New Law Would Ban College Loan Kickbacks

After a nationwide investigation of some of the nation's top colleges and student loan lenders exposed questionable business practices and potential conflicts of interest, Congress approved a new law late Thursday prohibiting schools and financial aid officers from accepting payment or gifts from lenders and requiring loan providers to inform borrowers about the terms of a loan, interest rates and federal aid, among other measures.

"This historic legislation allows the rest of the nation to follow New York State's lead in cracking down on the deceptive student loan industry," said New York Attorney General Andrew Cuomo.

The Higher Education Opportunity Act of 2008 codifies a Code of Conduct developed by Cuomo, who led the nationwide investigation last year. The code has now been adopted by more than a dozen lenders and 26 schools and helped model the Student Loan Accountability, Transparency, and Enforcement Act of 2007, which passed the New York State legislature last year.

Cuomo said his investigation discovered student lenders who "were all too intent to ensnare students in loan packages that left them drowning in unnecessarily high debt."

If President Bush signs the bill into law, financial aid officers at colleges and universities will not be allowed to assign first-time borrowers to particular lenders or refuse loans from lenders that students have chosen. Lenders will also not be allowed to use a school's name, emblem, mascot or logo to make it look like a school has endorsed a lender through marketing tactics.

Supporters of the bill say it will also make higher education more affordable for students by requiring textbook publishers to sell books individually, instead of in bundles that may come with more materials than students need, and by increasing the Federal Pell Grant maximum from $4,800 to $6,000 in 2009 and to $8,000 in 2014. And Pell grants will be available all year-round.

"Non-traditional and community college students have improved options for funding their educations," said Sen. Michael Enzi (R-WY). "This bill recognizes that not every student chooses to attend a four-year university."

The National Association of Student Financial Aid Administrators released a letter of support it sent to the House and Senate education leaders this week, saying, "Passage before so many schools commence their academic year signals a commitment to students that the nation is willing to invest in their academic success. If America hopes to maintain its position as a world leader, we cannot let these students fall through the cracks."

Edie Irons, communications director for the Project on Student Debt, said last year's investigation uncovered some unexpected findings.

"We knew that there were problems, especially around preferred lender lists and how colleges recommended lenders and how they chose which lenders to recommend," Irons said. "But as far as the more extreme excesses, such as kickbacks in the form of stock options, they were pretty surprising to us."

Irons said students face major financial decisions regarding borrowing and that this bill helps clarify the terms of student loans, especially those that are private. But she said the bill also leaves out some measures that the Project on Student Debt was advocating for, such as the certification of private loans, which would require a lender to notify a school when a student took out a loan.

"This would ensure that schools can provide better options to students," said Irons. "Giving schools a heads up before a student borrows a private loan gives them an opportunity to save them a lot of money in the long run." She said the provision was taken out after pressure from the private loan industry.

The student loan business is an $85 billion a year industry in which schools had previously chosen preferred lenders based on benefits to the schools, Cuomo previously told ABC News.

"What we have learned in the investigation is often the banks that appear on the preferred lender list are not there because they give the best rate," Cuomo said. "They are also giving kickbacks to schools."

In July, the U.S. Department of Education and the Federal Trade Commission released a consumer guide called Student Loans: Avoiding Deceptive Offers, which provides advice for detecting deceptive marketing offers and warns against other problems with loan consolidation.

"Be wary of lenders that use high-pressure techniques such as 'your interested rate may go up unless you consolidate immediately'," and "Read the fine print on offers from lenders to lower the interest rate on your consolidated loans, as these may be tied to automated payments, a specific loan balance, or on-time payments for the life of the loan, and may change if the lender sells your consolidated loan to another company," the brochure reads.

Sen. Edward Kennedy (D-MA) was spearheading the bill before he was diagnosed with a brain tumor. He was joined by Sen. Michael Enzi (R-WY), Congressman George Miller (D-CA), Congressman Howard McKeon (R-CA), and Sen. Barbara Mikulski (D-MD), who has substituted for Kennedy as education chairperson.

"The legislation takes major steps to end cronyism, kickbacks and sweetheart deals between financial aid offices and the student loan industry," said Mikulski. "In some cases, school officials offered students their loans based on which lender gave the best gifts, trips and other perks, not based on what was the best deal for the student. This bill makes sure students get loans with the best interest, not in the broker's best interest."

Megan Chuchmach is a 2008 Carnegie Fellow at ABC News in New York. She recently graduated from Columbia University's Graduate School of Journalism.

Kyle Gassiott is a 2008 Carnegie Fellow at ABC News. He is currently a graduate student in journalism at the University of Iowa.

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