The following is an excerpt from my book, The Student Loan Scam (Beacon Press, 2009) that describes briefly just one of many examples of corruption within the Department of Education, and the student Loan Industry generally. I also include a story from a real borrower.
Please come to StudentLoanJustice.Org to find out more.
While there are too many scndals within and around the Department of Education and the student loan industry generally, one of the most illustrative is the so-called "9.5% Scandal".
This complicated scheme involved a provision in the Higher Education Act that guaranteed lenders a 9.5% rate of return for loans funded through nonprofit bonds issued prior to 1993. Initially, this provision was a response to the high interest rate environment of the 1980’s, and these loans were supposed to have been cancelled by the Department through a sunset clause, but certain lenders attempted to keep these loans alive, and in fact actually grew them through inappropriate accounting methods.
Nelnet, for example, had implemented a plan called "Project 950". Under this plan, the company transferred loans into and out of a tax exempt obligation from taxable obligations through a process called "recycling" or "cloning", and continued to bill under the 9.5% plan. In this manner, they could effectively transform a great number of loans into "9.5% loans"- far more profitable than standard FFEL loans of the time. Under this plan, Nelnet effectively increased the amount of loans qualifying for this increased subsidy from approximately $551 million in March 2003 to roughly $3.66 billion in June 2004- a massive increase by all accounts. It was estimated in the report that Nelnet overbilled the federal government for a total of about $278 million through this dubious accounting method.
However, Nelnet was not the only lending company using this recycling process in order to bill for higher subsidies from the U.S. Department of Education. Many others would be implicated. It was only through the actions of a Department employee, Jon Oberg (now retired), that these overbillings came to the public light. "I have come across what appears to be significant federal waste," department researcher Jon H. Oberg wrote in a 2003 memo to agency officials. "I estimate it amounts to about $30,000 per day, perhaps more."
According to an analysis performed by Mr. Oberg, a total of $716 million in claims by 10 FFEL lenders were paid out by the Department of Education between 2003 and 2006, with the lions share- some $400 million- being paid to Nelnet. Between 1993 and 2001, subsidy payments on these "sunsetted" loans totaled about $1.1 billion . The Washington Post performed an independent analysis in October 2007, and found that overpayments to Nelnet were at least $278 million between 2003 and 2006, and that illegal overpayments to other lenders could total $330 million during the same time period . According to staff at a New Hampshire lender who returned money after discovering this error, "It seemed like they would pay subsidies to almost anyone without checking at all."
Analysts including Oberg attempted to convince Department officials to address this issue, but had been largely unsuccessful.
A July 2004 email reporting this problem to appropriate management personnel within the Department uncovered what amounted to billions in improper payments. It was noted at the end of the email, by Mirek Halaska, that the Department would "get kicked hard for this issue sometime down the road" .
In 2004, Senator Kennedy called for legislation to require that the U.S. Department of Education recoup these funds from the lenders. Unfortunately, under the Republican Congress, he was disappointed. "A year ago, Senate Democrats proposed legislation to shut both loopholes down once and for all. The Senate Republicans did not act on that proposal, did not introduce their own legislation, and did not hold a single hearing. They asked no oversight questions of the Bush Administration. In short, they did nothing."
Shockingly, these claims were initially forgiven by management at the U.S. Department of Education, who decided not to pursue repayment. Secretary Spellings commented that the Department bore some responsibility for the confusion over these payments, and Assistant Secretary Diane Jones asserted that meaningful inferences couldn’t be made from the Department data. Jon Oberg found this assertion incredible. "I find it strange that four experts (cited in the Post) can quickly verify estimates of illegal claims, but the Department says no one can possibly know- and apparently they don't care.", he stated in an October 2007 conversation.
It is important to note that the managers of Financial Partners from 2002 to 2007 were brought in from the same lending interests that the office was in charge of overseeing. Kristie Hansen, manager of the office from 2002 to 2005, came to manage Financial Partners from the National Council of Higher Education Loan Programs (NCHELP), and her Chief of Staff, Tim Cameron, was her colleague at NCHELP before joining her to run the office. When selected to head the Financial Partners Office, Education Undersecretary William Hansen remarked that he was delighted that the Department was able to attract such an "experienced partner from the community of student loan providers".
