From the issue dated August 10, 2007
Nonprofit Lenders, While Helping Students, Help Themselves
Questions arise as Congress considers giving the state-based agencies an advantage over their competitors
By PAUL BASKEN
Janice Frazier, a 56-year-old single mother in Silver Spring, Md., has been struggling to pay back a $7,000 loan that she used to help her daughter attend Tufts University.
The nation's largest lender, Sallie Mae, spent six years ignoring her attempts to negotiate its share of the debt and win a deferment on medical grounds, Ms. Frazier says.
But the Pennsylvania Higher Education Assistance Agency, a nonprofit lender known as Pheaa that is run by the state and operates nationally, was even worse, she says.
"Eventually I had to begin sending everything certified mail and even had to file a complaint with the Better Business Bureau of Maryland to get AES [Pheaa's commercial arm] to admit they received my fifth deferment application and actually grant me a deferment," says Ms. Frazier, who now owes more than $15,000 from additional interest and fees. (Spokesmen for both Sallie Mae and Pheaa say they take care to resolve customer complaints but cannot comment on the details of Ms. Frazier's case, citing privacy laws.)
Despite some complaints about the practices of state-chartered lenders like Pheaa, lawmakers are looking to encourage their growth as Congress and the states tackle problems of corruption and profiteering in the student-loan industry.
There is little dispute that the nonprofit lenders are more generous with their income than are their for-profit counterparts. Pheaa earned $191.5-million last year, and gave 91 percent of that back to students in such forms as grants, scholarships, and educational programs. Sallie Mae earned $1.2-billion and donated about 1 percent of that through its charitable arm.
Less clear, however, are other benefits that nonprofit lenders might provide individual borrowers and taxpayers. Many use the same aggressive collection techniques seen at for-profit lenders. Some spend lavishly on executive salaries and vacation-style conferences. Some have relationships with for-profit partners that let those companies siphon off profits.
And many nonprofit lenders lobby alongside their for-profit counterparts in support of the federal government's bank-based system of student lending, despite lawmakers' arguing that the less-popular alternative — the Education Department's direct-loan program — is cheaper for taxpayers. Those efforts have some college and student lobbyists wondering if the nonprofit agencies deserve extra breaks from the federal government.
"I applaud them for whatever good they do at their own cost," Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers, says of the nonprofit lenders. "When the good they do is at our cost, maybe we ought to decide what good needs doing."
A Reward From Congress?
Congress doesn't appear to share that concern. A budget plan approved last month by the U.S. Senate would cut the federal subsidy to lenders in the bank-based loan program by 0.5 percent. The plan would cut nonprofit lenders' subsidy by only 0.35 percent.
The House version would cut subsidies for all types of lenders by 0.55 percent but give the nonprofit agencies additional fee breaks that would create an advantage similar in size to that of the Senate bill.
The chairmen of both the House and Senate education committees, Rep. George E. Miller, a California Democrat, and Sen. Edward M. Kennedy, a Massachusetts Democrat, respectively, declined repeated requests to explain why they support the breaks for state-run lenders.
"A number of committee members on both sides have effective nonprofit lenders in their states," says Melissa Wagoner, a spokeswoman for Senator Kennedy, "and it was important to those members that the Senate bill recognize them."
Others, including some traditional Democratic allies on student lending, do not agree. They point out that the nonprofit lenders are already exempt from paying income tax, and they can issue bonds that are tax exempt, both of which give them advantages over for-profit lenders.
"It doesn't make economic sense to provide them yet another extra subsidy," says Robert M. Shireman, a former education-policy adviser in the Clinton administration who founded the Institute for College Access & Success, an advocacy group in Berkeley, Calif.
Giving nonprofit agencies more money "to do the same job as more-efficient for-profit lenders," says Mr. Nassirian, "is not only economically illiterate, it sets the stage for whole new round of waste, fraud, and abuse."
Congress is reacting in part to such incidents as the estimated $225-million that Sallie Mae has paid its chairman, Albert L. Lord, since 1999; the discovery that several college student-aid directors as well as an Education Department official were holding stock in a for-profit lender, Student Loan Xpress; and the corporate giveaways at events like the annual conference of the National Association of Student Financial Aid Administrators.
But some of those same activities, albeit on a smaller scale, can be seen among nonprofit lenders, who hold about 20 percent of the federally guaranteed student-loan market.
Tony Hollin, as chief executive and chairman of Educational Funding of the South, a nonprofit student-loan company based in Knoxville, Tenn., and known as Edsouth, collected more than $1-million in salary in both 2003 and 2004, according to federal tax filings.
Edsouth, which says it is the nation's 13th-largest holder of student loans, paid Mr. Hollin $570,461 in 2004, when he reported working 50 hours a week, according to the IRS Form 990 filed by the company. That same year, he was paid $540,000 while working 50 more hours a week as president of Educational Services of America, an affiliated Knoxville-based nonprofit agency that helped manage student loans.
Mr. Hollin also received more than $1-million from the two companies in 2003, also while reporting 50-hour-a-week duty at both jobs. Mr. Hollin left Edsouth after a corporate reorganization last year, becoming chairman of two for-profit companies, Edfinancial Services and Edamerica, that had been part of Educational Services of America.
