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Cuomo Continues Student Loan Investigation NEW YORK—Though the Office of the Attorney General first began a preliminary investigation into what it called “potential financial arrangements between universities and loan providers” back in November 2006, current Attorney General Andrew Cuomo gave the investigation a serious jumpstart this February when he requested records from six lending institutions and more than 60 public and private colleges. Cuomo said the purpose of requests is part of an effort to ensure that students are “being steered toward lenders offering the most competitive rates, not those who offer the best perks to schools or financial aid administrators.” ‘An Unholy Alliance’ Cuomo’s probe revealed what he referred to in March as “an unholy alliance between banks and institutions of higher education that may often not be in the students’ best interest” in the form of so-called preferred lender lists, revenue sharing between schools and lenders, “denials or impediments to a student or parent’s choice of lender based on the borrower’s selection of a particular lender or guaranty agency” and “impediments to competition in the lending industry that stifle better loan terms.” “The financial arrangements between lenders and these schools are filled with the potential for conflicts of interest,” said Cuomo. “In some cases, they may break the law.” As of press time, a total of 21 schools have agreed to adopt a “College Code of Conduct” that would prohibit revenue-sharing arrangements, kickbacks and preferred lender lists based on anything but the students’ best interests, as well as bar lending institutions from staffing college financial aid offices with their own employees. According to Cuomo’s office, the three lenders have agreed to put $6.5 million in total into a consumer education fund to educate high school students and their parents about the college loan process, and eight schools have agreed to reimburse students over $3 million for the cost of revenue-sharing agreements. Student loan giants Citibank and Sallie Mae, for example, settled with the attorney general’s office, consenting to pay $2 million each to finance a program that would educate college-bound students and their parents about college loans. On April 25, the New York State Senate passed the Student Lending, Accountability, Transparency and Enforcement (SLATE) Act of 2007, a piece of sweeping legislation that regulates the relationship between lenders and schools and, said Cuomo, sets “a standards of lending integrity.” And just a little more than a week later, the House of Representative took what Cuomo called “the next step in closing the book on corruption in the student loan industry” with its passage of the Student Loan Sunshine Act which will, stated the attorney general, “help put an end to the vicious cycle of debt perpetuated by lenders and their university partners.” Developments continue to come thick and fast, with new revelations reported almost daily. At the beginning of May, Cuomo announced that his office has begun serving subpoenas—90 so far—to alumni associations “seeking full disclosure of their relationship with Nelnet, one of the nation’s largest student loan consolidation companies,” and on May 9, the head of the U.S. Department of Education’s student aid office resigned amidst strenuous public criticism of the agency’s apparently permissive administration of the student loan industry. A Conflict of Interest? NYSSCPA Personal Financial Planning Committee member Gary E. Carpenter said he was always suspicious of preferred lender lists and many schools’ seeming reticence to allow students and their families to select lenders not on the list. Carpenter, who also is founder of CollegeLOAN Evaluator, a college financial planning company located in Syracuse, said he was able to find better rates for his clients with lenders not on the preferred lists. “The colleges would tell the students and their parents that they had to use the lenders on the list,” said Carpenter. “The loan is being taken out in the client’s name and he or she therefore has the right to select the lender.” One of the main issues with the lists, explained Carpenter, is that students and their families were entering into a loan situation “without knowing all the facts,” such as the criteria and processes used by the college to select the preferred lenders and the nature of the fiscal relationship between the lender and the school. Potential for Borrower Confusion NYSSCPA Higher Education Committee Chair Priscilla Z. Wightman, however, hopes that the repercussions from Cuomo’s investigation will not ultimately serve to harm students instead of help them. “It is my understanding that students had the benefit of fee waivers and discounts on loan rates perhaps because of the relationship between the preferred lenders and the colleges,” said Wightman. “My ultimate fear is that, from a financial literacy standpoint, significant numbers of school-bound kids who have no experience with finances or borrowing money will suddenly be confronted by a complex barrage of hundreds of providers and will not have a system that will enable them to differentiate and choose,” she said. “I also fear that with this kind of a backlash, anything that had been leveraged from the providers—benefits such as discounts and fee waivers—will be taken away from the students, which will effectively increase the cost of going to school. “To relate this to audit engagements, independence is the cornerstone of who we are and yet, as auditors, we spend a large amount of time with our clients, offering management advice and recommendations,” said Wightman. “That relationship is constantly being reassessed; perhaps this is a reassessment period for the financial aid process.” What the Future Holds An $85-billion-a-year business, the student loan industry is an extremely profitable enterprise, said Carpenter, pointing as an example to the recent $25 billion sale of Sallie Mae to JP Morgan, Bank of American and two private funds buyers. But profitability aside, lenders are going to have to learn how to revamp their processes to fit the current push for greater clarity, said Carpenter. “With the attorney general going after colleges, the lenders and the schools are going to have to work within a different environment, one that is more transparent than it has been,” said Carpenter. “I think we are just seeing the tip of the iceberg here and that there is much more corruption out there in this area.” Wightman
agrees that, as a result of the probe, lenders and colleges will
have to change the way they do business. Borrowers: Shop Around As far as advice for college-bound students and their families, Carpenter recommends being assertive and informed about the borrowing process. “I advocate that students and their parents not be shy and ask the financial aid office directly what the benefits are of using a lender on a [preferred lender] list and even what benefits the college receives from the lender for being on the list,” said Carpenter. “The most important thing we can walk away with is this: When it comes right down to it, it’s not the school borrowing the money, the students and their families are, and they’re going to be the ones who have to pay it back after graduation.” Allison Schiff, Associate Editor, can be reached at aschiff@nysscpa.org. |
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