Five months after his office waded into a $90-billion relationship that federal officials are still debating how to handle, New York State’s attorney general, Andrew M. Cuomo, is drawing blood in his effort to change the way colleges do business with the banks that lend to their students.
At least 35 colleges and one lender have accepted Mr. Cuomo’s demands that they pay some restitution to students and accept a new code of conduct. At least two other state attorneys general are gearing up for their own probes. And late last week, two new developments in the story emerged that signaled the questions about the cozy dealings may not end anytime soon.
First, student-aid directors at three leading universities faced inquiries about whether they personally profited from investments in a bank they promoted as their university’s preferred lender.
Then, it was reported that a top official at the U.S. Education Department, Matteo Fontana, held at least $100,000 worth of stock in Student Loan Xpress after he joined the department in 2002.
“The department takes this matter very seriously and our office of the general counsel is actively reviewing it,” said Samara Yudof, a department spokeswoman, in a statement.
The revelations against the three administrators and Mr. Fontana were reported by Higher Ed Watch, a blog by the New America Foundation, a Washington-based policy group. Mr. Fontana oversees lenders and guarantee agencies that participate in the Federal Family Education Loan Program, and previously was in charge of a database of students who received federal aid that reportedly consolidation companies mined for potential customers.
The three college administrators — David Charlow, senior associate dean of student affairs at Columbia University; Catherine C. Thomas, director of financial aid at the University of Southern California; and Lawrence W. Burt, associate vice president for student affairs at the University of Texas at Austin — owned at least 1,500 shares apiece in September 2003 in Education Lending Group Inc., parent of Student Loan Xpress, which is listed as a preferred lender at each of the universities, Mr. Cuomo’s office said.
It is too early to tell who among them may have violated any laws, said Barmak Nassirian, an associate executive director of the American Association of Collegiate Registrars and Admissions Officers. Yet the growing investigation shows that many American colleges may have started down a “slippery slope” in which any original intention of helping students afford tuition may have been overcome by banks maneuvering to enrich themselves, Mr. Nassirian said.
“They have created an environment in which otherwise perfectly decent, honorable people can’t tell right from wrong,” he said. “The problem with getting entangled in the seemingly innocent act of robbing Peter to pay Paul is that you find yourself sort of increasingly developing a hearty appetite for robbing Peter.”
Under the preferred-lender arrangements, colleges give banks such as Sallie Mae and Citibank advantages that include prominent listings on the colleges’ student-aid forms or Web sites. Some banks also provide the institutions with help in running their aid programs.
Federal law explicitly bans colleges from accepting compensation in return for listing banks as preferred lenders for the guaranteed-loan-program. Less clear are the rules governing the listing of banks as preferred lenders for the growing field of private lending, which students pursue after they have reached their maximum borrowing limits under the federally subsidized program.
In some cases, colleges list the same banks as preferred lenders for both the federally guaranteed program and the additional private lending. That makes it difficult to assess whether a benefit paid by the banks for private loans is in fact an illegal compensation for a listing under the federally guaranteed program, said Karin Pellmann, a spokeswoman at MyRichUncle, a seven-year-old student-loan company that has raised public awareness of the issue.
Competitive Pressures
The allegations that surfaced last week against the three student-aid administrators may reflect the competitive pressures banks are putting on colleges to find new ways of winning loan business from students, said Terry W. Hartle, senior vice president for government and public affairs at the American Council on Education. Nevertheless, “if the facts are as they say, it is inexcusable and indefensible,” Mr. Hartle said.
Mr. Cuomo sent subpoenas to the three universities asking for more details. It was not immediately clear whether the three administrators had purchased the stock on their own or received it from Student Loan Xpress, then a unit of Education Lending Group and now owned by CIT Group Inc.
The New America Foundation cited unnamed sources as saying the three administrators, who have since been placed on administrative leave by their universities, had received stock options from Student Loan Xpress as compensation for serving on an advisory board.
The National Association of Student Financial Aid Administrators, which has been critical of Mr. Cuomo’s investigation, left open the possibility that such stock ownership might not be “improper.”
The group, which represents student-aid officers at more than 3,000 colleges, said in a written statement that it agreed “it would be inappropriate for a school to place a lender on a preferred-lender list in exchange for shares of stock.” Yet, it said, “if the financial-aid administrator purchased the stock with their own funds, their ownership of the shares may not be evidence of improper conduct, but would certainly present the appearance of a conflict of interest.”
Mr. Burt, of the University of Texas at Austin, said in an interview that he sold his 1,500 shares in Education Lending Group in 2003. He said he purchased the shares in 2001 when Education Lending Group was known as Direct III Marketing and made consolidation loans only. He said he did not receive any stock options from the lender for serving on its advisory board.
The stock ownership “in no way, shape, or form” influenced his university’s choice of preferred lenders, Mr. Burt said. He said the university chose its lenders based solely on the quality of service and borrower benefits they provided, not on any perks offered to the institution or its employees.
“We receive no benefit from our lenders,” he said. “We don’t receive revenue sharing or printing, and we don’t use any call centers.”
