Blowing the Lid on Student Loan Corruption

Sallie Mae, Nelnet, and Citibank are the top three loan sharks in the $85 billion a year student loan biz, with John Boehner's favorite, Sallie Mae, getting about half. Sallie Mae, in fact, had a 43 percent return last year on its cost of capital for student loans with little or no risk. You see, Congress regulates the interest rates and also makes sure that the taxpayer picks up the bill on student defaults. No wonder Sallie Mae, Citi, and Nelnet know who their sugar daddy and sugar mama are-or was, until the November election. Student loan industry lobbyists are now fanned out over the Capitol spreading cash and the good word about how the loan industry is making sure that poor black students get the money they need to go to college.

The less visible operations in this multi-billion dollar scam involves the other payees in the payola, the universities. For just as Boehner's and Spellings's buddies make it sweet for Sallie Mae, Nelnet, and Citi on the regulatory end, the universities make it sweet on the client end, providing the providers with innocent borrowers looking for a way to go to school. Last October's story on Educap's cancellation of a "loan summit" to Nevis for university officials and their families blew the lid off the university-loan company corruption that now Andrew Cuomo is stirring up in New York.

The New York Times has the latest. It's interesting that the university loan offices that have been nailed are now complaining about a lack of student loan company regulations. In other words, when ethics fail, blame someone else. See if your alma mater is on the list--so far:

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 University, Syracuse, St. John’s and Fordham — all in New York — and the University of Pennsylvania will make payments of more than $3.2 million to student borrowers who received loans from companies that paid money to the institutions to steer students their way.

Though neither Citibank nor the universities admitted to any wrongdoing, they all agreed to adopt a code of conduct governing relations between student lenders and academic institutions. St. Lawrence University and Long Island University as well as the State University of New York also agreed to the code.

The agreements follow an investigation into the often undisclosed relationships between student loan companies and universities that often create preferred lender lists. In 2006, students borrowed about $85 billion, according to the College Board.

Mr. Cuomo has singled out in particular a practice he called “egregious,” in which loan companies give universities back payments that rise along with the volume of private student loans from the schools. Private loans are not secured by the federal government.

Lenders have also invited university officials on expense-paid retreats. And at several institutions, call centers operated by loan companies handle student questions about financial aid. Each arrangement, critics say, creates an incentive to steer students toward particular lenders regardless of the loan terms they are offering.

The National Association of Student Financial Aid Administrators issued a statement accusing the attorney general of tearing “the fabric of trust between schools and students” and adding “any preferred lender list abuses and genuine conflicts of interest should end, however such abuses are rare.”

Lawyers in Mr. Cuomo’s office are in negotiations with about 60 additional academic institutions and with other loan companies. Mr. Cuomo has announced his intention to sue one loan company, Education Finance Partners of San Francisco, for deceptive business practices in paying colleges based on private student loan volume.

Under the agreement, New York University will set aside nearly $1.4 million, or all that it received over a five-year period from Citibank, to be distributed to students who took out a loan during that time. In two other cases involving Citibank, the University of Pennsylvania will repay $1.6 million received over two years and Syracuse will pay back $164,084 received over three years.

In cases involving Education Finance Partners, St. John’s University will pay $80,553 and Fordham will pay $13,840.

Under the code of conduct agreed to by the eight institutions and Citibank, universities and their employees are prohibited from receiving “anything of value from any lending institution in exchange for any advantage,” the attorney general’s office said, and would have to disclose the criteria used to select preferred lenders.

Citibank, in a statement, said it had participated “only modestly or not at all” in most of the practices singled out by Mr. Cuomo’s office. The company, which makes loans at about 3,000 colleges, said that students at colleges that received payments had “received the best terms, benefits and servicing available.”

The universities’ payments to students will vary with the amount each student borrowed. At the University of Pennsylvania, the compensation fund will pay an average of $500 per student, university officials said. Craig R. Carnaroli, the executive vice president, said the decision to settle was made “to avoid any appearance of impropriety.”

John Beckman, a spokesman for N.Y.U., defended the university’s payments from Citibank. The university used the money to provide additional financial aid to its students, Mr. Beckman said.

“While we and the attorney general’s office do not see eye-to-eye on this, we were able to agree on an industry-wide code of conduct,” Mr. Beckman said in a statement.

At Syracuse, the vice president of enrollment management, David C. Smith, said the university had done nothing wrong but added that there was insufficient regulation of student lending.

Dominic Scianna, director of media relations at St. John’s University, defended the institution’s recommendation of Education Finance Partners as a preferred lender. “The company is one of three St. John’s preferred lenders,” Mr. Scianna said, “each of which was selected for having among the lowest rates in the country, no fees and historically the best service to students.”

Fordham stopped accepting payments from Education Finance Partners after just one year, the university said.