Hall of Shame: Kentucky Higher Education Student Loan Corporation

Raiding the Treasury and Making Teachers Pay the Price

The state of Kentucky has, unfortunately, had plenty of experience with supposedly “trustworthy” people bamboozling its citizens. For example, the state’s treasurer from 1867-1888—known as “Honest Dick” Tate—fled the country with tobacco sacks filled with gold and silver coins after using the treasury as his personal bank account for years. All in all, Honest Dick misappropriated nearly a quarter million dollars (the equivalent of about $5.8 million in 2008 dollars) from Kentucky taxpayers.

More recently, Kentucky has received national coverage after the Kentucky Higher Education Student Loan Corporation (KHESLC), also known as the “Student Loan People,” overcharged the federal government $80 million, used the money to offer loan forgiveness to teachers, and then abandoned their promise, leaving many teachers with thousands of dollars of debt that they thought would be forgiven.

KHESLC, unlike NelNet and Sallie Mae, is not some giant, soulless corporation hell-bent on profit at any cost, at least on paper. KHESLC is a non-profit entity created in 1978 by the state legislature, but, like Honest Dick, KHESLC proved through its deeds to have quite a different character than its words would imply.

Robbing Peter…

KHESLC was one of several student loan companies to manipulate their loan portfolios in order to receive millions in improper payments under an arcane provision in the Federal Family Education Loan Program (FFELP) that guaranteed lenders a 9.5% return on their investment in certain kinds of loans.

As Higher Ed Watch explained, the 9.5% provision was created to help the struggling non-profit sector of the student loan industry in the 80s, but by 1993 Congress ended the provision for all new loans. That left only the loans made in the 80s and early 90s eligible for the generous provision, and this amount should have fallen gradually as students paid off their debt. Yet between 2003-04 the volume of loans eligible for the provision jumped by 43%.

We know what you’re thinking: a satellite must have fallen to the earth while emitting a strange radiation that makes long-settled loans come back to life as some sort of horrible “zombie debt.” But this case, unfortunately, involves no zombies. Instead, lenders found a clever way to “recycle” old loans into new ones. So long as the new loans were financed by the same bonds that financed the old loans for any period of time—including just a few hours—the lenders received the 9.5% guarantee.

Interestingly, Higher Ed Watch found that the Financial Partners division of the Student Financial Aid office in the Department of Education not only approved these schemes, but sometimes even provided advice to student loan companies about how to make their schemes more profitable. This was going on even as the Department was attempting to shut down these overpayments. Higher Ed Watch also found that the Financial Partners Division actually told KHESLC that they had under billed the Department of Education, and gave KHESLC a one time opportunity to review the data and claim the “additional” subsidy payments.

Why would the Financial Partner’s division help a loan company bilk more money from the Department? Perhaps because the division was very lax and cozy with student loan companies. At the time, the Financial Partners division was run by Matteo Fontana, who was later put on administrative leave because of the conflicts created by his close ties to student loan companies. He resigned while on forced leave.

…to “Pay” Paul

After receiving $80 million in improper payments from the federal government, KHESLC didn’t bother lugging around tobacco bags full of precious metals while on the lam.

Newly flush with cash, the loan agency decided that it could better compete with both the for-profit and non-profit business in the industry if it was able to provide better benefits for borrowers than other competitors. A heaping helping of good public relations is never a bad idea either, and so KHESLC announced “Best in Class,” a very generous loan forgiveness program for Kentucky teachers.

Under the plan, all Kentucky teachers, guidance counselors, and librarians would not have to pay interest on their KHESLC loans, and some teachers (like special education and science teachers) were eligible to have 20% of their principle forgiven each year. Essentially, this means that if you took out all of your loans from KHESLC, your entire student debt could be forgiven after five years of service. They also ran a similar program (“Best in Care”) for nurses.

For a while, this benefit helped thousand of Kentucky educators, but KHESLC designed the program poorly. The Department of Education finally came to its senses in 2007, and required all claims for the 9.5% subsidy be reviewed by independent auditors, and that lenders receiving the subsidy submit to regular audits. KHESLC refused to provide proof that the payments were legitimate, and so lost a major source of funding that they were counting on to continue the program.

Combined with a $7.8 million raid on the company’s bank account by the Kentucky state government, federal subsidy cuts for all FFELP lenders in order to provide interest rate cuts and increased Pell grants for students, and a global credit crunch, KHESLC could not maintain its commitments. More than 4,000 teachers are now forced to pay off loans that they believed would be forgiven.

Some would have never gone into teaching if it wasn’t for the promise of loan forgiveness. Others borrowed much more than they would have otherwise, under the impression that their loans would not be sticking around. Suddenly they are facing large monthly loan payments that do not fit into the budgets they have planned.

Click here and here to read stories and reactions from some of the teachers who are being affected.
 

This article was originally featured on Students Over Banks. Students Over Banks is a Campus Progress campaign aimed at supporting President Obama’s plan to make college more affordable for Americans.

Related Stories

• Gender-Neutral Housing Comes to Princeton
• Campaign Communications Director, Repower America
• Toke Up Marijuana Laws
• Send a Health Care E-Card
• The Battle for Pittsburgh