National Probe: Colleges Take “Kickbacks” From Student Loan Lenders

Mar 15, 2007 11:05am

Some of the nation’s top colleges and student loan lenders have come under investigation for questionable business practices and potential conflicts of interest ranging from misleading students; kickbacks to colleges; and even junkets to Caribbean resorts for their financial aide officers, according to Andrew Cuomo, the Attorney General for the State of New York. "There is a range of practices – depending on the lender and school. There are certainly arrangements where kickback is the only word there is," Cuomo said. These questionable practices in the $85 billion a year student loan business include choosing preferred lenders based on benefits given to the schools, not the students receiving the loans.  This may deceive students applying to four year colleges – two thirds of whom finance parts of their higher education through loans — and could cost them real money in terms of the interest rate and back end fees on their loans, Andrew Cuomo said in an interview prior to announcing the latest results from his office’s investigation on Thursday. "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. They are also giving kickbacks to schools," Cuomo said.  Short list lenders under investigation include NelNet, Education Finance Partners, Educap, Sallie Mae, College Board and CIT. They all were informed of the investigation by the Attorney General in early January, a senior aide said Thursday. They have all been the subject of prior news reports and press releases regarding the attorney general’s investigation. Nearly 90 percent of financial aid applicants pick their lender from the short list offered by their school. Click Here for Full Blotter Coverage. The dangers arise from the practice of colleges steering financial aid applicants to a short list of "preferred lenders;" three or four financial institutions recommended to students and their parents by financial aid officers. Unknown to these borrowers is the fact that the preferred lender loan rate may not be what earned a bank berth on a school’s short list. Often what helped the lender earn a berth on the list was an attractive package of incentives to the sponsoring school, Cuomo said.  Those incentives included hundreds of thousands in fees to schools and other forms of compensation, gifts and consideration and in some cases Caribbean junkets and golf outings to exclusive Pebble Beach, a senior aide to the Attorney General told ABC News. One Lender, Educap, in 2005 invited financial aid officials to an "education summit" at Pebble Beach Lodge; a summit that the brochure promised would not focus on the minutia of financial aid, but on "big ideas."  ABC reviewed a copy of the aid letter. Some of the nation’s best schools are actively under investigation and they were informed of that fact in early February, according to the same senior aide. Those include Syracuse University, New York University, Fordham University and Pace University in New York City, Drexel University in Philadelphia, and Marist College in upstate New York.  In a letter sent to several hundred schools Thursday, Cuomo advised school officials to review financial aid business practices and examine potential conflicts of that include fee splitting arrangements with banks that have earned some colleges several hundred thousand dollars a year, sweeteners to institution including multi-million dollar lines of credit and junkets worth thousands of dollars to financial aide officers and their spouses. Especially troubling, Cuomo said, was the fact that the limiting of preferred lenders to a short list not only left the impression on aide applicants that these lenders MAY provide the best rate, but cut off dozens of other potential lenders from competing for a part of the multi-billion dollar pie. Requests for information were sent to more than 10 schools in California, to nine in Pennsylvania, eight in Massachusetts, and six in Michigan, according to a February announcement by the Attorney General. The probe has touched schools in New Jersey, South Carolina, Wisconsin, Texas and Colorado as well as schools in Missouri, Delaware, Oregon, Tennessee, Mississippi, Rhode Island, North Carolina and Arizona. "Unfortunately, complaints about lender lists have been raised by a few disgruntled competitors who have failed to achieve market success due to inferior, higher-cost products," says Tom Joyce, a spokesman for Sallie Mae. Response from Fordham: Fordham no longer participates in revenue-sharing opportunities with student loan firms. Fordham did not choose lenders based on their revenue-sharing programs in the past, nor did the University benefit directly from such programs. The University has always sought the best rates and repayment terms from the most reputable institutions in the private lending industry. We also prefer lenders who offer not only the best rates but responsive service to the individual needs and circumstances of our students. Response from Sallie Mae: Tom Joyce a spokesman for Sallie Mae defended the preferred lender list as a method of encouraging not stifling competition: "(The) preferred lenders list serve very useful purpose," he said. "Schools use these lists to drive costs down and force lenders to compete. Saving hundreds if not thousands of dollars on loans per year."
Joyce said that Sallie Mae did not provide vacation junkets to financial aid officers, and did not engage in many of the practices that New York’s Attorney General found questionable. Questionable Practices in the Student Loan Industry

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