The 9.5% scandal provided a glimpse of the inner workings at the U.S. Department of Education, and in particular, how deeply this office had been stacked with industry insiders. In a 2007 exchange regarding the 2004 email that first brought this issue to public light, Mr. Oberg noted:
"...The first three recipients of that e-mail were industry people brought in to ED: Sutphin, Fontana, and O'Brien, all of whom were Sallie Mae people. The Financial Partners office was headed in those years by Kristie Hansen and her chief of staff, Tim Cameron, both brought in from NCHELP. Of course Terry Shaw from Sallie Mae and Sally Stroup from PHEAA were in charge of FSA and OPE, respectively. Kathleen Smith (of PHEAA and EFC) was in John Boehner's office, supervising from the Hill."
In January 2008, the U.S. Department of Education ignored findings by its own Office of the Inspector General, and in effect, gave one lender permission to decide for themselves how much, if any, of the overbilled amount it should repay. The OIG had estimated overpayments to the Pennsylvania Higher Education Assistance Authority (PHEAA) totaled about $34 million. Nonetheless, in a letter from Patricia Trubia, head of the office of Financial Partners at the Department to PHEAA in January 2008, the Department said that its own estimates showed overpayments of about $15 million- far less than the OIG estimate- and further asked PHEAA to calculate for itself an estimate of what the student loan agency thought it had overpaid. Keith New, spokesman for the company said that the company may well end up with zero liability depending on the outcome of their analysis.
Across the board, members of the grassroots borrower community were not impressed with this move by the Department. In particular, Patricia Trubia had come to head the Financial Partners office under a dark cloud (as discussed below) after previously having charge of Default Management for the Department. That an individual would go from a position where borrowers were harmed greatly through the default collection process to assume a new position where the lenders were effectively forgiven hundreds of millions of dollars in illegal billings was seen as ironic to many, but fitting to many more in the StudentLoanJustice.Org community.
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Peter (Tennessee)
Peter
A short synopsis:
I am 46 yrs old. I borrowed about $17,000 throughout the 1980's.
I have a condition well documented called panic disorder. That condition started before it was even in (then) the DSM-III sic 1981.
This condition was virtually incapacitating until the SSRI drugs became available.
I struggled through scholl, and aquired enough credits to gainn meaningful employement by 1990, at 30 yrs old. I have yet to complete my degree,but am very close.
I worked as a Chemical Lab technician & eventually gained enough experience to gain the title of chemist.
Throughout 1990 until the present(2006), The Student loan has gone from 17000 priciple to $ 40,000 principal through deferments.
Since then, even though I paid when I was finanacially capable, that debt has swelled at present to $ 109,000 after default, as they proceed to sell off the loan from one agency to another.
I wrote the Student Loan people a very through letter ragarding my past and sent it certified mail to insure reception.
At no time during this period was it ever aknowleded that I was attempting to communicate with the Student loan people. I juts kept getting form letters telling me I owed yada and the debt getting progressively worse each time I heard from them or the collection agency they passed the loan off to.
I finally threw up my hands in dispair and said the heck with it. Let them garnish the 10 % maximum in the State of TN.
Now I recieve a letter telling me they are going to take 15 % . My gross income is ~ $32.000 a year.
I feel they have stolen my future. I don't feel I can have childern, buy a house, or even hope my social security or 401k, if I build one, is going to be safe in the future.
At this poin, I ask myself why I even try ? I could seek permanent disabilty and likely qualify if I was of that rame of mind.
I don't want to do that.I borrowed money & to the best of my abilty wish to honor that debt, not dodge it.
But as I watch this progession ($17,000 principle to a legit $ 40,000 or so with deferments ballooned to $110,000 and counting), I have little hope for the future.
What really makes me angry is knowing this is happening to alot of people
like myself & much worse , who go to work, do their best, pay taxes et.al
and watch the Student Loan people break their backs.
Is there a worse kind of debt to be in than this ? This is our public servants looking out for it's citizens while they run a Trillion dollar deficit, spend money on a questionable war etc, etc ?
What is the point of working at all ?
I apologize for the emotional components of this letter and hope the data in it helps.