April 19, 2007 / 7:19 PM / 12 years ago

"Revolving door" eyed in student loan scandal

NEW YORK (Reuters) - The widening U.S. student lender scandal is putting new scrutiny on the ties between private loan companies like Sallie Mae and the government agencies that oversee federal loan programs.

Graduating students are seen at a commencement ceremony in New York in a file photo. The widening U.S. student lender scandal is putting new scrutiny on the ties between private loan companies like Sallie Mae and the government agencies that oversee federal loan programs. REUTERS/Chip East

A number of top U.S. Department of Education officials in President George W. Bush’s administration previously had worked for student lenders or related groups. Critics say these links have led to weak monitoring of federal loan programs and contributed to the turmoil surrounding the $85 billion student loan business.

On Wednesday, the Democratic chairman of the U.S. House of Representatives’ Education Committee called for an investigation of all top employees at the Education Department involved in higher education issues to examine potential conflicts of interests.

The lawmaker, California Rep. George Miller, said the government’s guaranteed student loan program has had little or no oversight for six years.

“You now see where relationships, conflicts of interest and inducements and bribes have become a part of this system,” he told reporters. “They’ve been able to do it because nobody has checked them up on it.”

Several state attorneys general and two Congressional committees are examining links between university officials and lenders that critics say pose conflicts of interest. Critics of the Education Department’s handling of loan programs say the movement of many former private industry people into the department is part of the problem.

“I would definitely say there has been a revolving door,” said Stephen Burd, a senior research fellow who studies education matters at the nonprofit New America Foundation. “The Bush administration rewarded lenders with prominent positions throughout the department.”

Burd, whose group has criticized universities’ ties to private lenders that are recommended to students, said the Education Department had been warned repeatedly of lax oversight of loan programs, including in a September 2006 report by its own inspector general.

But, Burd said, the agency didn’t take action.

“I think that’s what happens when you rely on industry people to police their own industry,” he said.

The Education Department has defended its integrity.

“Let me assure you that I hold the department and the thousands of civil service professionals who administer these programs to the highest ethical standards,” Secretary of Education Margaret Spellings wrote in a letter this week to U.S. Sen. Edward Kennedy, Democratic of Massachusetts.

The agency has said officials with private sector expertise can provide valuable help to the department, and it has brought in top officials from the lending industry, such as Theresa Shaw, a 20-year veteran of Sallie Mae, the largest U.S. student lender, formally known as SLM Corp.

Since September 2002, Shaw has led the department’s Federal Student Aid office, which oversees government student loan programs.

Shaw worked at Sallie Mae until 1999, then went to a technology start-up firm from 2000 to 2002, before entering government during the Bush administration, according to her biography on the Education Department’s Web site. She could not be reached immediately for comment.

Several other former Sallie Mae colleagues also came to the Education Department after Shaw, including Matteo Fontana, who earlier this month was put on paid leave by the department after revelations were disclosed that he held stock in a student loan company overseen by his office.

According to a September 2003 regulatory filing, Fontana, who came to Federal Student Aid in November 2002 and became general manager of the Education Department’s Financial Partners Services in April 2005, held 10,500 shares of the parent company of Student Loan Xpress Inc.

The company, now part of CIT Group Inc., is under investigation by New York State Attorney General Andrew Cuomo, who is probing the student lending industry.

A phone message left for Fontana on his office voice mail was not immediately returned.

It is not unusual for government agencies to hire people with private sector expertise, said Mark Kantrowitz, publisher of finaid.org, a Web site that provides student financial aid information. However, he said, the question at the Education Department is whether these close ties affected officials’ oversight duties.

“Part of the problem with the recent student loan scandal has been in some ways a lack of enforcement of existing rules.” Kantrowitz said. “In such an environment where the lenders are getting away with a lot, they keep pushing the boundaries.”

Additional reporting by Kevin Drawbaugh in Washington

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