Spellings Rejects Criticism on Student Loan Scandal

With scandal rattling the $85 billion student loan industry, Education Secretary Margaret Spellings argued at a House hearing on Thursday that she lacked legal authority to clamp down on many abuses.

Ms. Spellings faced pointed questioning at the hearing from Congressional Democrats, who accused her department of mismanagement and complacency.

In about three hours of testimony before the House education committee, Ms. Spellings portrayed her department’s oversight of federal lending programs as vigorous, but said that the world of private lending, which has become increasingly important as college costs have outstripped federal loan programs, was mostly beyond her regulatory authority.

She told the panel that the entire student loan system needed overhaul, saying, “The system is redundant, it’s byzantine and it’s broken.”

Several Democrats, led by Representative George Miller, questioned her aggressively, asserting that she had regulatory power and moral influence that she had neglected to wield to stop loan companies from paying universities or giving gifts, trips, stock and consulting payments to the university financial aid officers who guide students toward loans.

This from the New York Times.

Whistle-Blower on Student Aid Is Vindicated

Jon Oberg, a former Department of Education researcher, warned that

student loan companies were abusing a subsidy program

and collecting millions in federal payments to which they were not entitled.

Photo by Michael Temchine for The New York Times.

When Jon Oberg, a Department of Education researcher, warned in 2003 that student lending companies were improperly collecting hundreds of millions in federal subsidies and suggested how to correct the problem, his supervisor told him to work on something else.

For three more years, the vast overpayments continued. Education Secretary Rod Paige and his successor, Margaret Spellings, argued repeatedly that under existing law they were powerless to stop the payments and that it was Congress that needed to act. Then this past January, the department largely shut off the subsidies by sending a simple letter to lenders — the very measure Mr. Oberg had urged in 2003.

The story of Mr. Oberg’s effort to stop this hemorrhage of taxpayers’ money opens a window, lawmakers say, onto how the Bush administration repeatedly resisted calls to improve oversight of the $85 billion student loan industry. The department failed to halt the payments to lenders who had exploited loopholes to inflate their eligibility for subsidies on the student loans they issued.

Recent investigations by state attorneys general and Congress have highlighted how the department failed to clamp down on gifts and incentives that lenders offered to universities and their financial aid officers to get more student loans.

This from the New York Times.

Listen in: NPR has several programs following the student loan scandal.

Plan to Change Student Lending Sets Up a Fight

This from the New York Times:

WASHINGTON — The private student lending industry and its allies in Congress are maneuvering to thwart a plan by President Obama to end a subsidized loan program and redirect billions of dollars in bank profits to scholarships for needy students.

The plan is the main money-saving component of Mr. Obama’s education agenda, which includes a sweeping overhaul of financial aid programs. The Congressional Budget Office says replacing subsidized loans made by private banks with direct government lending would save $94 billion over the next decade, money that Mr. Obama would use to expand Pell grants for the poorest students.

But the proposal has ignited one of the most fractious policy fights this year...

During the Bush administration, a massive student loan scandal exposed student lending companies that were improperly collecting hundreds of millions in federal subsidies. At the time, Education Secretaries Rod Paige and his successor, Margaret Spellings, argued repeatedly that under existing law they were powerless to stop the payments and that it was Congress that needed to act.

Obama apparently disagrees.

For lenders, the stakes are huge. Just last week, Sallie Mae reported that despite losing $213 million in 2008, it paid its chief executive more than $4.6 million in cash and stock and its vice chairman more than $13.2 million in cash and stock, including the use of a company plane. The company, which did not receive money under the $700 billion financial system bailout and is not subject to pay restrictions, also disbursed cash bonuses of up to $600,000 to other executives...

Stephen Colbert v Margaret Spellings Tonight

What happens when an irrestable personality runs into an immovable personality?

Of course, I'll be asleep by 10... but you can watch the trains wreck tonight on Colbert at 11:30 pm, on Comedy Central.

You may recall US Secretary of Education Margaret Spellings appeared on Comedy Central's Daily Show with John Stewart back in May 2007. She was the first Bush administration official to do so.

Unfortunately, Stewart lobbed softballs and appeared to want to avoid anything controversial.

He gave Spellings an apple, got out his #2 pencils and a Lunchable. Nothing about the Reading First scandal...scant little on the student loan scandal.

So the bar is set low. Let's hope Colbert clears it by a mile.


