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PHEAA turns to debt collection

| Saturday, Oct. 13, 2012, 9:06 p.m.

A state agency created to extend loans for education found a more lucrative line of business: going after deadbeat student borrowers.

Yet the Pennsylvania Higher Education Assistance Agency, known as PHEAA, faces criticism for its new mission collecting millions of dollars a year from borrowers who struggle to pay their debts.

“It's unfortunate that PHEAA can only exist as a debt collector. Maybe it's time to change the model,” said Matthew Brouilette, executive director of the free-market Commonwealth Foundation in Harrisburg.

PHEAA, established in 1963, once turned a tidy profit issuing and insuring federally guaranteed student loans. Unlike many state agencies, it pays its way and uses its profit to make grants to Pennsylvania students.

The agency reinvented itself in 2009 when Congress decided the Department of Education would issue federal student loans, eliminating one of PHEAA's largest profit centers.

The agency still underwrites grants — $75 million this year. But records show the profit funding its grants increasingly comes from servicing loans and dogging delinquent borrowers. It gets a cut of collections from defaulted loans.

Officials counter critics by arguing that PHEAA adapted successfully as circumstances changed. Moreover, spokesman Keith New said, someone has to ensure that debtors pay outstanding loans and advise them on avoiding default — and it might as well be this agency.

“Please keep in mind that those defaulted loans are insured, paid off, by federal taxpayers. We work to represent the taxpayer and collect as much as possible,” New said.

Fast-growing business

PHEAA's debt collecting business is growing faster than its loan servicing.

Between 2001 and 2011, its revenue from loan servicing tripled from $65.7 million to $219.7 million. At the same time, its money from defaulted loan collections — 16.5 percent to 18 percent of all loan collections — quadrupled from $34.9 million to $148.8 million.

The emphasis on collections and its profitability brought about a hiring boom. PHEAA employs more than 2,795 workers, including hundreds of new hourly employees at call centers in Chester, State College and Mechanicsburg. That's up nearly 1,000 workers from the start of 2011, when PHEAA employed 1,896.

Greg Murphy, 29, of Greensburg, a graduate student in Indiana University of Pennsylvania's safety science program, said he has friends who have been on the other end of the line when PHEAA employees called about delinquent loans.

“PHEAA is notorious. ... I know someone who is struggling now and they just keep on calling. I 100 percent would not have accepted those grants from PHEAA if that's how they're making their money,” said Murphy, alluding to grants he received toward associate's and bachelor's degrees.

Like Brouilette, Harrisburg watchdog Eric Epstein of Rock the Capital questions the agency's revised business model. “Bad debts from one generation shouldn't finance grants for the next,” he said.

Despite the criticism, PHEAA remains profitable.

Governed by a board that state lawmakers control, PHEAA has raked in multimillion-dollar profits for years. A Tribune-Review analysis of its financial statements shows the agency's bottom line grew from $36.5 million in 2001 to $174 million last year.

History of controversy

The agency is no stranger to criticism and controversy. In 2007, it made headlines for spending thousands of dollars on travel and luxury digs for board members at pricey resorts.

Then it ran afoul of Auditor General Jack Wagner, who uncovered more than $100,000 in entertainment costs and a $1.1 million executive bonus program that he called a “double-dip for recipients who receive bonuses up front and higher pensions after retirement.”

Chastened officials took note, revising PHEAA's policies and reconfiguring its board.

Even so, the agency's future seemed to hang in the balance when the credit crunch hit in 2008. PHEAA posted a $28 million loss that year, its first in more than a decade, and the federal government stepped in with a bailout for it and similar agencies.

PHEAA bounced back in 2009. And because years earlier it developed American Education Services, a multi-state loan serving business, PHEAA was ready to jump when the Education Department quit using it to issue loans but sought contractors to handle loan servicing. It quickly became one of four prime contractors nationally servicing federal loans.

Today, operating under the name FLS, PHEAA oversees 4.7 million federally guaranteed loans totaling $87.6 billion dollars.

PHEAA continues to collect interest on loans it issued before 2009, but its loan servicing operation has become its largest profit center.

Survival tactic

State Sen. Wayne Fontana, D-Brookline, joined the PHEAA board in 2008 and has been vice chair for the past two years. He credits CEO James Preston and his executive staff for a quick turnaround when the government assumed direct lending.

“We had to be able to survive. We wanted to be able to keep serving Pennsylvania students with grants and loans. They created a new mission, and that mission is starting to take hold,” Fontana said, adding that PHEAA continues to serve students with grants underwritten from profits and is creating jobs in its call centers.

New said PHEAA's profits benefit Pennsylvanians. The money enables the agency to administer the state's grant program at no cost to taxpayers and underwrite a program that paid loan origination costs for PHEAA borrowers.

“Over 10 years, $1 billion in benefits have been paid back through different public services,” New said.

Persis Yu, a lawyer with the National Consumer Law Center, said other quasi-governmental state student aid agencies faced the same dilemma as PHEAA when the government took over the loan program. Later this year, the Education Department will add a dozen agencies to loan servicing.

New said PHEAA officials aren't worried about keeping their share. He said the department evaluates contractors' performance for renewal and PHEAA's servicing operations have yielded results that placed its default rates 2 percent or 3 percent below the national average.

Epstein acknowledges that PHEAA does a lot of good, ticking off the agency's programs to underwrite grants for deaf and blind students and nursing.

“No one is taking that away, but the issue I have a deep concern with is mission creep. The mission is to make post-high school education more affordable, and my sense is PHEAA played a crucial role in making it more affordable for middle-income families. But I'm not sure what PHEAA really is anymore,” he said.

Debra Erdley is a staff writer for Trib Total Media. She can be reached at 412-320-7996 or

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