More Resources Dear Colleague letter

U.S. Secretary of Education Margaret Spellings made the following statement on today's Committee on Education and Labor Hearing, "Examining Unethical Practices in the Student Loan Industry":

"Contrary to New York Attorney General Andrew Cuomo's testimony today, the U.S. Department of Education takes its role as steward of federal financial aid very seriously. I share his concerns on lender practices but believe his testimony was ill-informed on the Department's actions and on federal law. Any suggestion by a state attorney general that a violation of a state's deceptive trade practices law and/or a state's fraud law would equate with an automatic violation of Title IV of the Higher Education Act (HEA) is misleading. The Department is investigating, under its authority, whether, in fact, there have been Title IV violations.

"We have taken a number of steps to tighten our oversight responsibilities of federal student financial aid programs under existing regulations and within the authority the Department has been given through the congressionally-mandated process for issuing new regulations.

"In fact, in January 2005 the General Accountability Office (GAO) notified the Department that it had removed the federal student financial aid programs from its High Risk list, stating, 'We commend Education's commitment to addressing risks in its student financial aid programs.'

"Further, Federal Student Aid has reduced the default portion of the student loan portfolio by 40 percent, from nearly 10 percent in FY2000 to six percent in FY2005, as the overall outstanding student loan portfolio doubled during that same period. Additionally, we have taken specific actions regarding guaranty agencies, lenders and third party servicers, including the closing of seven outstanding guaranty agency Office of Inspector General audits resulting in the recovery of more than $13.5 million in liabilities. Other actions have returned nearly $49 million to the government's federal fund accounts maintained at the guaranty agencies. These are merely a few examples of the compliance and oversight actions by the Department and Federal Student Aid.

"As noted in my letter to Senator Edward Kennedy on April 17, 2007, the Department issued a Dear Colleague letter on March 30, 2007 (http://www.ifap.ed.gov/dpcletters/FP0704.html) reaffirming that student and parent borrowers of the Federal Family Education Loan (FFEL) Program may select the lenders of their choice. Additionally, during its annual Title IV compliance training conferences in October and November of 2006, Federal Student Aid specifically addressed the importance of compliance with the anti-inducement provisions in the HEA.

"Absent Congressional reauthorization of the HEA, in November 2006 we began the negotiated rulemaking process to address, among other issues, preferred lender lists and prohibited inducements. Indeed, in January 2007, the Department offered draft regulatory language to strengthen existing regulations on preferred lender list practices and on inducements. Despite the Department's urging that the proposed language be adopted, the negotiated rulemaking committee's fourth and final session on Friday, April 20 did not reach consensus.

"Given the complexity and importance of these issues, I moved earlier this week to create an internal task force to review and build on the negotiated rulemaking committee's work and have directed them to move rapidly on their deliberations.

"Finally, as the Commission on the Future of Higher Education that I appointed nearly two years ago noted, our financial aid system is confusing, complex, inefficient and duplicative. The Commission understood that piecemeal attention to various parts of the financial aid system would not be effective.

"Efforts to focus only on regulation or oversight of this complex financial aid system will not produce all of the necessary reforms. We must not lose sight of the larger picture—as the Commission noted, the entire financial aid system is in urgent need of reform."

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