How nonprofits won special treatment in student lending bill

Introduction

This is the first in a series of articles on student lending reported in partnership with the Stabile Center for Investigative Journalism at Columbia University.

When President Obama unveiled a plan in February to overhaul the student loan industry, nonprofit lenders in dozens of states feared their business was doomed. But now those nonprofits — including some accused of previous misconduct by state and federal authorities — are on the verge of winning a protected position in the higher-education business.

Interviews and a review of documents and e-mails for the Huffington Post Investigative Fund show how nonprofit lenders persuaded the U.S. House to award them the equivalent of no-bid contracts potentially worth millions of dollars each.

The House voted in September to approve the Obama administration’s student loan reform plan. In effect, it would make the federal government the primary lender to college students. No longer would the government subsidize or guarantee loans made by nonprofits or by for-profit lenders such as Sallie Mae. The plan, according to the administration, would save the government billions of dollars a year that would be funneled into direct student aid.

Under the new system, for-profit and large nonprofit companies would still be able to bid on contracts to service some government loans, a job that includes collecting monthly payments and processing loan defaults.

But before the House bill was introduced, the lobbying group for nonprofit education lenders, the Education Finance Council (EFC), worked behind the scenes to craft its own legislative provision. The EFC wanted each nonprofit to receive a guaranteed annual contract to service government loans for up to 100,000 borrowers. The EFC’s document, unearthed over the summer by a higher education blog, was stamped “Confidential” and shopped on Capitol Hill.

In the end, the EFC’s language was included nearly verbatim in the House bill.

Nationwide, 39 nonprofits now stand to benefit from the provision, according to an e-mail from the EFC’s president to a nonprofit lender in Vermont, obtained through a public records request.

In an $85-billion-a-year industry dominated by big for-profit lenders such as Sallie Mae and Citigroup, nonprofit lenders have managed to carve out a lucrative niche, with current EFC members reporting about $3.7 billion in revenue on federal tax forms in 2007. Even as their business has grown, nonprofits continue to promote themselves as public-service organizations dedicated, according to the EFC’s Web site, “to the single purpose of making college more affordable.”

But some of them have a checkered past. In recent years, government auditors, state attorneys general and the federal Department of Education have accused many nonprofits of misconduct such as steering students toward high-interest loans, offering cash to universities to drum up student business, providing questionable compensation and perks to top executives and overcharging the government by a total of about $37 million. [Please see related story.]

Nonprofit representatives say these accusations are isolated problems in an industry otherwise dedicated to helping students. The lenders’ lobbying group has protested that Obama’s plan would choke off their primary source of income, endangering thousands of local jobs as well as programs designed to educate students about the dangers of default.

“We like the convenience if you have a student in, say Kentucky, who is able to deal with their local student loan provider who has built up a relationship with them,” said Krista Cole, vice president of communications and industry relations for the EFC. “That’s going to be taken away and they could be calling some 1-800 number.”

Some critics argue, however, that the no-bid loan servicing arrangement for nonprofits could undermine the cost-saving goals of Obama’s reform plan. “If a state loan agency is capable of competing for the contract in a way that objectively is the most beneficial, they should get it, and if they can’t, they shouldn’t,” said Mark Kantrowitz, publisher of FinAid, a Web site that provides financial aid information to students.

‘Hill Day’

During his campaign and upon taking office, Obama took aim at the Federal Family Education Loan program, which has helped finance student lending for more than four decades. Under the program, the government subsidizes students’ interest payments and covers most losses that private lenders incur when students default. Essentially, lenders act as a middleman between students and Washington.

Obama administration officials argue that eliminating the middleman would be cheaper for the government in the long run. The nonpartisan Congressional Budget Office estimates that replacing the subsidized program with direct federal loans would save $87 billion over 10 years.

In treacherous economic times, the argument gained political traction. Nonprofits had to move quickly to secure a role servicing government loans after Obama unveiled his proposal in February. On March 19, the EFC organized a “Hill Day,” hours of meetings with lawmakers and congressional staffers. The council armed 15 participating nonprofits with 10 pages of talking points, which included warnings of “35,000 Expected Job Losses Under Administration Proposal.”

“Please keep in mind that the primary purpose of this week’s Hill Day is to oppose the President’s budget proposal,” the council’s then-vice president of legislation and coalitions, Katie Bailey, wrote members in a March 17 e-mail.

