College Loans by States Face Fresh Scrutiny

DES MOINES — When Iowa set up a corporation to make student loans more available, it hoped to expand access to college. Now state officials are investigating whether the corporation’s aggressive practices to get business help explain why Iowa’s college graduates have the nation’s second-highest debt burden per student.

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The nonprofit Iowa Student Loan Liquidity Corporation, created in 1979, has become the dominant student lender in the state, with 400 employees and .3 billion in outstanding loans. Its officials, in recently disclosed e-mail messages, emphasized “continued ‘hypergrowth’” and benefits of “an aggressive, offensive strategy to bring in new loan volume.”

Some Iowa lawmakers, after hearings this fall, threatened to strip it of its authority to issue tax-free bonds, raising its costs, and the attorney general is investigating its business practices and governance.

It is just one of several state-created lenders that have come under scrutiny.

The states are focusing, to a degree, on issues similar to those raised in the national student loan scandal of the spring: lax oversight and, in Iowa, whether incentives to colleges led them to steer students to Iowa Student Loan. Other questions are particular to state-affiliated, nonprofit lenders, like whether they should be held accountable for lavish spending, be subject to greater public scrutiny or retain a right to issue tax-exempt bonds.

In Pennsylvania, the state auditor is investigating the Pennsylvania Higher Education Assistance Agency, which has doled out million in bonuses to senior employees since 2004 and spent lavishly on retreats. Its chief executive resigned in October. And last month the federal Education Department’s inspector general concluded that the agency improperly exploited a federal subsidy program to rake in million.

A recent state audit of the Missouri Higher Education Loan Authority, a quasi-government corporation, found that it too had paid millions of dollars in bonuses, perks and severance packages to top executives.

“They did not act like a state agency at all,” said Susan Montee, the Missouri state auditor. “They really had the mindset that they were a for-profit business.”

In a response to the audit, the authority’s chief executive, Raymond H. Bayer Jr., said the lender had new board members and senior managers “strongly rededicated to accountability, efficiency and transparency at all levels of the organization.”

Keith New, a spokesman for the Pennsylvania authority, said the company had adopted new policies on compensation and spending. But Chuck Ardo, a spokesman for Pennsylvania’s governor, Edward G. Rendell, said he was reserving judgment. “Unless they show him that students are their first priority, then he thinks that they need to be privatized,” Mr. Ardo said.

State-affiliated student loan corporations came into existence when low-cost student loans were not widely available. Some guaranteed loans before the federally guaranteed student loan program was created in 1966. Others bought loans from banks, enabling them to lend more.

Over the years these agencies evolved dramatically. They became so lucrative that a rash of them were acquired by private companies.

Roughly 30 remain. Kathleen Smith, president of the Education Finance Council, which represents nonprofit and state-affiliated loan companies, said that the lenders performed a vital function and that the conduct of only a very few had drawn scrutiny.

But in Pennsylvania, Missouri and Iowa, state officials have been asking whether the agencies have forgotten their purpose.

State Senator Michael Connolly, a Democrat, said of Iowa Student Loan, “If they’re going to act like an aggressive profit-making corporation and pay their C.E.O. a quarter of a million dollars a year and pay their board members ,000 a meeting, then maybe we should cut them loose.”

The chief executive of Iowa Student Loan, Steve McCullough, strongly defended the corporation and said it had helped students go to college as federal and state aid stagnated. He has pledged to make the corporation more transparent by giving the state an annual report and formally opening board meetings to the public.

He attributes debt burdens to rising tuition and relatively low family incomes in Iowa. “Iowa Student Loan does not control the factors that cause the need for students to borrow,” Mr. McCullough said.

Part of what has drawn attention to Iowa Student Loan is its dominance. At Iowa State, more than 90 percent of students who take out private loans borrow from Iowa Student Loan; at the University of Northern Iowa, about 80 percent do.

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