Why Are Progressives Fighting Student-Loan Reform?

Editors' Note: This piece has been modified since publication.

High-stakes Washington lobbyists have multiple tactics to win policy fights on behalf of their clients. A classic move is to line up unusual allies, especially progressive supporters for special-interest causes. Sometimes this is done through shell groups, but it's far more effective to get established progressive leaders and organizations to lend their credibility to your cause.

Which is how the Obama administration, in its recent attempt to regulate the for-profit college industry, found some unusual opponents: Melanie Sloan, director of the government watchdog group Citizens for Responsibility and Ethics in Washington, and Tom Matzzie, MoveOn's former Washington director. With their help, the industry successfully delayed the implementation of new rules to obstruct predatory lending practices, in part by painting critics of the industry as scheming banksters.

"What we see here is that the for-profit school industry has not just bought off the Republican Party but has done an amazing job of buying off the elite of the political left as well," says education activist Barmak Nassirian, who heads a trade association of nonprofit college admissions officers.

Students enrolled in for-profit schools represent just 10 percent of all postsecondary students in the United States but account for 44 percent of all student-loan defaults. The industry has grown substantially in the past decade, as federal financial aid to for-profit schools' students ballooned from $4.6 billion a year in 2001 to $26.5 billion a year in 2009, according to analysis done by The Chronicle of Higher Education. Federal dollars totaled 87 percent of revenue at 14 for-profit schools in 2009, including the largest, the University of Phoenix. These schools are often unaccredited and, in the words of Secretary of Education Arne Duncan, "are saddling students with debt they cannot afford in exchange for degrees and certificates they cannot use."

For-profit schools have little incentive to care whether their students land well-paying jobs; if graduates can’t pay back their loans, taxpayers will, because the federal government guarantees the loans. Recently, the Department of Education proposed a new regulation called the "gainful employment rule" to limit government liability for such defaults in the future. The new rule would cut off federal aid to for-profit programs that extend unaffordable loans to students.

In June, Wall Street short-seller Steve Eisman, who was made famous by Michael Lewis' book about the financial crisis, The Big Short, testified about the rule in front of the Senate Health, Education and Labor Committee. "I thought that there would never again be an opportunity to be involved with an industry as socially destructive as the subprime mortgage industry," Eisman said. "I was wrong. The for-profit education industry has proven equal to the task." He argued that students will default on up to $275 billion in loans during the next 10 years.

Matzzie, a veteran progressive activist with experience at both MoveOn and the AFL-CIO, pounced on Eisman's testimony. Despite his reputation as a bold progressive who goes for the corporate jugular, Matzzie wrote an op-ed attacking Eisman's testimony against for-profit schools. The op-ed deployed talking points similar to those used by former Clinton White House counsel Lanny Davis in a defense of the industry the day before. Both claimed that Eisman should not be allowed to testify because, as a short-seller, he stood to profit if the price of stock in private colleges dropped -- the likely result of the new regulations.

Citizens for Responsibility and Ethics in Washington (CREW), another prominent watchdog that normally focuses on the unsavory relationships between members of Congress and their funders, also joined the attack, filing a complaint with the Senate HELP Committee criticizing Eisman's testimony -- the first time the organization has intervened in a policy dispute like this.

CREW concedes that it did not consult any experts about short-sellers' role in the financial system, nor did it look at Eisman's track record; the complaint merely cited Davis' op-ed and a Politico article that quoted Matzzie and the head of the for-profit schools' front group, The Career Colleges Association. Sloan, CREW's director, would make the same argument in The Huffington Post, suggesting that the new regulations would benefit financial speculators more than students. She, like Matzzie and Davis, did not mention that another person with a financial conflict of interest -- Sharon Thomas Parrot of DeVry University (a for-profit school) -- testified that same day.

It's no surprise Eisman would be invited to testify: Short-sellers have consistently been among the first to spot weakness in the private sector. James Chanos, for example, noticed fraud at Enron before regulators did. Indeed, the point of Lewis' book is that regulators and investors should have paid attention to warnings about the subprime bubble from people like Eisman. The purpose of Eisman's testimony on for-profit schools was to reveal -- not conceal -- his financial interest: His credibility as a critic of for-profit education companies comes from his willingness to bet that the fundamentals of those companies are as weak as his analysis suggests.

Davis, a longtime corporate lobbyist, was hired by the Coalition for Education Success, a trade association of for-profit colleges that is part of a major lobbying blitz against the new rules, after he wrote his column, while Sloan and Matzzie have declined to publicly reveal their connections to the for-profit school industry, raising questions about the integrity of their criticism.

Matzzie is vice president of the lobbying firm LawMedia Group. LawMedia represents the Student Access, Student Choice Coalition, which is funded by several for-profit schools. Matzzie also runs an organization called Accountable America, which he says accepted funding from John Sperling, the chair of the Apollo Group, which owns the University of Phoenix. Matzzie did not disclose these conflicts of interest when he denounced Eisman for testifying against for-profit schools' predatory loans.

Is Sperling, a major funder of progressive organizations, also behind CREW's intervention in the issue? Sloan wouldn't say, and CREW, a transparency organization, does not release the identities of its funders. But Sperling was one of the early backers of the Democracy Alliance, a coalition of donors that steers money to progressive causes, and Democracy Alliance played a vital role in funding CREW as it expanded after its founding in 2003. Democracy Alliance also declined to comment on whether Sperling is a current participant or whether the consortium currently funds CREW.

The Prospect spoke with Julian Epstein, the president of LawMedia Group who was once Sloan's boss at the House Judiciary Committee. Epstein says that while he and Sloan had discussed her joining the LawMedia group, he never spoke directly with her about the for-profit school industry -- except in a voice mail he left her. He acknowledges that one of his lobbyists may have contacted her.

CREW has also launched a legal probe of the new regulations' advocates. The organization filed FOIA requests with the Department of Education for all e-mail between the department, Nassirian, and Pauline Abernathy, an education advocate at the Institute for College Access and Success, alleging that Eisman influenced them and the department's regulatory proposals. Eisman says that while he has met Abernathy and Nassirian in passing, he does not make political donations, and both Nassirian and Abernathy deny they have received any money from him or any of his associates. Both their organizations offered to open their books to prove this, a request both CREW and Democracy Alliance refused.

"Never in my life did I imagine I would be attacked by an organization with a reputation as ethics watchdogs like CREW," Nassirian says. "I worked against the for-profit school industry for 20 years, long before I knew Steve Eisman even existed. For CREW to implicitly allege that I am bought off by Steve Eisman is outrageous."

Last month, the Department of Education announced that it was delaying the implementation of the "gainful employment" rule until 2011. Punting the issue down the road increases the likelihood that the new regulations could be killed, especially with Republicans, who oppose the measure, expected to make major gains in Congress this fall.

In her criticism of Eisman's testimony, Sloan warned that "Congress and the Department of Education should remain vigilant against the efforts of a few opportunistic multimillionaires to abuse the regulatory process for their own pecuniary interests." But the efforts of Sloan, Matzzie, and Davis have allowed an opportunistic industry -- one whose collateral damage includes young people's finances and lost taxpayer dollars -- to do just that.

Editors Note: After not returning calls while this story was reported, Davis contacted the Prospect, saying that at the time he wrote the op-ed criticizing Steven Eisman, he was not yet engaged as a lobbyist for the for-profit colleges. Three months after publication, he says, he was asked to represent the Coalition for Educational Success, a group of for-profit firms lobbying against student loan regulation. The story has been edited to reflect that there was no formal relationship to disclose. "If I had ever done such a thing, that would be an unethical act," Davis says.

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