by Gaurav Bhola, MSM, Managing Editor
Tuesday, August 14, 2007
A new chapter begins in the student loan scandal which has been brewing since spring. Recently, the Senate Finance Committee ordered EduCap, a Virginia-based non-profit company that offers student loans and student loan consolidation programs to provide documents detailing its operations and functions, bringing into question its not-for-profit status.
Congress wants in detail, the company’s expenditures, how it approves its borrowers, how it sets loan interest rates, and copies of correspondence with the IRS over the last ten years. EduCap’s CEO Catherine B. Reynolds is seen as a pioneer in the private student loan industry. The company has garnered the national spotlight because some of its actions are seen as excesses: paid Reynolds an annual income of $1 million, bought a $30 million private Gulfstream jet, and donated millions to a nonprofit foundation headed by her husband.
Recently, Reynolds challenged her and EduCap critics to take their grievances to Congress, to Congress’s credit they listened. Congress has been holding inquiries into the student loan scandal, sparked by New York Attorney General Andrew Cuomo earlier this year. Congress has also passed legislation to slash subsidies for student loan lenders.
The investigations by Congress and Cuomo revealed that colleges and universities and student loan lenders had private arrangements that allowed lenders to be placed on preferred lenders lists. The lenders gave schools or their financial aid officials’ trips, meals, consulting fees, company payments, company stock, and other allurements.
So far, some colleges and lenders have settled with Cuomo’s office and twelve private lenders such as Sallie Mae, Nelnet Inc., JP Morgan Chase, Citibank, and Bank of America have paid $17 million towards a national education fund. Several schools have agreed to implement a new code of conduct complied by Cuomo. But surprisingly, the US Education Department has not been active in the investigation.
Congress’s research arm, the Government Accountability Office (GAO) has discovered that the Education Department doesn’t maintain overview of agreements between colleges and student loan lenders. The department has been complacent in investigating the nexus between schools and lenders.
It was only after Congress made some noise that the department started looking into the scandal. Conversely, under existing laws the department has limited authority to address such practices. The role of the education department needs to be expanded; so that in the future it can enforce non-compliance by lenders and schools.
Also, investigation by Congress and IRS of EduCap’s possible non-compliance of laws governing not-for-profit organizations has led the company to cut back its loan business. EduCap will continue to service existing loans. The company was in the headlines last year when the United States Students Association filed a complaint with the Federal Trade Commission (FTC) against EduCap, for engaging in misleading marketing practices.
Alas, the FTC couldn’t entertain the complaint because its jurisdiction doesn’t extend to non-profit groups. It is inaction by government and others who are supposed to regulate actions of schools and student loan lenders on behalf of the public that has led to this scandal. Looking back, the student loan scandal could have been avoided by having stronger regulations coupled with enforcement.
