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Student Loan and Reading First Oversight Hearings

May 11, 2007—Representative Miller and Senator Kennedy have released additional reports regarding the conflicts of interest and mismanagement in Reading First, naming contractors of the regional technical assistance centers that financially benefited from the sale of products sold to school districts.

Yesterday morning Chairman Miller questioned Secretary of Education Margaret Spellings about both matters. Most of the hearing was devoted to questions about the student loan problem. Inducements and the resolution of abuses by provider NELNET topped legislators concerns.

According to the Secretary, most of the inducements could not be directly connected to the granting of a specific loan, and therefore, she was unable to take any enforcement action. The majority members were clearly not satisfied with this reply. Rep. Andrews asked her why the “flurry of activity” around reconciling the problems only began in January 2007, when she knew of problems as early as August 2004. Spellings replied – we did stop one lender, but it was only when we had direct evidence the inducements were tied to a loan. Up to 6,000 institutions of higher learning may be involved.

The entire scandal made national news when NY attorney general Andrew Cuomo began exposing the problem early in 2007. One member of the committee inferred Cuomo was using the issue for publicity. Rep. Keller reminded the committee that during Cuomo’s tenure as HUD Secretary, the agency was listed as high risk for waste, fraud and abuse by the GAO. Spellings also reminded the committee that the Student Loan division of the USED was removed from the same list in 2005.

On Wednesday legislation was passed that will address many of the issues that were raised in today’s hearings. The bill was a bi-partisan effort and also supported by Secretary Spellings.

HR 890 (Miller, California), the “Student Loan Sunshine Act” to establish requirements for lenders and institutions of higher education in order to protect students and other borrowers receiving educational loans was passed by a vote of 414-3. Some of the provisions are:

• A preferred lender arrangement is still allowed and is now defined as an arrangement or agreement between a school and a lender under which the lender makes educational loans (including private loans) to students attending the school, and the school recommends, promotes, endorses or uses the lender’s loans.
• A lender is required to certify to the Secretary that its preferred lender arrangements comply with provisions of the Higher Education Act. The lender must have certification attested to by the lender’s auditor.
• A preferred lender may not make a private educational loan until the school has informed the student or parent of their remaining options for borrowing under Title IV.
• Preferred lenders cannot use school logo’s in their marketing.
• The Department of Education is tasked with developing a model disclosure for use by schools and lenders in disclosing the terms of educational loans (including private educational loans) offered by the lender.
  ∑ Lenders are required to submit a report with the required information to all schools with which they have a preferred lender arrangement, and schools are required to report this information for each preferred lender to the Department, together with an explanation of why the loans involved are beneficial for students. The report shall be made available to students and parents.
• Schools must also disclose on its website, and in materials that describe financial aid, that students are not required to use preferred lenders.
• Schools that provide information on private educational loans to students must inform the students of their eligibility for Title IV assistance with a description of the terms of such private loans that are less favorable than Title IV loans.
• Schools are required to have codes of conduct to prohibit conflicts of interest.
• Lenders, guarantors and servicers are prohibited from offering any gift to a school employee. A “gift” includes any gratuity, favor, discount, entertainment, hospitality or other item having more than a de minimus monetary value. (Refreshments at training sessions are excluded.)
• School employees are prohibited from receiving any financial benefit for advising a lender.
• Lenders cannot pay referral fees or provide staffing assistance to schools.
• So called “opportunity pools” are prohibited.
• Employees of a school financial aid office are prohibited from participating with a lender advisory council.
• The Department is granted enforcement authority.
• Schools that maintain preferred lender lists must list not less than 3 unaffiliated lenders and must disclose the process for selecting such lenders.
• Private educational loan lenders must in every loan application and advertisement state that the borrower may qualify for Title IV assistance, that that assistance may be more beneficial, and that the consumer can obtain information concerning such assistance from the Department’s website. The consumer must acknowledge that this disclosure has been read.
• In addition, private loan lenders must make available the information on their private loans required to be provided by preferred lenders in the model report developed by the Department.
• The Department is required to promote federal student financial assistance on its website.

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