Federal

Student-Loan Controversy Is Drawing Wide Concern

By Alyson Klein — May 01, 2007 5 min read

New York state Attorney General Andrew M. Cuomo charged last week that the U.S. Department of Education has been “asleep at the switch” in monitoring what he sees as the often-cozy relationships between college financial-aid offices and student lenders.

Since taking office in January, Mr. Cuomo has been cracking down on what he deems “predatory lending practices” resulting from interactions between colleges and student lenders. For instance, some colleges have entered into revenue-sharing arrangements with lenders, he said. Schools receive a cut of each transaction, in exchange for recommending the lender to students, typically on a list of preferred lenders presented to borrowers.

“It’s especially offensive because schools are in a relationship of trust. This is not a normal marketplace relationship,” Mr. Cuomo told the House Education and Labor Committee at a hearing April 25. “The school says, ‘Go to this lender,’ they go to that lender. … It’s illegal, it’s wrong, it’s offensive, it’s unethical, it’s unproper, and we’re going to enforce the law.”

The hearing offered federal lawmakers a forum to take a closer look at a spate of revelations about questionable student-loan practices and allegedly improper ties between colleges and student lenders. Congress and the Education Department are wrangling over how to respond to the matter, which has been complicated by allegations that at least one department official involved in college-loan issues failed to properly disclose that he owned stock in a student lender.

While students may select lenders from outside college-recommended lists, most rely on their financial-aid offices to sift through the often-mystifying maze of loan products to find the best deals, Mr. Cuomo said.

To get a spot on such lists, he said, lenders have supplied college financial-aid officials with free software and served as counselors in financial-aid offices. They’ve offered seminars in exotic locations, and thrown lavish parties for aid officials, he said.

The New York state inquiry into student-lending practices was begun by Mr. Cuomo’s predecessor, Eliot Spitzer, who was elected the state’s governor last fall. Both Mr. Cuomo and Gov. Spitzer are Democrats.

Matteo Fontana, who oversees lenders and loan guarantors that participate in the Federal Family Education Loan Program, held more than $100,000 in the stock of Education Lending Group Inc., a San Diego-based lender. Higher Ed Watch, part of the New America Foundation, a Washington think-tank, disclosed the information last month.

Mr. Fontana has been placed on administrative leave, and the matter has been referred to the Education Department’s inspector general’s office, said Katherine McLane, a spokeswoman for Secretary of Education Margaret Spellings.

Department’s Efforts

Secretary Spellings sharply disputed Mr. Cuomo’s contention that her department hasn’t kept a watchful eye on college lending practices.

Contrary to Mr. Cuomo’s testimony, she said in an April 25 statement, “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.”

Ms. Spellings noted that she has called for new regulations on student loans. She announced last week that she plans to create an Education Department task force on loans. The task force would take up where a departmental rule-making panel on the issue, established last year, left off. The panel failed to reach agreement on new loan regulations.

Rep. George Miller, D-Calif., the chairman of the House education committee, said establishing such a task force isn’t sufficient. He said the secretary should instead require lenders and colleges to fully disclose any relationships that might present a conflict of interest and impose a moratorium on preferred-lender lists until the federal government can ensure that colleges’ recommendations aren’t tainted by favoritism.

Secretary Spellings plans to appear before the House education panel on May 10 to address the college-lending issue, as well as findings of conflicts of interest and mismanagement in the federal Reading First program.

So far, Mr. Cuomo has reached settlement agreements with at least 15 higher education institutions, including the University of Pennsylvania, New York University, and Syracuse University.

Although many of the colleges that have reached agreements with the New York attorney general’s office are in that state, Mr. Cuomo says he has the authority to investigate any college in which New York state residents are enrolled.

He has also reached agreements with at least two lenders, including SLM Corp., or Sallie Mae. The lending giant, which has a portfolio of over $142 billion loans, pledged to pay $2 million into a national consumer education fund and agreed to a code of ethical conduct.

Counselor Skepticism

The code would bar lenders and colleges from entering into revenue-sharing agreements, and would prohibit college officials from accepting valuable gifts, including trips from lenders, among other provisions. Other lenders and colleges have reached similar agreements with the New York attorney general’s office.

Some of the money from the New York state settlements, more than $6 million so far, could be used to develop a Web site to promote financial literacy, an aid to Mr. Cuomo said.

The revelations of alleged improprieties in the college-loan world have shaken the trust of at least some high school counselors, who have historically relied on colleges to provide students and families with objective information about loans.

High school counselors consider college financial-aid officials to be their most trusted source of information about paying for college, above even education-focused nonprofit organizations and state and federal education departments, according to a 2004 survey of more than 1,000 counselors conducted by the National Association for College Admission Counseling, an Alexandria, Va.-based group that includes both high school and college counselors.

“In the old days, if a student or parent looked for loans, I’d say see who the college recommends,” said Brad MacGowan, a college counselor at Newton North High School in Newton, Mass. “Those days are over.”

Such skepticism is unfortunate, said Esther Hugo, a college-outreach coordinator at Santa Monica College, a two-year college in Santa Monica, Calif.

“In my experience working closely with financial-aid professionals, they always make decisions based on the needs of students and families,” she said. “I think [the revelations] have cast a shadow on a lot of good work that has been done.”

A version of this article appeared in the May 02, 2007 edition of Education Week as Student-Loan Controversy Is Drawing Wide Concern

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