Thanks 2 Alexander Russo.

Obama Invests in College Affordablity

This from Ed Week:

President Obama on Thursday proposed a huge expansion of the government's role in making college more affordable and putting it within reach of more students... The president was following through on a campaign promise to give every child the chance to go to college or pursue some form of higher education.

In his budget plan, Obama seeks to link growth of the Pell Grant program to inflation for the first time since the program began. It would grow by more than 75 percent over the next decade.

Obama seeks to save money and protect students from the current turmoil in financial markets by boosting direct lending by the government and discontinuing government-subsidized loans made by private lenders.

During the Bush administration, a massive student loan scandal exposed student lending companies that were improperly collecting hundreds of millions in federal subsidies. At the time, Education Secretaries Rod Paige and his successor, Margaret Spellings, argued repeatedly that under existing law they were powerless to stop the payments and that it was Congress that needed to act.

Obama apparently disagrees.

Spellings Pulls A Gonzales

Alexander Russo's blog commentary from This Week in Education was recently picked up by the Huffington Post. Here's his take on Spelling's Capitol Hill performance last week.

The only thing saving Education Secretary Margaret Spellings

from drifting into Alberto Gonzales territory

right now is, well, Alberto Gonzales.

If it weren't for the fact that everyone's attention is focused on him, more folks would notice that Spellings has been up to some very Gonzales-like things over at the Department of Education. (You can watch a video of the testimony here.)

In response to the growing litany of reports and investigations surrounding misdeeds in the multi-billion-dollar student lending industry, Spellings has, somewhat unbelievably, claimed that she lacked the authority to take on the lenders and universities who were manipulating the system for financial gain.

In response to the scandal surrounding an early literacy program called Reading First, which independent reports have found full of conflicts of interest and unwise if not illegal implementation, Spellings argues that she wasn't Secretary then and that everyone involved - former Secretary Rod Paige, former Assistant Secretary Gene Hickock, and others - has left.

True, Spellings wasn't Secretary back then when Reading First was headed off the rails. But it's not like she wasn't there. Before becoming the EdSec, Spellings was head of the Domestic Policy Council, which oversees education from the White House.

And yet, Spellings claims clean hands.

"It would have been impossible for me to have been intimately involved with oversight of all those programs," she said last week in Los Angeles about her responsibilities at the DPC. It's a response that comes awfully close to Gonzales infuriating claims to have not been involved in the Attorney General firings, and to not remember key events.

The Gonzales-Spellings similarities don't end there.

Like Gonzales, Spellings is continually vexed by a former employee who contradicts her account of events. For Gonzales, it's Kyle Sampson. For Spellings, it's Chris Doherty, the former head of the Reading First program, who was summarily dismissed when things started to heat up.

Doherty claims that the White House was intimately involved in every step of the implementation of the program, which allegedly violated federal statutes by excluding certain reading programs from being used. ("Four Officials Profited From Publishers, Report Finds," The Washington Post)

But none of this has led to the type of bipartisan piling-on that Gonzales has endured, nor the calls for her resignation...

For her part, Spellings has done her best to address the allegations against her management of these programs, and to divert attention when she can't. She announced the departure of one top student lending official on Tuesday, just before she was scheduled to testify. ("Federal Student Loan Official Is Resigning", The New York Times) She encouraged the House passage of a student lending "sunshine" law the day before she was to appear, which took much of the steam out of the Thursday proceedings. ("House Passes Ban on Gifts From Student Lenders", The New York Times)

This editorial from the New York Times underscores the point:

“It’s not our fault.” That’s what Education Secretary Margaret Spellings seemed to say while testifying before Congress last week about her department’s failure to halt the payoffs, kickbacks and general looting of the public treasury by a lending company that collected nearly $300 million in undeserved subsidies. But that doesn’t track with the federal Higher Education Act, which clearly authorizes the secretary to disqualify from federal programs lenders who employ payoffs, kickbacks and unethical practices like those that have been found to be commonplace in the college lending business.

'Pay for performance' pitfalls

This from Lynn Stout in the Los Angeles Times:

Last week, 35 public school teachers and administrators indicted for allegedly cheating to raise test scores in an Atlanta school district began turning themselves in to authorities. They may be the tip of the iceberg; a state investigation implicates 178 educators in the scandal.

