we're going to take a closer look at misdeeds that have occurred at individual agencies over the last several years. In case after case, the leaders of these companies appear to have lost sight of their agencies' missions -- acting more like high-rolling executives at for-profit corporations than the leaders of tax-exempt public-purpose organizations.

Here are five such cases:

Iowa Student Loan Liquidity Corporation

The chief executive officer of Iowa's nonprofit student loan company, also known as ISL, has not been shy about his ambitions for the agency. In an internal company e-mail obtained by The Des Moines Register in 2007, Steve McCullough wrote that his aim was to achieve "continued 'hypergrowth" by pursuing "an aggressive, offensive strategy to bring in new loan volume."

A report released last fall by Iowa's Attorney General Tom Miller demonstrates how ISL officials carried out this strategy. According to the report, the agency's leaders pursued a concerted strategy to steer students in the state to its most expensive private student loan products. Among other things, the AG found that ISL had provided kickbacks to colleges that recommended its private "Iowa Partnership Loans" to their students; gave financial rewards to their employees based on the number of private loan borrowers they secured; paid bonuses to staff members at the college access centers they managed based on the number of borrowers they brought in; 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 Iowa agency also was an aggressive participant in the 9.5 student loan scheme, a fact that was not mentioned in the report.] In a statement responding to the report, agency officials did not dispute any of the report's findings but instead took solace in the fact that the AG had not found them guilty "of mismanagement,misappropriation of funds, or criminal conduct."

It's no coincidence that Iowa students graduate with the highest level of debt in the country. The AG concluded that the loan agency's leaders had "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."

The Pennsylvania Higher Education Assistance Agency

The Pennsylvania loan agency, known as PHEAA, was the largest nonprofit lender that participated in the 9.5 student loan scheme. Between 2002 and 2006, PHEAA made 9.5 claims on between $1.2 billion and $2 billion each year.

While the agency spent much of the money it earned on grants, scholarships, and loan forgiveness programs in Pennsylvania, PHEAA executives used a substantial share of the proceeds, according to The Chronicle of Higher Education, to "embark on a spending spree" and to woo college financial aid administrators. Expense reports that PHEAA was forced to release in March 2007 in response to an open records request, revealed that the agency had spent more than $860,000 at eight high-priced resorts for retreats held over a five year period. At these retreats, they lavished money on board members for falconry lessons, cigars, limousines, and spa treatments.

PHEAA's leaders also rewarded themselves with enormous bonuses. For example, Richard Willey, the agency's chief executive, received an $179,000 bonus in 2007, bringing his total compensation to $469,000 that year. Meanwhile, a report by the Pennsylvania state auditor in the summer 2008 described bloated compensation packages for PHEAA executives and board members, including salaries of more than $164,000 paid to 12 executives and an all-expense-paid trip for employees and their families to a local amusement park.

Management at PHEAA appears to "have become distracted by the rewards of being PHEAA 'executives' rather than public servants for the Commonwealth of Pennsylvania.," the state auditor concluded.

Kentucky Higher Education Student Loan Corporation

The Kentucky student loan agency, known as KHESLC, was one of the most aggressive participants in the 9.5 student loan scheme. Over the course of four days in January 2004, KHESLC's leadership engaged in a massive loan and bond refinancing and recycling project so that the agency could claim 9.5 subsidy payments on "nearly all of its loan portfolio," according to a recent report by the U.S. Department of Education's Inspector General (IG). The IG estimated that between 2004 and the end of 2006, the Kentucky agency overcharged the federal government more than $80 million.

KHESLC officials used a share of the funds they obtained through this risky scheme to finance its popular "Best in Class" loan forgiveness program, which was designed to encourage students to pursue careers as teachers. But in January 2007, Education Secretary Margaret Spellings put a stop to the 9.5 scandal by barring lenders who refused to submit to independent audits -- like KHESLC -- from receiving any further 9.5 payments. As a result, the loan agency was eventually forced to pull the plug on the loan forgiveness program, leaving thousands of newly-minted teachers in the lurch -- deeply indebted with loans they never expected to have to pay off.

