The libertarian roots of the Lumina Foundation, Part 2

(Editor’s note: This the second part of a two-part story detailing the little-known roots of the Lumina Foundation, a major force in higher education policy today. Part 1 is here.)

Richard Cornuelle, the Indianapolis libertarian activist who started United Student Aid Funds (USAF), had a fight on his hands. His organization, whose downfall led ultimately to the creation of today’s college-access giant known as the Lumina Foundation, was created with the goal of competing with the federal government’s nascent student loan programs.

By the mid-1960s, however, the government began to fight back.

The basis of this fight was the Higher Education Act, a law Lyndon B. Johnson signed in 1965 as part of his Great Society plan. The new law encroached on USAF’s territory much more than 1958’s National Defense Student Loan Program; this one threatened to crush USAF.

To defend USAF, Cornuelle created the Council of Private Lending Institutions as a separate lobbying organization. Cornuelle had to officially cut ties with USAF in order to establish the lobbying organization and fight his legal battle.

Cornuelle discussed the legal proceedings in the 1993 afterword to his 1965 book Reclaiming the American Dream. He wrote that the first version of the new law would have “overwhelmed” his charity, but a compromise stipulated that the government could only guarantee loans after voluntary means had proven inadequate.

Cornuelle and his lawyers were able to achieve not only this concession, but also language defining exactly what the government meant by adequacy, which Cornuelle considered a victory.

Nevertheless, the victory was short lived. He wrote that the government chose to play a game of hardball, in which “federal representatives literally conspired to create artificial surges in the demand for guarantees so that, state by state, our program could be ruled technically inadequate and the federal programs activated.” The government ultimately stomped out USAF, Cornuelle left the organization for good, and USAF reluctantly began guaranteeing federal loans instead of competing with them.

By the 1990s, USA Funds had become the nation’s largest private student loan guarantor—a somewhat controversial situation for a nonprofit organization. After it began to take on tasks beyond loan guarantees, USA Group was formed as a holding company for USA Funds and other affiliates. By the late ’90s, USA Group was criticized for its high executive salaries; its president made a $1 million annual salary.

The way the Lumina Foundation delicately puts it in its official history is that “USA Group had developed a wide range of services that arguably no longer fit comfortably within the nonprofit corporate model.” One official quoted in the history said that he and his colleagues were concerned that “the government might eventually come in and challenge the continuation of our tax-exempt status.”

Meanwhile, Sallie Mae entered the scene. Created by President Nixon in 1972 as a government-sponsored enterprise, Sallie Mae—the Student Loan Marketing Association—had been propped up by the government for decades. Starting in 1993, it began considering privatization. Part of that process was the purchase of USA Group in 2000.

USA Funds itself was excluded. According to USA Funds vice president of corporate and marketing communications Bob Murray, the reason was a federal rule preventing for-profit companies from guaranteeing federal loans. However, USA Funds agreed to contract its guarantee services exclusively to Sallie Mae.

The merger was widely criticized for allegedly allowing Sallie Mae to monopolize the student loan industry. However, the state of affairs had hardly resembled a free market since at least 1965, when President Lyndon Johnson signed the Higher Education Act and the acceleration of federal student loans began.

With so much attention on Sallie Mae during the merger, and less attention on USA Group, few today will recall hearing anything about the USA Group Foundation. But the future Lumina Foundation was suddenly a philanthropic organization with an enormous $770 million endowment (the price Sallie Mae paid for USA Group) and an unclear mission. The board ultimately settled on college access and success.

This story was similar to that of other student-loan conversion foundations created in the late ’90s. Changes in the law allowing nonprofits to convert to for-profit businesses necessitated the creation of a number of non-profit foundations. This was because of the legal doctrine of cy-près. That doctrine holds that once the original mission of a nonprofit becomes impossible or illegal, the use of the nonprofit’s assets must be as close to the nonprofit’s mission as possible.

So, increasing college access, the vague goal of the federal government’s student loan program, became the mission of most student-loan conversion foundations. Besides the Lumina Foundation, smaller regional foundations were formed after the privatization of Massachusetts’ Nellie Mae Corporation, the Nebraska Higher Education Loan Program, and others.

Spawned from the ashes of USA Group and heavily endowed with Sallie Mae money, Lumina is an ironic continuing reminder of how the government trounced Dick Cornuelle’s student loan charity.

Lumina’s primary goal since Jamie Merisotis became CEO and president in 2008 has been to increase the proportion of Americans with “high-quality” degrees and certificates from 40 percent to 60 percent by 2025. A new Lumina report finds that at the current progress rate, an optimistic projection will bring the number to 48.7 percent.

While “Goal 2025” is superficially attractive, it forces Lumina down a path that blindly supports any proposal that puts more people in college. For example, as George Leef and Jenna A. Robinson have pointed out, Lumina continually funds studies dubiously claiming that expanding degree attainment will boost economic development. That is far from a sophisticated analysis, and at worst is dead wrong.

Thus, Lumina shares the agenda of the federal education interventionists Cornuelle opposed. The fall of his organization—which was designed to prevent the excesses of government intervention—ultimately led to the rise of an organization that promotes college access for its own sake and supports the growing role of the federal government in providing that access. That is the antithesis of Cornuelle’s vision of the independent sector as providing an alternative to the compulsion of the public sector.

It could be said that the real tragedy of the Sallie Mae-USA Group merger was the symbolic death of Cornuelle’s dream.

True, USAF’s original mission to provide student aid for poor students who could not otherwise afford to attend college is superficially similar to the mission of the federal student loan program or the various efforts Lumina has supported, like the Institute for College Access and Success (TICAS) and Complete College America. But the low default rates of Cornuelle’s organization reflected the fact that it limited funds to students who were serious enough to be able to finish school and earn an income. Groups like TICAS and Complete College America aim to get as many students as possible into college, and pay little attention to students’ academic capability and interest.

In the 1993 afterword to Reclaiming the American Dream, Cornuelle called USAF an “illuminating failure” and said that USA Funds had become “an instrument of the state.” Cornuelle had his moment collaborating with the federal government when president-elect Richard Nixon had him lead a volunteerism task force in 1968. Looking back on the task force in 1993, he wrote of his efforts, “I cannot imagine why I thought for a moment that the state could be persuaded to contrive its own undoing.”

While Cornuelle’s dream of directly competing with the federal student loan behemoth is probably untenable today, Lumina could honor Cornuelle’s dream for the independent sector—and be true to its origins—by pursuing voluntary solutions to college quality and access, independent of the federal government. Today, it is merely echoing the government’s mission to manufacture credentials.