The Education Department, after an internal review, has upheld its December 2004 decision to permit a contractual arrangement between Sallie Mae, the nation’s largest student-loan company, and USA Funds, the nation’s largest guarantee agency.
“We are confident with the decision, which was a legal one, and we find no reason to change or revisit it,” James F. Manning, the department’s deputy chief operating officer in charge of federal student aid, said on Tuesday in a written statement.
Separately, however, the Education Department said it had sent a survey to all 35 guarantee agencies in the federal system of subsidized student loans, asking a series of questions about their operations and contractual relationships. The survey, in a three-page letter dated June 11, requests responses from the guarantors by July 11, according to a copy provided by the department to The Chronicle.
Guarantee agencies are nonprofit entities whose duties include contacting borrowers who fall behind in repaying their loans, and relaying the federal reimbursement for defaulted borrowers to the loan companies after ensuring that the lender has complied with the terms of the program.
Federal law prohibits a guarantee agency from hiring any outside party to help it keep borrowers on their repayment schedules if that entity also holds the loan. Sallie Mae has a contractual relationship with USA Funds in which it performs such work on behalf of USA Funds. In its December 2004 ruling, the Education Department agreed to permit that relationship despite objections from its inspector general.
A copy of the contract between Sallie Mae and USA Funds, obtained last month by The Chronicle, demonstrates a relationship that some student-aid experts say is so close and harmful to the interests of students and taxpayers that it should have been ruled a violation of the law (The Chronicle, June 26).
“The contract is saying that USA Funds is the guarantor in name only,” Larry Oxendine, who was the department’s director of student-aid policy and analysis before he retired last summer, said last week after being shown a copy of the 51-page document. “Sallie Mae does everything and makes all the decisions on behalf of USA Funds.”
Both Sallie Mae and USA Funds reject such complaints. “Our contract with USA Funds has resulted in substantial savings for students and taxpayers,” said Tom Joyce, a spokesman for Sallie Mae. Sallie Mae bought the parent company of USA Funds in 2000 and then spun off USA Funds as an independent entity, while simultaneously entering into the contractual relationship.
Reinforcing a 2004 Decision
Mr. Manning, in his statement on Tuesday, upheld the department’s 2004 decision that Sallie Mae’s arrangement with USA Funds was within the law. That decision was issued by Matteo Fontana, a former Sallie Mae employee who was serving at the time as head of the Education Department office that oversees lenders and guarantee agencies. Mr. Fontana rejected a recommendation by the department’s inspector general to forbid the relationship, saying it was legal because the Sallie Mae subsidiary that tracks borrowers on behalf of USA Funds had a separate tax-identification number.
Because federal loans are issued with a guarantee of repayment to the lender by the government, the law requires a separation between the lender and guarantor to help ensure that the amount of a loan in default does not unduly grow without sufficient attempts to contact the borrower.
Some student advocates questioned Mr. Manning’s new endorsement of Mr. Fontana’s conclusion. That interpretation does not seem justified, especially in light of the extensive financial relationship between Sallie Mae and USA Funds detailed in the newly publicized contract, said Robert M. Shireman, a former White House and Congressional policy adviser who now serves as president of the Institute for College Access & Success.
“Given that USA Funds is responsible to U.S. taxpayers for overseeing Sallie Mae’s role in the federal student-loan program, this problem deserves more than the official shrug that it is currently getting from the Department of Education,” Mr. Shireman said.
The Education Department, however, said in its June 11 letter to guarantee agencies that it’s trying to learn more about potential conflicts in relations between guarantors and lenders. The letter specifically mentions the department’s interest in enforcing the prohibition against a lender performing borrower-tracking services on behalf of guarantors.
Along with requesting copies of contracts between the guarantor and any service providers, the department’s letter requests a series of details about the officers and directors of the guarantee agencies, including any potential conflicts in their personal financial interests.
An Education Department spokesman said he could provide no further detail on what prompted the letter, which was signed by Richard Criswell, a specialist in the Office of Federal Student Aid.
The department’s departing inspector general, John P. Higgins Jr., said in an interview on Thursday that he relayed a copy of the Sallie Mae contract with USA Funds to Mr. Manning after it was detailed by The Chronicle. Mr. Manning promised to review the contract’s terms to see whether the degree of financial connection between the two entities had “gotten better or worse” since the 2004 ruling, said Mr. Higgins, who began his retirement on Tuesday.
The Education Department spokesman, who declined to be identified by name, said Mr. Manning had issued his statement on Tuesday in support of the 2004 ruling as a response to The Chronicle report detailing the Sallie Mae contract with USA Funds. The spokesman said, however, that he could not confirm whether Mr. Manning had reviewed the contract before issuing the statement.