"The loan forgiveness played a large role in me deciding to go into this field," Travis Gay, a special education teacher, told the Lexington Herald-Leader. "I paid for my entire master's degree out of the program, books and all, and so did my wife. We were told, ‘It's something you can count on.' But then it was gone."

The South Carolina Student Loan Corporation

According to a recent Higher Ed Watch investigation, the student loan agency in South Carolina, known as SCSLC, seems to have used its ties to the state guaranty agency to obtain excessive taxpayer subsidies from the federal government. The loan agency appears to have done this by helping the guarantor exploit an emergency program the government has in place to ensure that all eligible students are able to obtain federal student loans.

The federal lender-of last-resort program is administered by the designated guaranty agency in each state to provide government-backed loans to students whose applications have been denied by other lenders. Since the agency must give all borrowers who qualify for this program a loan, the federal government takes on all the risk associated with the debt. This means that holders of these loans are reimbursed for 100 percent of any losses sustained due to borrower default, as opposed to ordinary FFEL loans, which are reimbursed at a 97 percent rate.

Most guarantors use this program only in rare cases. But as Ben Miller at Higher Ed Watch reported, the rate that the South Carolina guarantor used this program to request reimbursement from the Department was at least 100 times greater than for any of the other 9 guaranty agencies he had reviewed, including the largest guarantors in the country.

What makes this case especially intriguing is that SCSLC effectively runs the operations of the guarantor, making it easy for the agency to carry out such a scheme. Here's what we think is happening: SCLSC is denying the loan applications of financially needy students at an unusual frequency. Under SCLSC's lender-of-last resort plan, a single denial makes the students eligible for a lender-of-last-resort loan through the South Carolina guarantor. That agency, in turn, conveniently contracts with SCSLC to provide that loan. Denying students' FFEL applications and shifting them into the lender-of-last resort programs would be a worthwhile endeavor for SCSLC because it allows the agency to reduce the risk in its portfolio, obtain higher federal reimbursement payments than it otherwise would receive, and, make its loan assets more attractive to potential investors because they carry a 100 percent government guarantee.

The Department of Education is carrying out its own investigation of these allegations and is expected to issue a report on them soon.

The Connecticut Student Loan Foundation

The student loan agency in Connecticut, known as CSLF, has been in turmoil ever since the details of a report by the state auditor began to emerge several months ago. The audit found CSLF officials had engaged in lavish spending on salary compensation and other perks at the same time that the agency was operating tens of millions of dollars in the red and laying off employees (as well as allowing its pension fund to run dry).

"Despite the negative cash flow," the Hartford Courant reported, "the foundation spent $4,459 for a holiday party in 2006 for the board of directors and managers at Portofino's Restaurant and spent $1,884 to hire four limousines to take certain board members to the party."

"Auditors also criticized the foundation for spending $6,850 for club seats to the UConn football season, paying monthly dues to the Tournament Players Club golf course in Cromwell, paying $1,378 toward the cost of a retirement party for the financial aid director at Eastern Connecticut State University and spending $650 for Big East Basketball tournament tickets and $1,100 to sponsor a foursome in the Notre Dame Golf Open."

Ever since the details of the state audit became public, almost all of the foundation's board members have resigned. And this month, the remaining board members fired the agency's president Mark Valenti for cause after they discovered that he had ordered the human resources department to start making six-figure severance payments to him.

"Executives at the Connecticut Student Loan Foundation -- the state chartered nonprofit group that guarantees and finances loans -- have behaved like masters of the universe on Wall Street," Rick Green, a columnist for the Hartford Courant, wrote in May.

These examples show how non-profit loan agencies have strayed from their missions. We're not saying that these companies are any worse than their for-profit rivals. But we're not so sure that they are that much better either.