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DURBIN CALLS FOR INSPECTOR GENERAL TO INVESTIGATE ANY CONFLICT OF INTEREST BETWEEN UNIVERSITIES AND STUDENT LENDERS

Tuesday, October 31, 2006

[Chicago, IL] – U.S. Senator Dick Durbin (D-IL) today called on the Inspector General of the Department of Education to investigate any conflict of interest between lenders and the universities to which they offer outsized incentives based on how much students borrow.

Durbin questioned the “disturbing” practice of colleges and universities maintaining preferred lender lists--from which students will be encouraged to obtain private loans to cover the shortfall in tuition. He said recent incentives from lenders have included all-expenses paid trips, iPods and bonuses based on how much students borrow.

“The first obligation of any college or university is to help its students, not the lenders,” Durbin said. “At a time when college costs continue to rise and students are borrowing more and more to pay for higher education, university officials should be looking out for the interests of the students and not the next all-expenses paid trip to the Caribbean.”

Durbin added, “At the end of the day, the incentive-based relationships between lenders and universities could lead to students being saddled with even more debt. It’s time for these sweetheart arrangements to come to an end.”

In a letter to John P. Higgins, Jr., the Inspector General of the U.S. Department of Education, Durbin wrote: “Colleges and universities should not be enticed to select ‘preferred’ lenders or take other actions related to the student loan program on the basis of factors that are irrelevant, or at best ancillary, to the primary interests of the students… When a student is faced with obtaining a private loan to cover a shortfall, the student should know whether their school is receiving an inducement in exchange for the loan."

Durbin also said that he was “extremely troubled” by a recent Department of Education Inspector General report which found that the government had improperly paid more than $278 million in student loan subsidy payments to Nelnet. The payments were made to guarantee a 9.5% interest rate on student loans regardless of current market rates. According to the report, Nelnet took advantage of the program by adding ineligible loans to this group. As a result, Nelnet received more than $278 million from the federal government as of June 30, 2005, and the IG report warned that they could be improperly paid an additional $882 million for the ineligible loans after June 2005 if the Department of Education fails to take proper action.

In a letter to Spellings, Durbin wrote that it is “an outrage that money that could have gone to student financial aid was instead being paid to a student loan company that was knowingly fleecing the federal government.” He called on her “to enforce the IG’s recommendation that DoEd direct Nelnet to discontinue claiming special allowance payments for all Project 950 loans, require Nelnet to pay back to the federal government all overpayments described in the IG’s report, and implement new measures to prevent similar actions by Nelnet and other companies.”

Senator Durbin’s letters to IG Higgins and Secretary Spellings are below:


October 30, 2006

The Honorable John P. Higgins, Jr.
U.S. Department of Education
Office of Inspector General
400 Maryland Ave., SW
Washington, D.C. 20202

Dear Mr. Higgins:

A recent article published in the New York Times revealed examples of incentives offered by student loan companies in order to be placed on a college or university’s “preferred” lender list. Examples cited in the article included an all-expense paid trip to the Caribbean for university officials and their spouses, gifts such as iPods, and bonuses that are based on how much students borrow.

I am also concerned about other types of inducements that lenders might be offering colleges and universities to try to influence school decisions about student loan options.

At a time when college costs continue to rise and students are borrowing more and more to pay for higher education, it is very disturbing to learn that some lenders and some colleges and universities may be engaged in practices that do not appear to be in the best interests of the students. Colleges and universities should not be enticed to select “preferred” lenders or take other actions related to the student loan program on the basis of factors that are irrelevant, or at best ancillary, to the primary interests of the students.

The law sets out a number of actions that would disqualify a lender from participating in the Federal Family Education Loan program (FFEL). For example, lenders are prohibited from:

  • offering directly or indirectly, inducements to any educational institution or individual in order to secure loan applications;
  • conducting unsolicited mailings to students in order to urge the student to borrow from the lender (unless the student previously obtained a loan through that lender);
  • offering, directly or indirectly, student loans as an inducement to a prospective borrower to purchase insurance or other products; and
  • engaging in fraudulent or misleading advertising.

