August 19, 2008

Pennsylvania Auditor Urges Governance Changes at Student-Loan Agency

One year after the Pennsylvania Higher Education Assistance Agency was found to be spending lavishly on its top staff, the state’s auditor is calling for major changes in the governance of the nonprofit state-chartered student-loan company.

The Pennsylvania auditor general, Jack Wagner, called today for changes at the lender, known as Pheaa, that include selecting a group of financial and academic experts to replace eight of the 16 state lawmakers on Pheaa’s 20-member board.

News reports last year described such expenses incurred by Pheaa executives as $45,000 to charter a Lear jet and more than $860,000 on trips that included spa treatments for spouses and staff members, limousine rides, and falconry lessons.

The auditor general reported today that Pheaa paid $121-million in salaries for management staff members during the three-year period audited, giving at least 12 of its executives salaries and bonuses that exceeded the governor’s annual salary of $164,500 during the 2006-7 fiscal year.

“Auditors documented a pattern of expenditures by which top management benefited themselves at the expense of taxpayers and students,” Mr. Wagner’s office said in a statement announcing its findings. The full text of Mr. Wagner’s report, which contains a written response from Pheaa, is available on the office’s Web site.

Pheaa, in its response, accepted several of Mr. Wagner’s recommendations intended to hold down salaries and benefits paid to the staff. But agency rejected the proposal to cut back on the number of state lawmakers serving on its board, saying the current system is important to maintain political diversity on the board, to maintain Pheaa’s tax-exempt status, and to ensure the flow of state funds to the agency.

Pheaa already has laid off staff members and, in February, stopped issuing federally guaranteed student loans. —Paul Basken

Comments

1. The shameful behavior of PHEAA executives is just another example of the basic flaws of the government-guaranteed student loan program.

   By allowing state agencies to serve as lenders in these historically over-subsidized programs, federal law has created a perverse incentive for the states to turn their agencies into cash machines at the expense of the taxpayers and students. The obscenely high profits these agencies generated for the states insulated them from accountability to state authorities. At the same time, their state affiliation protected them from meaningful federal oversight.

   Some of these entities raised funds at below-market rate by issuing tax-exempt bonds, only to lend them out at above-market rates through the federal student loan program—thus burning the taxpayers not once, but twice. The huge amounts of easy cash they made, of course, was used to politically prime the pump at the state and federal levels, and, needless to say, to take care of their fortunate executives, who were blessed to find themselves in the right place at the right time.

   I hasten to anticipate the comments of colleagues from the many loan-industry lobby shops here and around the country, who will inevitably point out that it was only PHEAA, and that the credit crunch has changed everything. That was then, they will insist, and this is now. They are, like Captain Renault, “shocked, shocked, that gambling is going on in here.”

   — Barmak Nassirian    Aug 19, 04:15 PM    #

2. Falconry lessons? Did that say falconry lessons?!? Did they have a rodent problem in their offices or something?

   How much more evidence is needed that the FFEL program is corporate welfare in which a little bit trickles down to needy students? Direct Lending and private loans prove that guarantors are 5th wheels to begin with, and here they were (and it wasn’t just PA; make like Washington and cross the Delaware and see what was happening there) making more money than they knew what to do with.

   — DS    Aug 19, 04:23 PM    #

3. Barmak — the student loan industry knows better than to engage in a debate with you — or anyone else that includes references to Casablanca!

   — Don Heller    Aug 19, 08:11 PM    #

4. The unfortunate reality is the wrong individuals will be moved on and out. The chief executives that perpetrated this atrocity will remain in place and continue the same behavior. The only thing that will change is how they hide their greed. In the “old” days you would never hear of this happing. Parents would go down to their local bank fill out the paper work and pack their kid/s off to school. Default rates were under control and the lenders knew their borrowers. It is important to note the correlation between the growth of for-profit education and the activities of the “non-profit” state based loan organizations.

   — Dr. Bill    Aug 20, 12:48 PM    #

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