Student Loan Blog : Pennsylvania Higher Education Assistance Agency

Restructuring of Pennsylvania Student Loan Agency’s Board Wouldn't Affect Tax-Exempt Status as Agency Claims

Student Loan Girl — Tue, 16 Sep 2008 00:03:00 GMT

The Internal Revenue Service has reportedly disproven the Pennsylvania Higher Education Assistance Agency’s claim that cutting the number of lawmakers on its board in half — as recommended by Pennsylvania Auditor General Jack Wagner — would threaten the state student loan agency’s tax-exempt status, according to an article in The Patriot-News (“PHEAA tax status not issue, IRS says,” Sept. 14, 2008).

A letter obtained by The Patriot-News confirms that an IRS official told Wagner’s Chief Counsel Robert Teplitz during a telephone conversation that the proposed board restructuring — based on an audit that found the agency to be lavishly overspending under the current lawmaker-dominated board — “would have ‘absolutely no effect’ ” on PHEAA’s tax-exempt status.

In response to the audit, Wagner proposed that PHEAA, the state’s student loan agency, replace half of the 16 lawmakers on its 20-member board with banking and community leaders, college and university officials, and a full-time college student to restore public confidence in the student loan agency.

James Preston, the CEO of PHEAA, had expressed concern that adhering to Wagner’s suggestion to reduce the number of legislators on the board would threaten the agency’s “tax-exempt status, the loss of which could reduce PHEAA’s ability to provide future public service programs.”

State Sen. Sean Logan, the vice chairman of PHEAA, said, however, that if the PHEAA receives written confirmation directly from the IRS, he would support Wagner’s proposal. “Reducing the number of legislators on the board is a reasonable thing to do,” Logan said.

Wagner’s recommendation followed a special audit of PHEAA’s spending practices between July 1, 2004, and June 30, 2007, in which Wagner concluded that “The PHEAA was governed and managed within a culture that sometimes allowed self-reward to supersede fiscal prudence.”

The audit revealed that PHEAA board members used public money for facials, pedicures, culinary classes, and falconry lessons and spent $768,000 on trips to lavish resorts between 2000 and 2005. Wagner also found that the PHEAA’s 12 executives were grossly overpaid, prompting Wagner to recommend that the salaries of these executives, whose combined income totaled $121 million during the three-year period of the audit, be trimmed.

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Government’s Direct Lending Program Sees 43-Percent Increase in Volume

Student Loan Girl — Wed, 03 Sep 2008 00:36:00 GMT

As cash-strapped lenders continue to drop out of the Federal Family Education Loan Program, the number of student loans originated for the 2008–09 school year through the government’s Direct Loan Program has increased by 43 percent, reports The Chronicle of Higher Education (“As ‘Crisis’ Deters Loan Companies, Direct Lending Sees 43-Percent Jump,” Sept. 2, 2008).

Lenders in the FFEL Program — through which borrowers take out federal student loans through private, third-party lenders including banks, state agencies, and nonprofit lenders — have generally accounted for 80 percent of all federal student loan volume, according to the House Committee on Education and Labor (“The College Loan Landscape,” March 2008).

But the Direct Loan Program, which provides loans to students and parents directly from the Department of Education, is gaining ground. As of August 8, the Direct Loan Program had already originated more than $10.84 billion in federal student loans at 1,156 colleges and universities. At this time last year, the direct-lending program, had originated just $7.55 billion in loans at 851 institutions.

And although the exact figures have yet to be released, the Education Department estimates that the Direct Loan Program, which has generally made up 20 percent of all federal college loan volume, will soon be comparable in size to the FFEL program. FFELP lenders have only issued $13 billion in federal student loans at 3,230 colleges and universities this academic year, compared to the $55.8 billion in student loans they originated at 4,612 schools last year.

So Far, A Smooth Transition to Direct Lending

Government subsidy cuts to FFELP lenders enacted by the College Cost Reduction and Access Act last September, as well as continued fallout from the subprime mortgage crisis, have led more than 100 lenders to suspend their participation in the FFEL program.

