Thursday, April 30, 2009

Shady Stuff Going Down in South Carolina

Ben Miller has uncovered some pretty shady stuff that's going on in the student loan industry in South Carolina. It all has to do with something called a guaranty agency, a state-run agency that serves as a government-subsidized backup for federal loans. Miller has the goods here:
The federal lender-of-last-resort program is administered by the designated guaranty agency in each state to provide government-backed loans to students whose applications have been denied by other lenders. Since the agency must give qualified borrowers a loan-of-last-resort, the federal government agrees to take on all the risk associated with the debt. This means that holders of these loans are reimbursed for 100 percent (page 8) of any losses sustained due to borrower default, as opposed to ordinary loans made through the Federal Family Education Loans program (FFEL) that are reimbursed at only a 97 percent rate.

As its name suggests, this program is supposed to be used only in rare cases. But the documents, which we obtained from the Department of Education through a Freedom of Information Act (FOIA) request, show that over at least the past six years, South Carolina's guaranty agency has provided loans to students through this program with unusual frequency. The rate at which the agency used this program to request reimbursement from the Department was at least 100 times greater than any of the other nine agencies whose documents we obtained -- a sampling that included the largest guarantors in the country. All told, South Carolina's lender-of-last-resort claims were three times greater than those for the other nine agencies combined. (See chart below or the spreadsheet at the bottom of this post for additional information on the guaranty agency claims.)

In an e-mail to Higher Ed Watch a spokesperson for the Department of Education said the Department "is aware of the situation and the Federal Student Aid office is conducting a program review." The spokesperson, however, declined to comment further until that process is completed.

Miller has a lot more details here.

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