July 24, 2007

Backgrounder on Student Lenders

As college tuition has skyrocketed students are leaving college with more and more debt, to the benefit of student loan providers. At the same time, improper relationships between lenders and universities have contributed to the rising costs faced by students. As of Friday, New York Attorney General Andrew Cuomo had settled with 11 lenders in his probe of the student loan industry. The Department of Education — officials of which have also faced questions over potential conflicts of interest -- has failed to provide adequate oversight of the industry, leaving it to Congress to act. The Higher Education Reauthorization Act will provide important oversight of the out-of-control student loan industry and put an end to the cozy relationships between lenders and universities. Below are just a few examples of the conflicts of interest and financial arrangements that have come to light within the student loan industry.

Higher education institutions and lenders formed improper financial relationships:

Colleges Created Preferred Lender Lists and Formed Financial Arrangements with Lenders. “Investigators found that many colleges have established "preferred lender" lists and entered into revenue sharing and other financial arrangements with those lenders. Some colleges have "exclusive" preferred lender agreements with the companies.” [Newark Star-Ledger, 4/12/07]

Lenders Gave Universities or Their Employees Incentives to Get on the Preferred Lender Lists. “Being on a preferred list wields significant influence when students choose a lender. Preferred lenders typically get up to 90 percent of the loan business at a college or university, Cuomo said. As a result, some lenders have offered universities or their employees incentives to get on the lists, according to Cuomo's investigation of the $85 billion student loan industry.” [Chicago Tribune, 4/24/07]

Nation’s Largest Lender Sallie Mae Agreed to $2 Million Settlement in Student Loan Scandal. “Last week, Cuomo announced a $2 million settlement with the SLM Corporation, or Sallie Mae, the country's largest student lender, in which the company agreed to stop paying college financial aid officers who serve on its advisory boards and to discontinue the practice of providing staff support to schools.” [Baltimore Sun, 4/16/07]

Citibank Agreed to $2 Million Settlement. “Citibank, one of the largest providers of student loans, as well as five universities have agreed to pay $5.2 million to students and the New York State attorney general to resolve an investigation into student loan practices, Andrew M. Cuomo, the attorney general, announced yesterday. Citibank, which at year's end had $33.7 billion in student loans outstanding, agreed to pay $2 million into a fund to educate students and parents about student loans.” [New York Times, 4/3/07]

College Loan Corp. Settled for $500,000 in Student Loan Scandal – 11th Lender to Settle with NY AG Andrew Cuomo. “San Diego-based College Loan Corp., the nation's seventh-largest student lender, has agreed to pay $500,000 to resolve allegations that it gave perks to college financial aid officers in exchange for a ‘preferred lender’ status. College Loan Corp. is the 11th lender in recent months to settle with New York Attorney General Andrew Cuomo, who has been investigating the student loan industry since last year.” [San Diego Union-Tribune, 7/21/07]

Major For-Profit Education Companies Paid Thousands to Settle Questions About the Legality of their Relationships With Lenders. Two of the nation's largest for-profit education companies, both based in Illinois, have agreed to pay more than $100,000 to students and a consumer fund, after officials questioned the legality of their relationships with lenders… DeVry University, based in Oakbrook Terrace, will pass along to students $88,122 in payments it received from Citibank after the university listed the company among its nine preferred lenders during the 2004-05 school year… Hoffman Estates-based Career Education Corp., which offers training programs across the country, will return $21,200 -- the sum recommended lenders SLM Corp. and Wachovia gave to the university's non-profit scholarship fund from 2004 to 2006. SLM Corp., better known as Sallie Mae, is the nation's largest student lender.” [Chicago Tribune, 4/24/07]

Columbia University Agreed to Pay $1.1 Million As Part of a Settlement in Student Loan Scandal. “Columbia University will pay $1.1 million to a fund to educate students about loans and has agreed to have its financial aid office monitored by state officials for five years, under a settlement that New York State Attorney General Andrew M. Cuomo announced yesterday. The settlement, the most stringent Mr. Cuomo has reached with any university so far in his investigation of the $85 billion student loan industry, grew out of his finding that David Charlow, the financial aid director for Columbia's undergraduate college and its engineering school, was promoting a lending company in which he had a financial stake.” [New York Times, 6/1/07]

Financial Aid Officers Had Improper Dealings With Lender Student Loan Xpress. “In the past two weeks, financial aid directors at Columbia University and University of Texas at Austin have been fired after revelations that they owned stock in the parent corporation of Student Loan Xpress when the company appeared on the universities' preferred lender list, a roster meant to help students choose a credible lender. Johns Hopkins University's financial aid director also resigned last week because she accepted consulting payments from Student Loan Xpress.” [San Antonio Express-News, 5/29/07]

Department of energy officials who oversaw student loans owned stock in lenders:

No. 3 Official With Department of Education Who Oversaw Student Loans Invested in Lenders. “The No. 3 official in the U.S. Department of Education, who oversees the student loan industry, had more than $10,000 invested in student lenders, according to documents released last night. The department said she had not violated any ethics rules, which prohibit employees from working on matters involving a company in which they hold more than $15,000 in stock. The forms show that Tucker held $2,745 in Bank of America, $2,597 in Citigroup, $1,923 in Wells Fargo, $1,134 in J.P. Morgan Chase and $1,615 in Wachovia. Those companies are five of the six largest student lenders.” [Washington Post, 4/21/07]

Other Department of Education Officials Had Potential Conflicts of Interest. “Matteo Fontana, a former director of systems development at Sallie Mae, became general manager of the office that oversees a database with financial information on student borrowers. Mr. Fontana was put on leave by the department [of Education] after his ownership of $100,000 in stock in a different student lender was disclosed. Michael Sutphin, director of financial industry alliances at Sallie Mae until 2002, is state agency liaison officer at the department, according to his disclosure forms. When Mr. Sutphin joined the department, he held at least $50,001 in Sallie Mae stock, which he reported in 2005 that he had sold the preceding year, before a promotion that required him to work closely with lenders.” [Washington Post, 5/5/07]

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