Some nonprofit student lenders accused of misconduct

Introduction

As the cost of college continues to skyrocket, students are increasingly seeking loans from nonprofits — state-based organizations often viewed as an attractive alternative to for-profit lenders synonymous with Wall Street excess.

But some nonprofit student lenders have been dogged, like their for-profit competitors, by allegations of misconduct.

Nonprofit lenders in at least 10 states ran afoul of state and federal rules between 1993 and 2008, records show. Government investigators have exposed illegal payments to an alumni association, questionable executive compensation and perks, deceptive advertising and tens of millions of dollars in unwarranted federal subsidies.

In September, the U.S. Department of Education ordered a nonprofit lender in Iowa to pay $15.8 million for making illegal payments, or “inducements” to the Iowa State University Alumni Association. Between 2003 and 2007, the Iowa Student Loan Liquidity Corporation sent cash payments to the alumni association, which in turn, steered students to the nonprofit’s loans, according to an education department report.

The lender has appealed the sanction, arguing that the payments were permitted by federal regulations in place at the time and were meant to cover the cost of processing the loans.

A separate report in 2008 by the Iowa Attorney General’s office exposed how the Iowa nonprofit also paid 50 colleges a total of $1.5 million from 2002 to 2007. The nonprofit said the payments were meant to reimburse colleges for administrative costs associated with counseling borrowers, certifying loan applications and disbursing its private loans.

“In effect,” the attorney general’s report said, the nonprofit was “paying a fee for every application it received.” Such reimbursements are now illegal under state law. Although the payments may have been legal at the time the nonprofit made them, “it presented colleges with a potential conflict of interest between their pecuniary interests and the best interests of prospective borrowers,” the report said.

The report also cited the nonprofit for falsely advertising its private loans as the “lowest cost” options when its for-profit competitors often offered better deals. The Attorney General scolded the nonprofit, saying its ultimate goal is not to boost revenue but “to serve Iowa student borrowers as best it can.” The nonprofit signed an agreement with the Attorney General to stop the “inappropriate” advertising—a promise it has kept so far, according to Eric Tabor, chief of staff for the attorney general.

Another questionable advertising case involved the nonprofit Rhode Island Student Loan Authority. In 2004, the group sold an estimated $13 million worth of loans to for-profit student loan giant Nelnet, documents show. The deal also gave Nelnet the right to issue loans using the nonprofit’s name, and to operate its College Planning Center.

The center, which provided free financial aid advice, often encouraged students to take out Nelnet loans. But it did not identify its affiliation with the for-profit to students, according to news accounts. In fact, it continued to call itself “a free resource offered by the Rhode Island Student Loan Authority” in marketing materials.

After the arrangement was revealed in 2007, Frank Caprio, the General Treasurer of Rhode Island and a member of the nonprofit’s board, said the lender should be “managed by public officials who are accountable to the people of Rhode Island, not an out-of-state loan provider.”

Noel Simpson, who was the nonprofit’s executive director in 2007 and is now its chief financial officer, noted that his group has since terminated its agreement with Nelnet and adopted a code of ethics that includes a commitment to maintaining control of the College Planning Center.

Nonprofits in at least nine states, meanwhile, have run into trouble for claiming federal subsidies that officials said they didn’t deserve.

The problem stemmed from a program that ended officially in 1993, which guaranteed lenders a 9.5 percent interest rate on some loans they originated. But the Government Accountability Office later determined that several nonprofits financed new loans with proceeds from old loans to improperly qualify them for the subsidies. This practice, used by for-profit and nonprofit lenders, cheated taxpayers out of “$209 million in 2001 to more than $600 million as of June 30, 2004,” according to the most recent report by the GAO.

As a result, the education department has ordered nonprofit student lenders in Iowa, Pennsylvania, Arkansas, Texas, Louisiana, Indiana, Alabama and New Hampshire to reimburse the federal government a total of more than $37 million, according to documents provided by the department.

Many of the nonprofits continue to defend the subsidies, saying they were legal. “By definition, a loophole is legal,” said Diana Barber, general counsel for the nonprofit Kentucky Higher Education Assistance Authority, which according to federal investigators received more than $88 million in subsidies between 2001 and 2006. “If it was illegal, the Department of Education wouldn’t have allowed us to do it.”

Executive pay at some nonprofit lenders also has come under fire. Out of 10 independent nonprofit lenders that filed federal tax documents for 2007, eight had top executives whose salaries were greater than the average compensation earned by heads of similar-sized nonprofit financial institutions, according to an analysis of data provided by the Economic Research Institute, a compensation consulting firm.

Of those eight executives, three earned salaries of more than $250,000, while the average compensation for similar-size nonprofit financial institutions was $199,400.

In a 2008 report, Jack Wagner, Pennsylvania’s Auditor General, condemned the salaries paid to executives at the Pennsylvania Higher Education Assistance Authority. Nonprofits’ executives “on the one hand, publicize their strong belief in public service but, on the other hand, will enter public service only at a salary commensurate with private employment,” Wagner said in the report.

The nonprofit’s board complied with Wagner’s suggestion that it reform its compensation policies, but opposed his overall recommendation that it improve oversight by restructuring its board, according to Wagner’s office.

In Connecticut, the nonprofit Student Loan Foundation came under fire recently for perks awarded to executives and board members. The nonprofit, for example, spent $1,884 on three stretch limousines and one sedan to take board members to a holiday party, $660 on four tickets for executives to attend the Big East Basketball tournament in March 2007 and $6,580 for four club seats to the University of Connecticut 2008 football season, according to a recent report by state auditors. Executives also spent more than $3,000 at a golf club in 2008. The former president approved his own expenses after a weekend and vacation day spent golfing.

Financial troubles overcame the group. It stopped servicing loans this summer and an outside company has taken over its role as a guarantor of Connecticut student loans.