By April of this year, some 5.8 percent of lenders remaining in the FFEL program had switched over to the direct-lending program and another 19.3 percent said they were considering the switch, according to Student Lending Analytics, a company that provides financial aid administrators with data about lenders (“Drift Toward Direct Lending (Update),” Inside Higher Ed, April 30, 2008).

Although some lenders questioned the Education Department’s ability to handle an increase in loan volume through its Direct Loan Program, some financial aid administrators say the Department of Education has done well in handling the influx of business.

Anna Griswold, executive director of student aid and assistant vice president for undergraduate education at Penn State, says she has been “pretty pleased” with the Direct Loan Program and has not experienced any glitches. Penn State, the 10th-largest FFELP lender last year, became a direct-lending school this year after its FFELP lender, the Pennsylvania Higher Education Assistance Agency, stopped offering federal student loans in February.

Penn State borrowers have already taken out $100 million in student loans this year through the direct-lending program.

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Audit of State Student Loan Agency Calls for Major Reform

Student Loan Girl — Thu, 21 Aug 2008 21:23:00 GMT

The Pennsylvania Auditor General Jack Wagner has recommended sweeping changes for the Pennsylvania Higher Education Assistance Agency a year after the state student-loan agency was found to be lavishly overspending on internal operations, according to a Forbes.com article (“Pa. Audit Seeks Loan-Agency Board Overhaul,” Aug. 19, 2008).

In a performance audit of the agency, Wagner concluded that “The PHEAA was governed and managed within a culture that sometimes allowed self-reward to supersede fiscal prudence. In those instances PHEAA failed its mission by not using all available resources to benefit Pennsylvania students.”

Wagner began the audit in April 2007, after news reports accused the agency of overpaying executives and staff members and freely spending hundreds of thousands of dollars on extravagant banquets, bar bills, golf outings, and spa treatments — all while failing to increase college grant amounts to keep pace with rising tuition costs.

Now, after a year-long investigation that analyzed the agency’s spending and management practices between July 1, 2004, and June 30, 2007, Wagner is asking the student loan agency to trim the salaries of PHEAA’s 12 executives whose combined income totaled $121 million during the three-year period of the audit.

Wagner is also urging the PHEAA to replace half of the 16 lawmakers on the 20-member PHEAA board with heads of banking and community agencies, leaders of colleges and universities, and a full-time college student.

PHEAA Bends on Some of Report’s Recommendations

PHEAA President and Chief Executive Officer James Preston said while the agency agrees with most of Wagner’s findings, the audit is based on “really old information.”

“What you have to look at is what’s really happened going forward,” he said. “Our board and our management and employees are dedicated to reform.”

Over the last 18 months, PHEAA has overhauled its spending practices, instituted annual internal spending audits, and increased oversight of its travel policies.

But Preston rejects Wagner’s proposal to alter the makeup of the agency’s board — a change that would require legislative approval — saying that too many adjustments to the board’s organization would jeopardize the PHEAA’s ability to retain its tax-exempt status, which allows the agency to receive state funding for its student loan programs.

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State-Based Loan Agencies May Not Offer Student Loans, Despite Government Intervention

Student Loan Girl — Fri, 20 Jun 2008 23:18:00 GMT

Just this year, some 112 student loan lenders have cut back or ended their participation in the federal and private student loan markets, including nine state loan agencies, who have each issued slightly different responses to the industry’s changes, according to The Chronicle of Higher Education (“Some State Loan Agencies Say They May Stay on the Sidelines This Year,” June 12, 2008).

After the passage of the Ensuring Continued Access to Student Loans Act, which was intended to aid ailing student lenders, state-based student loan agencies in Kentucky, Missouri, and New Hampshire — often the largest student loan providers in their states — have said they will resume lending again sometime this year.

However, the Missouri Education Loan Authority says it will no longer be able to offer borrower benefits like the .25-percent interest rate reductions for those who make automatic monthly payments, or interest rates as low as .25 percent for graduates who gain employment in the state after school.

With over $12 billion in federal student loans, the Pennsylvania Higher Education Assistance Agency, the largest state lending entity in the country, will reduce grant awards to 160,000 low-income students by approximately $500 each, but is still unsure whether it will re-enter the student loan market in 2008.