In late May, the groups pressed their case at a hearing of the House Education and Labor Committee. René Drouin, president and chief executive of the nonprofit New Hampshire Higher Education Assistance Foundation, argued in his testimony that Obama’s proposal would perpetuate a servicing system dominated by large lenders. (Existing Department of Education guidelines require servicers to have the capacity to take on 2 million loans each year—a bar too high for most nonprofits.)

After Drouin’s testimony, Rep. Carol Shea-Porter, a Democrat from New Hampshire, grilled a witness from the Education Department, demanding to know whether nonprofits would survive the proposed legislation. Shea-Porter emphasized the importance of making servicing contracts available to nonprofits.

By summer, before the bill’s language had been made public, the EFC was circulating its own proposal.

The unsigned, undated document was obtained and published in June by the New America Foundation’s Higher Ed Watch blog. The document offered lawmakers a plan to guarantee that each nonprofit would service a minimum “annual allocation” of 100,000 borrowers, or the total number of new borrowers within the nonprofit’s state — whichever is less. The document stipulated that the Education Department would pay nonprofits a “market-based rate” for servicing duties.

As a result of the EFC’s plan, for-profit and large nonprofit companies could compete for contracts to service loans beyond the 100,000 mark. But in states where fewer than 100,000 students receive federal loans, nonprofits would have a servicing monopoly, student loan specialists said. Nonprofits are slated to take advantage of this monopoly in at least 15 states. In some of these states, there is only one nonprofit lender.

On Sept. 17, the House passed a bill that included the key aspects of EFC’s proposal. An aide to a member of the House education committee acknowledged that the provisions “came from the people in the industry, quite frankly.”

The Senate is expected to take up the measure after it completes work on healthcare reform.

“Many members of our committee saw the value of including nonprofit lenders in the program because of their longstanding relationships with students and schools in their states, their proven track record in providing high-quality services to students and schools, and to help maintain jobs in their local communities,” said Rachel Racusen, a spokeswoman for Rep. George Miller (D-Calif.), the committee’s chairman and the sponsor of the bill.

Niel Wright, a spokesman for Rep. Thomas Petri (R-Wisc.), the ranking Republican on the House Education Committee, suggested that the nonprofit provision was crucial to passing the bill in the House.

Petri, who supported the legislation, “would not have written the loan servicing provisions the way they are in the bill,” Wright said. “But if protections for certain local institutions was the price necessary to ensure passage of the bill, he thought it best not to make an issue of it at that time.”

Washington Ties

The nonprofits’ clout stems in part from the EFC’s connections in Washington.

Peter Warren, the council’s president, previously spent three years as the chief budget analyst for education and labor programs at the House Budget Committee. The council’s senior vice president, Vince Sampson, worked in the Education Department’s Office of Postsecondary Education. And Cole, vice president of communications, was once a senior research analyst at the National Republican Senatorial Committee.

To complement its own lobbying efforts, the council hired lobbying firm, BKSH & Associates, which also represents corporations such as AT&T, Boeing and Coca-Cola, records show. Between payments to BKSH and its own lobbying expenses, EFC has spent more than $145,000 every year since 2005. As of last September, EFC had spent just more than $150,000.

Some nonprofits have lobbied individually as well. The Pennsylvania Higher Education Assistance Agency, which spent $300,000 lobbying in 2009, was cited by a state auditor for failing to report more than $2 million in lobbying expenses from 2004 to 2007. Most nonprofits spend less. At least nine others have recently lobbied on Capitol Hill, but none of these groups spent more than $130,000 in a year.

Those numbers pale in comparison to the millions spent by larger student lenders like Sallie Mae. But Christine Lindstrom, higher education program director for the advocacy organization U.S. Public Interest Research Group, said that the nonprofits’ power extends beyond their checkbooks because they are located “in the backyards of federal lawmakers.”

While many of those lawmakers have supported granting nonprofit lenders a large slice of the new business, other advocates for student loan reform have questioned the wisdom of the idea.

“There’s no reason to believe these institutions are suddenly going to become mendicant Catholic orders,” said Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers. “They’re going to be voraciously focused on taking care of themselves, as they have been.”

Donal Griffin, Cezary Podkul, Jeannette Neumann, Delphine Reuter, and Andrew Tobin of the Stabile Center for Investigative Journalism at Columbia University contributed reporting.