Barre Montpelier Times Argus, VT
12-09-07
Once the solution, student loan agencies face scrutiny
By JONATHAN D. GLATER The New York Times
DES MOINES, Iowa — When Iowa set up a corporation to make student loans
more available, it hoped to expand access to college. Now state officials are
investigating whether the corporation's aggressive practices to get business help
explain why Iowa's college graduates have the nation's second-highest debt
burden per student.
The nonprofit Iowa Student Loan Liquidity Corp., created in 1979, has become
the dominant student lender in the state, with 400 employees and $3.3 billion in
outstanding loans. Its officials, in recently disclosed e-mail messages,
emphasized a need for "continued 'hypergrowth"' and benefits of "an aggressive,
offensive strategy to bring in new loan volume."
Some Iowa lawmakers, after hearings this fall, threatened to strip it of its
authority to issue tax-free bonds, raising its costs, and the attorney general is
investigating its business practices and governance.
It is just one of several state-created lenders that have come under scrutiny.
The states are focusing, to a degree, on issues similar to those raised in the
national student loan scandal of the spring: lax oversight and, in Iowa, whether
incentives to colleges led them to steer students to Iowa Student Loan. Other
questions are particular to state-affiliated, nonprofit lenders, like whether they
should be held accountable for lavish spending, be subject to greater public
scrutiny or retain a right to issue tax-exempt bonds.
In Pennsylvania, the state auditor is investigating the Pennsylvania Higher
Education Assistance Agency, which has doled out $7 million in bonuses to
senior employees since 2004 and spent lavishly on retreats. Its chief executive
resigned in October. And last month, the federal Education Department's
inspector general concluded that the agency improperly exploited a federal
subsidy program to rake in $34 million.
A recent state audit of the Missouri Higher Education Loan Authority, a quasigovernment corporation, found that it, too, had paid millions of dollars in
bonuses, perks and severance packages to top executives.
"They did not act like a state agency at all," said Susan Montee, the Missouri
state auditor. "They really had the mindset that they were a for-profit business."
Montee said the authority could have used its earnings for things like improving
loan terms, but did not. "They weren't doing things to fulfill their mission of
making higher education affordable," she said.
In a response to the audit, the authority's chief executive, Raymond H. Bayer Jr.,
said the lender had new board members and senior managers "strongly
rededicated to accountability, efficiency and transparency at all levels of the
organization."
Keith New, a spokesman for the Pennsylvania authority, said the company had
already adopted new policies on compensation, bonuses and spending. But
Chuck Ardo, a spokesman for Pennsylvania's governor, Edward G. Rendell, said
he was reserving judgment and might yet recommend that it be sold. "Unless
they show him that students are their first priority, then he thinks that they need
to be privatized," Ardo said.
State-affiliated student loan corporations came into existence when low-cost
student loans were not widely available. Some acted as guarantors of loans
before the federally guaranteed student loan program was created in 1966.
Others bought loans made by banks, enabling them to lend more even when the
economy soured.
Over the years these agencies evolved, growing in size and reach, and
becoming lenders themselves. They became so lucrative that a rash of them
were acquired by private companies.
Roughly 30 remain. Kathleen Smith, president of the Education Finance Council,
which represents nonprofit and state-affiliated loan companies, said that the
lenders performed a vital function and that the conduct of only a very few had
drawn scrutiny.
But in Pennsylvania, Missouri and Iowa, state officials have been asking whether
the agencies have forgotten their purpose.
State Sen. Michael Connolly, a Democrat, said of Iowa Student Loan: "If they're
going to act like an aggressive profit-making corporation and pay their CEO a
quarter of a million dollars a year and pay their board members $1,000 a
meeting, then maybe we should cut them loose."
The chief executive of Iowa Student Loan, Steve McCullough, strongly defended
the corporation and said it had helped students go to college as federal and state
aid stagnated. He has pledged to make the corporation more transparent by
giving the state an annual report and formally opening board meetings to the
public.