Atlanta Public Schools defendant Sandra Ward, right, turns herself in at the Fulton County Jail accompanied by her attorney

Were these teachers and principals all "bad apples," intrinsically unethical individuals who somehow ended up in the same school district? Not likely. They were ordinary people who allegedly did unethical and dishonest things to achieve the student performance targets needed to keep their jobs and earn their bonuses. The Atlanta cheating scandal illustrates the dangers of the modern infatuation with incentives and what's called "pay for performance."

Lawmakers often view incentives as the answer to almost every policy problem. Stock returns lagging? Change the tax code — as Congress did in 1993 — to require executive pay to be linked to "objective metrics." Medicare costs spiraling upward? Launch a pilot program — as the Department of Health and Human Services has — basing physician payments on measured outcomes. Children failing to learn their ABCs? Tie teacher pay — as Atlanta's school district did — to student test scores.

What happened in Atlanta is only the latest instance in which performance incentives tempted employees into opportunistic, even illegal behavior. During the 2008 credit crisis, performance-based pay lured mortgage brokers into approving unqualified borrowers and financial executives into making risky derivatives bets. Incentive pay played a leading role in the Enron and WorldCom frauds. It was implicated in the 1980s savings and loan crisis.

These cases show the underbelly of pay for performance. Explicit incentives work for simple tasks where an employee controls the outcome and where product quality is easily assessed — for example, offering employees of a moving company $20 for every sofa they move in an hour without damage. It's pretty clear whether the sofas got moved, and whether they got damaged.

But what about complex, hard-to-monitor tasks where the desired outcome is difficult to measure and subject to influences outside the employee's control — such as educating a child or restoring a patient to health? It is almost impossible to design objective performance metrics that can't be met through illegal or undesirable behavior. In the case of education, it could be falsifying student test scores; in the case of healthcare, it could be controlling blood pressure through medications that make patients feel sick instead of persuading patients to exercise. And when you create a system that inadvertently incentivizes illegal or undesirable behavior, you get more of it.

Policymakers and reformers assume the solution is "getting the incentives right." They believe incentives might help and can't possibly hurt. But as the Atlanta scandal shows, and as social science has proved, incentives can hurt. Pay for performance can create workplaces that suppress ethics and conscience. Instead of more productive employees, you get more opportunistic, unethical and criminal employees. Incentive plans are like dynamite — useful but also dangerous. These plans should be handled only by experts, with great care and in small amounts.

What is the alternative to pay for performance? It's worth remembering that before free-market ideology and the dogma of incentives took root, employers often compensated employees — including teachers, doctors and business executives — with flat salaries and modest bonuses adjusted annually according to the employer's opinion of whether the employee had done well. The system relied on subjective, after-the-fact rewards more than objective, predetermined incentives. That required a fair amount of trust and a sense of mutual obligation. Employers had to trust employees to work to earn their predetermined salaries rather than loafing. (Bad employees can be fired, but this solution costs the employer too.) Employees had to trust that if they stuck around and did a great job, their employers would recognize and reward them.

Standard economic theory predicts that systems based on mutual trust and respect between employer and employee shouldn't work. But innumerable behavioral studies prove trust is a real phenomenon, and history shows it can indeed motivate employees. For example, before Congress changed the tax code in 1993 to tie executive pay to objective performance metrics, boards paid CEOs far less. Yet investors enjoyed higher stock market returns than today.

This doesn't mean pay for performance is always bad. When the task is simple and it's easy to spot employee misconduct — remember those sofa movers — incentive plans can get better results than a flat salary. Crude incentive plans that look only at a few simple performance measures and that are driven by the demands of elected politicians are especially dangerous.

We should let employers and supervisors on the front lines of the workplace — not politicians, bureaucrats or would-be reformers — decide how best to motivate employees. They might decide they need more trust, and fewer incentives.

Lynn Stout is a professor of business and corporate law at Cornell Law School and the author of "Cultivating Conscience: How Good Laws Make Good People."

John Stewart goes easy on Spellings

Last night Margaret Spellings appeared on Comedy Central's Daily Show with John Stewart; the first Bush administration official to do so. Unfortunately, Stewart lobbed softballs and appeared to want to avoid anything controversial. He gave Spellings an apple, got out his #2 pencils and a Lunchable. Nothing on Reading First. Scant little on the student loan scandal.

I love the Daily Show, but this was not John's best interview.