Mr. Cuomo has singled out such practices as evidence that colleges are receiving kickbacks from lenders. Mr. Burt said Texas has 20 lenders on its list, and that loans from Student Loan Xpress account for only 3 percent to 4 percent of the institution’s volume.
CIT Group said in a written statement that the stock transactions had occurred several years before the company acquired the lender. The statement said the company was “currently seeking to determine the facts surrounding those transactions.”
Growth in Private Lending
The federal government guarantees about $70-billion a year in subsidized loans to college students, according to the College Board. Private lending, involving college students who have reached their loan limits under the federal program, grew to $17-billion in the 2005-6 academic year, more than 12 times the amount a decade earlier, it said.
The New York investigation was started more than five months ago by Mr. Cuomo’s predecessor, Eliot L. Spitzer, a fellow Democrat who is now the state’s governor. Mr. Cuomo has claimed the authority to investigate the arrangements, even involving out-of-state colleges and banks, because they may be harming students from New York State.
Even before the revelations about the three student-aid administrators, both colleges and banks were softening their initial characterization of Mr. Cuomo’s investigation as largely a political exercise modeled on Mr. Spitzer’s crusading style.
The Cuomo investigation has clearly ended the practice of colleges’ accepting payments from the banks who lend to their students, said Brett Lief, president of the National Council of Higher Education Loan Programs, which represents schools, lenders, and other agencies involved in providing federally backed student loans.
It is less clear, however, what the future relationship between colleges and the banks will look like, Mr. Lief said. Most colleges still have not accepted the terms set out by Mr. Cuomo, and they may be waiting to get a better idea of what new rules the Bush administration and Congress will propose, he said.
“That might be more deliberatively handled at the federal level, and maybe schools will wait for the dust to settle before they sign on,” Mr. Lief said.
The U.S. Education Department issued draft regulations in January that would limit the ability of colleges to identify banks as preferred lenders. Democrats in both houses of Congress have also proposed legislation that would require colleges to treat banks as preferred lenders on the basis of the benefits provided to borrowers.
One chief concern for colleges still deciding whether to accept Mr. Cuomo’s proposal is whether the federal rules will contain language making clear that they override any state regulation that is more restrictive, Mr. Lief said.
Also, it is not clear how many colleges actually accepted payments from banks. Of the 3,000 institutions with which Citibank had relationships, only three — New York University, the University of Pennsylvania, and Syracuse University — had current referral fee arrangements, said Mark Rodgers, a spokesman for Citibank’s Student Loan Corporation subsidiary. Those three are among the 35 colleges that, along with Citibank, accepted the settlements announced by Mr. Cuomo.
Mr. Cuomo has not publicly identified all the institutions that were targets of his investigation. The 35 colleges and universities that accepted the agreement represent fewer than one-tenth of the 400 institutions that have faced some level of inquiry from Mr. Cuomo’s office.
Yet even that percentage may suggest a greater level of cooperation than exists because 29 of the institutions are campuses of the State University of New York, which is already subject to state policy. SUNY was not found to be involved in any deceptive or illegal practices and is not paying any money to its student borrowers, said David Henahan, a university spokesman.
The agreements accepted last week oblige repayments to students of as much as $1.6-million from the University of Pennsylvania and $1.4-million from NYU. Citibank agreed to pay $2-million to a new fund that Mr. Cuomo’s office said it would use to “educate collegebound students and their parents about the student-loan industry.”
Still, the payback amounts are only “a fraction” of what the students actually lost from the arrangements, since the banks were giving colleges only a portion of the additional profit they have been realizing from their exclusivity arrangements, said Ms. Pellmann, the spokeswoman at MyRichUncle.
Citibank denies that. “We are absolutely confident that our student borrowers received among the best terms, benefits, and servicing available in the market,” Mr. Rodgers said. Even the three universities with referral-fee arrangements — NYU, Penn, and Syracuse — did not have exclusive arrangements with Citibank, he said. New York University had 16 lenders on its list, and Syracuse and Penn had at least four apiece, Mr. Rodgers said.
The fees paid by the banks were not illegal at the time the arrangements were made, and there is “no proof” yet shown that the borrowers paid more for their loans than they would have in the absence of an exclusive arrangement, said John Dean, special counsel to the Consumer Bankers Association, whose members include Citibank and Bank of America Corporation.
Of those that have identified themselves as targets of Mr. Cuomo’s investigation, several have indicated sympathy with the attorney general’s overall goals, if not his tactics.
“ASU welcomes the opportunity to review and improve our student-loan practices in the best interest of our students,” Arizona State University said in a written statement. The university, however, has not decided how it will respond to Mr. Cuomo’s threat of legal action, it said.
The National Association of Student Financial Aid Administrators said it would “respect” the decision of any institution that accepts Mr. Cuomo’s settlement offer. “But we will stand by any postsecondary institution that decides otherwise and goes to court to adjudicate this matter,” the group said in a written statement. “Schools that do not agree to this settlement care just as much about their student and parent borrowers and have as much integrity as the schools that agreed to the settlement. We believe the schools who challenge the attorney general’s actions will prevail in any court case.”
Josh Keller contributed to this article.
http://chronicle.com Section: Government & Politics Volume 53, Issue 32, Page A1
