New York state Attorney General Andrew M. Cuomo charged last week that the U.S. Department of Education has been 鈥渁sleep at the switch鈥� in monitoring what he sees as the often-cozy relationships between college financial-aid offices and student lenders.
Since taking office in January, Mr. Cuomo has been cracking down on what he deems 鈥減redatory lending practices鈥� resulting from interactions between colleges and student lenders. For instance, some colleges have entered into revenue-sharing arrangements with lenders, he said. Schools receive a cut of each transaction, in exchange for recommending the lender to students, typically on a list of preferred lenders presented to borrowers.
鈥淚t鈥檚 especially offensive because schools are in a relationship of trust. This is not a normal marketplace relationship,鈥� Mr. Cuomo told the House Education and Labor Committee at a hearing April 25. 鈥淭he school says, 鈥楪o to this lender,鈥� they go to that lender. 鈥� It鈥檚 illegal, it鈥檚 wrong, it鈥檚 offensive, it鈥檚 unethical, it鈥檚 unproper, and we鈥檙e going to enforce the law.鈥�
The hearing offered federal lawmakers a forum to take a closer look at a spate of revelations about questionable student-loan practices and allegedly improper ties between colleges and student lenders. Congress and the Education Department are wrangling over how to respond to the matter, which has been complicated by allegations that at least one department official involved in college-loan issues failed to properly disclose that he owned stock in a student lender.
While students may select lenders from outside college-recommended lists, most rely on their financial-aid offices to sift through the often-mystifying maze of loan products to find the best deals, Mr. Cuomo said.
To get a spot on such lists, he said, lenders have supplied college financial-aid officials with free software and served as counselors in financial-aid offices. They鈥檝e offered seminars in exotic locations, and thrown lavish parties for aid officials, he said.
The New York state inquiry into student-lending practices was begun by Mr. Cuomo鈥檚 predecessor, Eliot Spitzer, who was elected the state鈥檚 governor last fall. Both Mr. Cuomo and Gov. Spitzer are Democrats.
Matteo Fontana, who oversees lenders and loan guarantors that participate in the Federal Family Education Loan Program, held more than $100,000 in the stock of Education Lending Group Inc., a San Diego-based lender. Higher Ed Watch, part of the New America Foundation, a Washington think-tank, disclosed the information last month.
Mr. Fontana has been placed on administrative leave, and the matter has been referred to the Education Department鈥檚 inspector general鈥檚 office, said Katherine McLane, a spokeswoman for Secretary of Education Margaret Spellings.
Department鈥檚 Efforts
Secretary Spellings sharply disputed Mr. Cuomo鈥檚 contention that her department hasn鈥檛 kept a watchful eye on college lending practices.
Contrary to Mr. Cuomo鈥檚 testimony, she said in an April 25 statement, 鈥渢he U.S. Department of Education takes its role as steward of federal financial aid very seriously. I share his concerns on lender practices but believe his testimony was ill-informed on the department鈥檚 actions.鈥�
Ms. Spellings noted that she has called for new regulations on student loans. She announced last week that she plans to create an Education Department task force on loans. The task force would take up where a departmental rule-making panel on the issue, established last year, left off. The panel failed to reach agreement on new loan regulations.
Rep. George Miller, D-Calif., the chairman of the House education committee, said establishing such a task force isn鈥檛 sufficient. He said the secretary should instead require lenders and colleges to fully disclose any relationships that might present a conflict of interest and impose a moratorium on preferred-lender lists until the federal government can ensure that colleges鈥� recommendations aren鈥檛 tainted by favoritism.
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Spellings Called to Testify About 鈥楻eading First鈥� Complaints
Secretary Spellings plans to appear before the House education panel on May 10 to address the college-lending issue, as well as findings of conflicts of interest and mismanagement in the federal Reading First program.
So far, Mr. Cuomo has reached settlement agreements with at least 15 higher education institutions, including the University of Pennsylvania, New York University, and Syracuse University.
Although many of the colleges that have reached agreements with the New York attorney general鈥檚 office are in that state, Mr. Cuomo says he has the authority to investigate any college in which New York state residents are enrolled.
He has also reached agreements with at least two lenders, including SLM Corp., or Sallie Mae. The lending giant, which has a portfolio of over $142 billion loans, pledged to pay $2 million into a national consumer education fund and agreed to a code of ethical conduct.
Counselor Skepticism
The code would bar lenders and colleges from entering into revenue-sharing agreements, and would prohibit college officials from accepting valuable gifts, including trips from lenders, among other provisions. Other lenders and colleges have reached similar agreements with the New York attorney general鈥檚 office.
Some of the money from the New York state settlements, more than $6 million so far, could be used to develop a Web site to promote financial literacy, an aid to Mr. Cuomo said.
The revelations of alleged improprieties in the college-loan world have shaken the trust of at least some high school counselors, who have historically relied on colleges to provide students and families with objective information about loans.
High school counselors consider college financial-aid officials to be their most trusted source of information about paying for college, above even education-focused nonprofit organizations and state and federal education departments, according to a 2004 survey of more than 1,000 counselors conducted by the National Association for College Admission Counseling, an Alexandria, Va.-based group that includes both high school and college counselors.
鈥淚n the old days, if a student or parent looked for loans, I鈥檇 say see who the college recommends,鈥� said Brad MacGowan, a college counselor at Newton North High School in Newton, Mass. 鈥淭hose days are over.鈥�
Such skepticism is unfortunate, said Esther Hugo, a college-outreach coordinator at Santa Monica College, a two-year college in Santa Monica, Calif.
鈥淚n my experience working closely with financial-aid professionals, they always make decisions based on the needs of students and families,鈥� she said. 鈥淚 think [the revelations] have cast a shadow on a lot of good work that has been done.鈥�
