Copyright© 2007 by School Services of California, Inc.

                                      Volume 20                   For Publication Date: August 17, 2007             No. 18

U.S. Department of Education’s Oversight
Comes Under Criticism 

According to a new report by the Government Accountability Office (GAO), an investigative arm of Congress, the U.S. Department of Education (usde) has failed to properly oversee the student loan industry. 

While current law requires colleges to allow students to borrow from the lender of their choice, recent investigations of the student loan industry by the GAO suggest that this is one of several laws that was not properly upheld by the usde. The report, titled Federal Family Education Loan Program: Increased Department of Education Oversight of Lender and School Activities Needed to Help Ensure Program Compliance, concludes that usde has done little to identify instances in which lenders and colleges have violated federal borrower-protection laws. 

The report comes at the request of Congress after state investigations uncovered violations and conflicts of interest in the student loan industry. The investigations found questionable financial relationships among lenders, student financial aid officers, and Education Department Officials. 

According to the Chronicle of Higher Education, the usde has relied on outside complaints to identify potential problems. Between 2001 and 2006, the usde reviewed 26 such complaints, 22 of which came from MyRichUncle, a relatively new lender that has accused colleges of blocking students and parents from borrowing federally subsidized student loans from the company. Ten of those 26 cases were dismissed, and 14 were left unresolved. In only two cases did the Department find evidence of a violation; in both cases, it issued a letter asking the lender to cease and desist. 

The usde was also criticized for not updating its guidance regulations. Even after requests from lenders, the usde has not updated its guidance to reflect changes in laws for close to 20 years. The GAO says, “Since 1990, the department has received at least 58 written inquiries from colleges, industry groups, lenders and others about whether certain activities are allowed under the law.” 

Some congressional members expressed concern regarding the usde’s handling of this issue, since the Higher Education Act gives the usde the authority to impose civil penalties or disqualify lenders from the federal guaranteed-loan program. One such critic is New York Attorney General Andrew Cuomo, who has accused the usde of being “asleep at the switch” in its oversight of student loan companies. 

While the usde has recently stepped up its oversight efforts by establishing an eight-person team to conduct targeted program reviews and investigate complaints, it may be too little too late, since the damage has been done to many students who have now incurred huge loan debts. 

The report makes the following recommendations to the Department: 

• Update its oversight tools
• Issue new guidance to colleges and lenders
• Establish standards for responding to violations of the laws

Congress called on Secretary Spellings to carry out the recommendations immediately.  A copy of the report can be found at: http://www.gao.gov/new.items/d07750.pdf. 

—Jamillah Moore, Ed.D.