Education Dept. Auditor Doesn’t See Loan Abuses Retiring With Him
By PAUL BASKEN
The Chronicle of Higher Education
July 3, 2008
As he begins retirement this month after 40 years of federal service, the Education Department's departing inspector general, John P. Higgins Jr., sees one area that stands out for its susceptibility to costly waste and abuse.
That area, Mr. Higgins said in an interview as he finished packing up his office, is student lending. And unless Congress greatly simplifies the system, the department's former chief auditor believes his successors will always have plenty of work to do.
"This is a very complex program," Mr. Higgins said of the government's system of paying subsidies to private banks that in turn distribute some $50-billion in loans to students. That complexity creates problems, he added, because "if you want to get competent people that know the programs and have the experience, you're going to have to go to the industry."
Mr. Higgins's concern stems from experience. The inspector general's adversaries in recent years have included a department official and former Sallie Mae official who overrode his objections to the student lender's partnership with an agency responsible for overseeing it, and several loan companies that took subsidies from a loan program long after Congress tried to cut them off. As he is leaving, department officials are promising new efforts to bring about some simplification, though longtime critics remain skeptical about their chances of success.
Reining In Abuses
One of the most high-profile series of investigations during Mr. Higgins's six years as inspector general concerned the government's payment of subsidies on a type of student loan that offered lenders a fixed 9.5-percent rate of return.
The program, created at a time of relatively high interest rates, became a financial windfall for lenders when market rates fell. Some lenders extended that advantage by recycling old student loans to keep them eligible for the 9.5-percent subsidy rate, eventually costing the government hundreds of millions of dollars in disputed payments.
The case persists. The Education Department agreed in January 2007 with the inspector general's recommendation that Nelnet, which cultivated the largest 9.5-percent portfolio, should forfeit claims to $882-million in expected future subsidies. But the department agreed to let Nelnet keep about $322-million in subsidies already received, despite Mr. Higgins's protests that they should have been disallowed.
The department also agreed to let other lenders keep their past subsidy payments, but limited them to collecting future payments only if they provided an acceptable review from an outside auditor certifying that they didn't improperly recycle old loans. The inspector general's office is now reviewing outside audit reviews submitted by 15 lenders and is conducting its own audits on two other large users of the 9.5-percent program—Sallie Mae and the Kentucky Higher Education Assistance Authority—to investigate other possible abuses, Mr. Higgins said.
And just last month, as he was heading out the door, Mr. Higgins got his first look at the partnership contract between Sallie Mae, the nation's largest student-loan company, and USA Funds, the nation's largest guarantee agency. Guarantee agencies are nonprofit entities whose roles in the federally guaranteed student-loan system include the oversight of lenders. They are expected to repay lenders for defaulted student loans with government money only after they ensure that the lender has complied with the terms of the program.
Mr. Higgins recommended in a 2002 audit that the department forbid the Sallie Mae relationship with USA Funds as a violation of federal conflict-of-interest regulations that prohibit the lender from performing the duties of a guarantee agency. His recommendation was overruled in December 2004 by Matteo Fontana, a former Sallie Mae employee serving as acting head of the Education Department office that oversees lenders and guarantee agencies.
A copy of Sallie Mae's contract with USA Funds, most recently updated in 2006 and showing the lender with extensive financial and operational control over the guarantor, was obtained last month by The Chronicle. Mr. Higgins said that version of the contract is "much more voluminous" than an older version his office had seen in the past.
"It's a totally different contract," Mr. Higgins said. He said he forwarded a copy to the Education Department's Office of General Counsel, which promised a review to see if the level of control between Sallie Mae and USA Funds had "gotten better or worse." James F. Manning, the department's deputy chief operating officer in charge of federal student aid, issued a subsequent statement affirming the department's 2004 acceptance of Sallie Mae's ties to USA Funds. "We are confident with the decision, which was a legal one, and we find no reason to change or revisit it," he said.
Broad Management Reviews
Mr. Higgins is not leaving without admiration for some efforts of the current administration. While cleaning out his office, he came across two audits dating back to the early 1980s, both highlighting cases where mismanagement left the department's financial statements out of balance by hundreds of millions of dollars. The Bush administration has made fixing that type of problem a priority, he said, instituting the broadest review of operational management he has seen in his 40 years in government.
"This is the first time I ever saw that it got more than lip service," Mr. Higgins said. "So I was very impressed with what this administration was doing in the beginning, and that's quite frankly one reason why I'm still here."
The Bush administration has also made significant advances in promoting computer security at the Education Department, he said. "They are getting better and better on that every year," he said.
The student-aid system, by contrast, sticks out, Mr. Higgins said. The department's campaign for stronger financial controls is helping, he said, noting that such measures would probably have helped detect the problem with the 9.5-percent loans earlier.
And yet the level of complexity in the student-loan system, which includes a variety of mathematical and financial variables to derive the rates paid to lenders, remains an obstacle to long-term improvement and hinders effective oversight, he said.
In one of his office's bluntest critiques, the inspector general issued an audit in September 2006 declaring that for much of the Bush administration, the Education Department's Office of Federal Student Aid "emphasized partnership over compliance in dealing with guarantee agencies, lenders, and servicers."
A Simpler System
Other loan-industry experts and officials agree that the federal system is complicated but don't believe that fact alone guarantees the programs will be open to abuses or poor oversight.
The federal system of distributing student-loan money through private banks "is more complex than it needs to be," said John Dean, a lawyer who represents the Consumer Bankers Association. That complexity, however, doesn't necessarily lead to higher costs, he added, since the subsidies and payment rates "make the program work better for students and other borrowers as well as for taxpayers."
Even in cases where the complexity of the system does open it up to abuse, the potential problems could be easily minimized, said Jon H. Oberg, a former Education Department analyst who uncovered the waste in the 9.5-percent program. If there were a will to do so, he said, the department or Congress could put in place a few "easy reforms," such as the government's conducting regular reviews of its loan-program operations and requiring that students have access to all details of the policies involved in calculating their aid packages. "I don't see it happening," he said.
Some members of Congress have argued that the loan companies should get reimbursed through formulas tied to market conditions, rather than have lawmakers periodically adjust the subsidy rates. Current formulas rely too much on "politics and backroom deals," said Rep. Thomas E. Petri, a Wisconsin Republican and member of the House of Representatives' education committee.
Meanwhile, the Education Department has made progress in its oversight of aid programs. The Government Accountability Office, after placing student financial assistance on its list of programs at high risk for waste or abuse in 1990, removed it in 2005, citing improvements in financial management and internal controls.
And with only a few months left in the Bush administration, department officials are joining Mr. Higgins in holding out hope for further improvement.
"We've got until January 20," said Sara Martinez Tucker, under secretary of education, and "our minds are open" to possible improvements along the lines suggested by Mr. Higgins.
A catalyst, Ms. Tucker said, may have been the decision by Congress and the Bush administration to help rescue the loan companies from declining economic conditions that led many lenders to threaten to stop offering government-subsidized loans.
The Education Department had already been examining some options for improving its student-loan operations, such as simplifying the eligibility questionnaire used by students and their families. But discussions on the industry-bailout package led Education Department officials to talk with loan-industry representatives and officials in the Treasury Department who had never been part of their discussions of improvements to the student-loan system, Ms. Tucker said.
"This is a unique opportunity for us to look at the entire federal student-aid operation," she said in a June briefing on the industry-rescue plan, "and look at leaving perhaps a blueprint for what a simplified federal student-aid system could look like."
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