The reorganization was designed to shed a part of Edsouth that "was a very commercially oriented activity," says Edsouth's president, John E. Arnold Jr. "That salary is not here any more, I can assure you that much," Mr. Arnold said of Mr. Hollin's compensation.
The tax filings also list Mr. Arnold as working a combined 100 hours a week in 2004 — or more than 14 hours a day, seven days a week, all year long — when he collected more than $300,000 from the two nonprofits. "I probably did, yes," work that many hours, Mr. Arnold said. He said he now averaged about 12 hours a day, "not including travel time."
In other cases, nonprofit lenders help outsiders enrich themselves. A leading example is Sallie Mae's relationship with USA Funds, a loan guarantor staffed mostly by Sallie Mae employees. USA Funds enjoys nonprofit status, yet pays $250-million annually to Sallie Mae, according to USA Funds' tax filings.
The nation's largest nonprofit holder of student loans, the Brazos Group, of Texas, pays for the services of a law firm owned by the president of Brazos, Murray Watson. The fees that Brazos pays for legal services are determined by an independent consultant, "who told us the high, the medium, and the low on legal fees," Mr. Watson said. "And we try to stay below whatever the medium fee is."
The nonprofit lenders also have annual gatherings with vacationlike elements at a time when the National Association of Student Financial Aid Administrators, under political pressure, is scaling back its meetings.
The Education Finance Council, which represents many of the nation's nonprofit and state-chartered student-loan companies, holds its annual conferences in resort locations like Henderson, Nev.; Rancho Mirage, Calif.; and Scottsdale, Ariz. The council's president, Kathleen Smith, defends the events as focused on work. "I am confident in the respect and care that my members have for the students in their states," she said.
Nonprofit lenders have also helped themselves, and their executives, through a federal law meant to help protect them at a time when the cost of making loans was high.
In the 1980s, when the economy was in the doldrums, Congress allowed nonprofit lenders — those that finance their loans with tax-exempt bonds — a guaranteed return of 9.5 percent. Congress eliminated the 9.5-percent guarantee in 1993 but grandfathered in loans already made. Several state-chartered nonprofit lenders, however, maintained that the government's regulations allowed them to keep receiving the 9.5-percent return by simply refinancing bonds issued before the cutoff date.
Some loan companies collected at least $6-billion in additional federal subsidies, according to a 2004 report by the Institute for College Access & Success. Pheaa ranked second only to the National Education Loan Network, a for-profit student-loan provider based in Nebraska that had bought some nonprofit agencies, in the volume of loans it submitted for the extended 9.5-percent reimbursement, the report said.
For several years, the subsidies from the 9.5-percent program provided Pheaa with a "rather large portion" of its profits, Pheaa's chief executive, Richard E. Willey, told state legislators at a hearing in February.
Over those same years, Pheaa executives embarked on a spending spree, incurring expenses such as $45,000 to charter a Lear jet, and more than $860,000 on trips that included spa treatments for spouses and staff members, limousine rides, and falconry lessons.
The spending was first reported by The Patriot-News of Harrisburg and other news organizations in Pennsylvania that spent 19 months fighting for public access to the records. Pheaa spent $410,000 opposing the disclosure.
Pennsylvania is now among a few states that are re-evaluating the benefit that such entities provide their students. Gov. Edward G. Rendell, a Democrat, and some members of the legislature have given encouragement to persistent suggestions by Sallie Mae that it purchase Pheaa assets.
State Rep. Craig A. Dally, a Republican, while expressing support for Pheaa's mission, told Mr. Willey at the February hearing, "You've certainly caused some of your own problems."
This year in Missouri, Gov. Matt Blunt, a Republican, signed into law a measure ordering the Missouri Higher Education Loan Authority to sell some of its student loans to help pay for $350-million in college construction projects. That was short of the outright sale of the agency that had been under debate.
Even critics of some of the behavior of nonprofit lenders agree that they might be a better alternative.
Nonprofit lenders and servicers "tend to be more responsive" to students, said Alan Collinge, founder of StudentLoanJustice.org, an advocacy group.
Yet, he said, "All lenders, whether nonprofit or for-profit, are operating in an extremely lucrative environment, and are protected by largely the same sets of laws that provide little protection for the borrowers, and allow huge fees, and draconian collection tools for delinquent debt."
The nonprofit agencies do give more money to students than for-profit lenders do; most pay their executives less; and none have been found engaging in such practices as making payments to college administrators or helping colleges shape their enrollments to steer needy students into larger loans, said Jon H. Oberg, a former U.S. Education Department researcher.
Pheaa's profits are used for purposes like forgiving the debt of active-duty soldiers and encouraging the training of more nurses in Pennsylvania. Brazos runs seminars to help high-school students understand their loan options. Edfund donates to groups like the Orphan Foundation of America.
"The not-for-profits are obviously not clean on a lot of things," Mr. Oberg says, "and that's why Congress really needs to reform them."
Yet the nonprofit lenders could also be seen by Congress as allies, especially as students increasingly face the need to finance their education through the growing private loan industry, he said.
"That," Mr. Oberg says, "is where their tax-exempt privileges and so on could do students and taxpayers of the country a real service."