More on Spellings Testimony May 10

A big clip from Inside Higher Ed:

. . . . Spellings said her decision to begin the rule making process will have “jump-started the regulatory process.” Spellings also noted that she was convening the heads of other federal agencies (like the Federal Trade Commission and the Federal Deposit Insurance Corp.) to look into how the government might better regulate the private student loan market, and for that moment, at least, she argued somewhat persuasively that the department had taken meaningful steps to attack the student loan industry’s problems.

The moment did not last, though. Under the questioning that followed, Miller turned back the clock, asking what steps Spellings (who joined the department in early 2005) and other department officials had taken in response to an August 1, 2003 memo in which the department’s assistant inspector general discussed allegations that Sallie Mae and other lenders had offered possibly illegal “inducements” to colleges in exchange for their student loan business.

The memo said that the inspector general’s review had concluded that “there are bargaining practices between schools and lenders for [Family Federal Education Loan Program] preerred lender status and private loan volume that should be addressed through statutory and regulatory changes or further department guidance.” The auditor encouraged the department’s political leaders to consider proposing a toughening of federal law governing such inducements and to consider whether existing laws and rules applied to the rapidly growing private loan market.

Instead, Miller said, documents his office had collected show that department officials decided to monitor “the higher education and lending communities’ efforts to reach an agreement on lender inducements” and, pressed further by the inspector general, to review agreements between lenders and colleges to “determine to what extent they are inconsistent” with federal laws and regulations.

If the department engaged in any kind of serious monitoring, Miller said, “I just don’t quite understand ... how it was that they didn’t pick up any of these activities” that recent investigations by Congressional leaders and state attorneys general, most notably New York’s Andrew M. Cuomo, have shown to be occurring between lenders and colleges. “Who was auditing? Did they have blinders on?” Miller asked pointedly.

At that point, Spellings got legalistic. Much of the alleged wrongdoing that Cuomo and others have pinpointed — which Spellings said troubled her — had occurred in the private loan program, over which federal law does not give the Education Department authority to regulate, she said. Other federal agencies — the FTC and the FDIC — might have authority over those loans, she said, but not the education agency.

And for the department to prove that some kind of payment or other inducement was illegal, Spellings said, there is a very high “hurdle that must be cleared” to show that there is a “quid pro quo relationship between the awarding of a particular loan and a cruise on New York harbor,” citing one high-profile example of a lender-financed benefit for college financial aid officers that Miller has cited in recent days. (Spellings said there had been a handful of cases, about which she did not provide details, in which the department had pursued legal action against lenders for allegedly offering inducements.)

That argument set off Miller, who said that just because the department might not have been able to prove that illegal activity took place doesn’t mean that its officials shouldn’t have been sounding the alarm about the practices in some other way — at least through the bully pulpit.

It’s not about “proving that in a court of law,” Miller said. How come “nobody from the Department of Education showed up at the front door” of colleges or lenders that might be engaging in behavior that the department thought might be unethical, even if it couldn’t be proved illegal? he wondered. Did department officials contact the trade commission or the Securities and Exchange Commission if its officials thought private lenders were acting badly?

Can the department really claim, he continued, that it has no authority to look into the activities of private lenders when many of them are also participants in the federal loan programs? And, Miller added, when some of the inducements — he especially cited loan funds, known as “opportunity pools,” that Sallie Mae and other lenders had allegedly provided to colleges for their high-risk students — were offered in part to get them to leave the government’s direct student loan program, over which the department clearly has authority?

“Why no Dear Colleague letter, no phone call” to warn colleges or lenders about their possibly inappropriate practices? Miller asked with increasing agitation. “How come nowhere in five years of monitoring did anybody make an effort to call a halt to these practices?”

Miller’s rhetoric seemed to be getting tougher by the minute, but Spellings was saved by the bell. With votes pending on the House floor, the investigative hearing broke up at that point for 45 minutes, and by the time the session reconvened, Miller’s 20-minute question period was almost over. He began a new line of questioning over the department’s decision last year to let the National Education Loan Network keep $278 million in subsidies it had gained improperly through a loophole in federal law, a settlement Spellings said she had reached because she feared the department might face a lawsuit from the lender that could cost it more than $1 billion in additional funds. . . .