  • It is unclear whether the law is being enforced by the Department of Education (DoEd) as it relates to the FFEL program or whether student loan companies have exploited a loophole that may allow lenders to offer inducements to school officials in return for “private” loan applications or other considerations.

    Even if the law does not prohibit lenders from offering inducements in exchange for private loan applications, there is the potential for a conflict of interest. Students generally seek assistance from their school officials to provide guidance on financial aid matters and have an inherent belief that their school is looking out for their best interests. When a student is faced with having to obtain a private loan in order to cover a shortfall, the student should know whether their school receives an inducement in exchange for their private loan.

    I would like to request that you investigate the activities of the student loan companies for their compliance with the letter and the spirit of the law. As you investigate this matter, I ask you to consider the following questions:

    In what ways are lenders building on the relationship they develop with students through government-backed loans (Stafford, PLUS) to offer students other products (such as private loans) that are not backed by the federal government and regulated by the federal student loan program? How many students who take out a government-backed loan through a lender end up borrowing additional money through a private loan from the same lender?

    What types of financial or other benefits have schools received for steering private loan applications to a particular lender? Do these arrangements violate the law? If so, what should DoEd do about them? If not, what changes are needed in the law to ensure that the interests of students are protected?

    This is not the first time lenders have been accused of offering inducements to schools or their officials. In the past ten years, what actions has DoEd taken in response to allegations of lenders offering illegal inducements to school officials? What steps has DoEd implemented to enforce the prohibition against illegal inducements? What additional safeguards should be implemented by DoEd in order to ensure that the interests of the students are protected? What additional safeguards should Congress consider to strengthen the law and help ensure that the interests of the students are protected?

    How many schools have left the Direct Loan program and switched to the FFEL program? What reasons do they give? What kinds of financial or other benefits have they received for doing so? What effects do such changes have on borrowers and on the government? What restrictions or safeguards are in place, or needed, to ensure that the interests of the students are a priority when a school switches from the Direct Loan program to the FFEL program?

    Thank you in advance for your cooperation.

    Sincerely,
    Richard J. Durbin
    United States Senator


    October 27, 2006

    The Honorable Margaret Spellings
    Secretary
    U.S. Department of Education
    400 Maryland Ave., SW
    Washington, DC 20202

    Dear Secretary Spellings:

    The findings contained in the recent audit report of the Inspector General (IG) of the Department of Education (DoEd) entitled “Special Allowance Payments to Nelnet for Loans Funded by Tax-Exempt Obligations” are extremely troubling.

    As you are aware, the IG conducted an audit of Nelnet’s “Project 950,” a process the company initiated in 2003 in order to increase the number of loans receiving a special allowance. The IG determined that between January 1, 2003 and June 30, 2005, Nelnet’s Project 950 “did not fund loans from an eligible source in compliance with the [Higher Education Act of 1965, as amended], regulations, and other guidance issued by the [DoEd].” The IG estimates that Nelnet was “improperly paid more than $278 million in special allowance for these loans from the quarter ended March 31, 2003, through the quarter ended June 30, 2005, and that Nelnet could be improperly paid about $882 million for the ineligible loans after June 2005 if Nelnet’s billings are not corrected.”

    At a time when college costs continue to rise and students and their families are finding it more and more difficult to pay for higher education, it is an outrage to learn that money that could have gone to student financial aid was instead being paid to a student loan company that was knowingly fleecing the federal government.

    The IG’s Nelnet report also raises the question of whether the DoEd is adequately monitoring the special allowance payments. What measures do you have in place to ensure that claims made by student loan providers are indeed eligible for the special allowance? What changes do you plan to implement to make sure that other student loan providers are not receiving improper special allowance payments?

    I urge you to enforce the IG’s recommendation that DoEd direct Nelnet to discontinue claiming special allowance payments for all Project 950 loans, require Nelnet to pay back to the federal government all overpayments described in the IG’s report, and implement new measures to prevent similar actions by Nelnet and other companies.

    Thank you for your attention to this matter and I look forward to your response.

    Sincerely,
    Richard J. Durbin
    United States Senator

     

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