The other five state-loan organizations in Indiana, Iowa, Massachusetts, Michigan, and Montana that have exited the federal program, say they’re also uncertain if they will start re-issuing loans this year, as they are awaiting clarification on loan servicing regulations under the new law. Many of these state-based lenders question whether they can continue afford to lend through the federal student loan program in light of the recent credit crunch and the elimination of federal subsidies to lenders last fall.

While industry insiders say that the new law is “a good first step,” Will Shaffner, director of business development at the Missouri Higher Education Loan Authority, believes that the federal rescue plan doesn’t go far enough. He said it doesn’t ease the longer-term problems both public and private lenders see with the federal program.

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Nursing, Teaching, Law Enforcement, Professions Losing Student Loan Incentives

Student Loan Girl — Fri, 13 Jun 2008 17:30:00 GMT

College graduates preparing to enter critical fields like nursing and teaching may no longer be able to take advantage of programs that previously offered them a break on their student loans.

In at least six states this year, state-affiliated lenders have dropped or scaled back programs that repay or forgive a portion of a borrower’s federal student loans when that student-borrower works in a critical-needs field, according to an article in USA Today (“Credit Crisis Weakens Relief for States’ Student-Loan Programs,” June 11, 2008).

Lenders are also eliminating loan programs that reduce student-loan interest rates for students who major in specific subjects.

These state loan agencies blame a $21-billion cut in government subsidies to lenders who participate in the federal student loan program and the ensuing fallout from the subprime mortgage crisis for making cuts to these incentive programs necessary.

More programs “are certainly at risk should the credit crisis continue,” says Krista Cole of the Education Finance Council, which represents student loan providers in 31 states.

Next month, Mike Reiber of the Pennsylvania Higher Education Assistance Agency, says the agency will stop funding programs for nurses, teachers, child care workers, and members of the military because the “money has literally dried up.”

Student Loan Benefits Being Reduced, Eliminated Nationwide

Other state student loan providers are already reducing or are trimming their borrower benefits for students in critical-needs fields:

The Missouri Higher Education Loan Authority will stop offering reduced student-loan interest rates for teachers, social workers, nurses, law enforcement personnel, firefighters, and National Guard members, beginning July 1.

The Iowa Student Loan Liquidity Corp. plans to cut student loan benefits for new teacher applicants this year.

The Michigan Higher Education Student Loan Authority eliminated a no-interest student loan plan in May for undergraduates majoring in engineering.

The New Hampshire Higher Education Loan Corp. suspended a benefit program in February that forgives some student loans for teachers.

The Kentucky Higher Education Assistance Authority suspended loan forgiveness programs for teachers, nurses, and lawyers in January and plans to reduce loan benefits for current borrowers.

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Pennsylvania Student Loan Agency to Cut Grant Aid, Offer Employee Buyouts

Student Loan Girl — Thu, 01 May 2008 00:06:00 GMT

Pennsylvania’s student-loan agency will cut college grant amounts for the 2008–09 academic year by up to $750 and will offer voluntary buyouts to some of its nonunion employees in an effort to keep the company afloat.

The Pennsylvania Higher Education Assistance Agency will determine the adjusted grant amounts based on a recipient’s college costs, family size, and the number of children from the family enrolled in college. Next year’s awards will range from $2,100 to $3,948, compared to this year’s awards which ranged from $2,500 to $4,700.

The agency expects to save $12.5 million annually with the nonunion buyout agreements, after losing more than $37 million in the nine months leading up to March 31, agency spokesman Keith New said in an Associated Press article, (“Pa. Student-Loan Agency to Cut Aid, Offer Employee Buyouts,” April 24, 2008).

During the same period last year, the agency earned nearly $113 million in operating income.

Employees eligible for buyouts will receive two weeks’ pay for each year of service at the agency for up to 16 weeks. The number of buyouts needed to steady the company has yet to be determined and is dependent on the salaries of departing employees.

The agency, which New said has “never before experienced more difficult or severe economic conditions,” will only impose layoffs as a last resort.

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