He attributes debt burdens to rising tuition and relatively low family incomes in
Iowa. "Iowa Student Loan does not control the factors that cause the need for
students to borrow," McCullough said.
Part of what has drawn attention to Iowa Student Loan is its dominance. At Iowa
State, more than 90 percent of students who take out private loans borrow from
Iowa Student Loan; at the University of Northern Iowa, about 80 percent do.
Originally set up to purchase loans made by banks, Iowa Student Loan in 1987
began to offer consolidation loans, which allow students to combine loans and
simplify repayment. In 1992, Iowa authorized the corporation to work with a state
agency to offer "Iowa Partnership Loans," private loans not backed by the federal
government.
The sector is fast-growing and largely unregulated, and was the focus of recent
state and federal investigations that turned up perks and rewards paid to college
financial aid officers and universities to promote certain loan companies. Iowa
Student Loan's efforts echo such practices.
The Des Moines Register, after a legal battle, obtained internal corporation email messages dating back to 2003 through the state's public disclosure law
showing the lender's zest for growth. The newspaper separately documented
how the corporation had arrangements with colleges and universities to assume
some of the costs of assisting students in taking out its private loans — an effort
that appeared to pay off.
For years, Iowa State University routinely included the corporation's private loans
in students' financial aid packages although they are generally the most
expensive way to pay for an education. State officials say that other Iowa
colleges followed the same practice.
Private loan volume has grown more than tenfold nationwide over the past
decade, but in Iowa the increase is more than five times greater, according to the
Iowa College Student Aid Commission, an agency that oversees the federal loan
program in the state. McCullough said that that statistic exaggerated growth
because the company's private loan program started out very small.
Students who appeared at a legislative hearing this fall said they thought that the
private loan was the only or the best option available. "The financial aid office
never talked about anyone but Iowa Student Loan," Taleen Brady, a senior at
Iowa State, said in an interview after testifying. She took out a $5,000 loan,
paying a 9 percent origination fee for her first year of college.
The next year, after talking to the director of the university's financial counseling
clinic — which is outside the financial aid office — she switched lenders and got
a loan with a much lower fee. Looking back, Brady was blunt in her assessment
of the financial aid office. "It was very deceptive."
Roberta L. Johnson, director of financial aid at Iowa State, said she had ended
the practice of including private loans in financial aid awards shortly after she
took over in 2003. She said, "Since we changed it, we have seen our student
debt levels start to drop slightly."
Iowa students also borrow a lot. According to Robert Shireman, executive
director of the Project on Student Debt, a nonprofit organization financed largely
by the Pew Charitable Trusts, the average debt of student borrowers graduating
in Iowa in 2006 was $23,680, compared with a national average that year of
$18,918.
McCullough said that the reimbursements to colleges did not cover all the costs
of handling the Iowa Partnership loans and that the lender offered the payments
because although the loan program was authorized by statute and required
counseling and other services to students, the state provided no financing.
"We are certain that the marketing of the Iowa Partnership loan program in no
way influenced students or parents to increase their borrowing," McCullough
said. He said the company stopped making the payments this year.
Iowa did not just authorize Iowa Student Loan to go into the private loan
business, it cut its risk. The Iowa College Student Aid Commission for years
bought defaulted private loans from the corporation. McCullough said the state
proposed the arrangement to try to make money, by paying a small fraction of
face value for the loans and then trying to collect.
But a report by the Iowa College Student Aid Commission in November said that
the agency did not expect to recoup $6.2 million it had spent to buy the loans.
The commission no longer buys such loans. Iowa Student Loan's board
members are appointed by the governor. Gov. Chet Culver, who took office in
January, is waiting for the state attorney general to report on Iowa Student Loan's
structure before making appointments. The state's auditor has recommended the
removal of some board members because they also hold state regulatory
positions, posing a conflict of interest.