U.S. Officials Scrutinize Colleges' Deals With Lenders

Education Dept. may ban rewards to institutions for referrals to students

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Text: Federal proposals to eliminate inducements to colleges from lenders

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By KELLY FIELD

In December 2005, purchasing agents at Florida International University issued a request for proposals seeking banks and student-loan companies for a list of "preferred lenders" that the university planned to give to prospective borrowers.

The request alone was not unusual. Many colleges use competitive bidding to secure attractive terms and conditions for students and their parents.

What was unusual about this request was the conditions it placed on inclusion. To be considered for the list, lenders had to agree to sponsor at least a dozen financial-aid workshops and recruitment events for new and prospective students and their parents, and to provide refreshments at the events. They also had to agree to make thousands of calls to student borrowers to remind them to sign their promissory notes, complete entrance counseling, and renew their applications for federal student aid.

Francisco Valines, Florida International's director of financial aid, says he saw nothing wrong with the requirements, since they were included in the context of a bid. "I can understand if it's a backroom deal," he says, "but if it's an open, fair process, what's wrong with that?"

The U.S. Education Department, however, does see something wrong with asking lenders for staff support in exchange for a spot on a preferred-lender list. And the department may soon ban such arrangements. This year it issued draft regulatory changes that would prohibit colleges from soliciting "financial or other benefits" in return for placement on their lists of lenders.

Department officials say that change and others are necessary to protect borrowers' right to choose whichever lenders they wish. They say they are concerned that some colleges are forcing students and parents to borrow from lenders with which the institutions have exclusive arrangements. "We believe that there are a number of institutions that are limiting borrower choice," says David Bergeron, director of policy and budget development in the Office of Postsecondary Education. He notes that the department has identified 300 institutions at which just one lender controls 99 percent or more of the loan volume.

College financial-aid officials deny that they are steering borrowers to listed lenders. They say they use their preferred-lender lists as guidance only, to point students and parents toward some of the best offers on the market.

Mr. Valines says lenders' help has enabled his office to reach many more students than it could alone. Last year the 10 preferred lenders on Florida International's list made 20,000 calls to students at the public university, which has an enrollment of about 37,000. "We're trying to do the best we can for our students — that's the bottom line," he says.

Short Lists

The Higher Education Act, which governs most federal student-aid programs, bars colleges from requiring their students to borrow from a specific bank or student-loan company. It also prohibits lenders from offering "points, premiums, payments, or other inducements" to students or colleges to secure loan applications or a certain loan volume.

But the law allows institutions to suggest "preferred lenders," and most students choose one of them. For that reason, lenders compete vigorously to appear on colleges' preferred-lender lists, offering various benefits to the institution and the borrowers. For the most part, the Education Department has stayed out of that process, leaving it to financial-aid officers and the loan industry to police themselves.

Recently, however, the department has become concerned about how some colleges are constructing their lists. Agency officials believe that these colleges may be accepting — even demanding — inducements in exchange for inclusion on their lists.

Of greatest concern to the department are colleges that recommend only one or two lenders. In recent months, the agency has begun sending letters to some of those colleges, asking them to explain how they chose their preferred lenders and to provide copies of any agreements they have signed with the lenders.

While it is not illegal for colleges to list only one or two preferred lenders, it is illegal for them to refuse to certify loans from other lenders. Mr. Bergeron says the department has received complaints from borrowers and lenders who say they have had trouble getting loans certified at some colleges.

Many of the complaints have come from MyRichUncle, a seven-year-old student-loan company that has accused college financial-aid officers of accepting "kickbacks" and "payola" from lenders. Last year MyRichUncle provided the department with a list of 900 students at 600 colleges who, it said, have experienced certification delays, some of them lasting for months.

The company said that one financial-aid officer, Creda Comacho, of the Montserrat College of Art, in Beverly, Mass., had flatly refused to certify a loan from the company, telling it in a voice-mail message that "MyRichUncle is not on my lender list, and we do not work with MyRichUncle, and that is the bottom line." Ms. Comacho declined to comment to The Chronicle about the message.

But MyRichUncle is not the only lender that has complained to the Education Department about college financial-aid policies, and Mr. Bergeron insists that the department's regulatory effort is "not MyRichUncle-driven," as critics of the company have speculated. "This is an issue that many lenders have brought to our attention," he says.

Locked Out

Robert L. Zier, senior vice president for loan consolidations at Indiana Secondary Market for Education Loans Inc., is one of those lenders. "A number of our major institutions have limited lender lists and lock out students who prefer another lender," says Mr. Zier, who is on a committee that is reviewing the department's recommendations. "They either talk the borrower out of it, delay the process, or, suspiciously, lose the application."

On Indiana University's flagship campus, in Bloomington, graduate students and parents applying for federal PLUS loans on the university's Web site are given one choice of lender: Sallie Mae. Undergraduates are told that the university has "teamed with Sallie Mae to provide students with excellent borrower benefits."

In addition, under the terms of a contract with Sallie Mae that made the company the exclusive servicer of loans originated on any of the Indiana system's eight campuses, financial-aid officials are required to "remind [students] of the benefits of selecting one lender for all of their funding needs." That arrangement has given Sallie Mae a virtual monopoly on the Bloomington campus. Last year loans made or purchased by Sallie Mae accounted for 98 percent of the volume there.

A financial-aid officer at Bloomington says that the university does not have a preferred-lender list, and that graduate borrowers are free to choose another lender. (They just can't do so online.)

But an e-mail exchange between MyRichUncle and an assistant director of financial aid at Indiana suggests that students are being strongly encouraged to borrow from Sallie Mae or one of its affiliated lenders. In one message, the assistant director, Paul Koch, of Indiana University-Purdue University at Indianapolis, told a MyRichUncle sales representative that they could meet to discuss the company's private loans, but not its guaranteed loans.

"The Stafford Loan program is pretty much a taboo discussion around this campus," wrote the Indiana official in the message, which was provided by MyRichUncle. "If it ain't a lender affiliated with Sallie Mae as the disbursing agent and/or servicer, using USAF [USA Funds] as guarantor, then IUPUI isn't going to include the lender as a 'preferred lender' for the students. The director would not be very happy with me IF I was pushing/suggesting anything but Student Loan Funding/Sallie Mae."

Asked about the message, Mr. Koch says he was trying to explain that he had more control over his university's private preferred-lender list than over its Stafford-lender list, which is set at the system level. If a student chose MyRichUncle or another lender for a Stafford loan, he says, he would process the loan manually. "We don't tell students, 'You must choose [Sallie Mae] or else," he says.

Colleges Under Scrutiny

The Education Department's efforts to regulate how colleges use their preferred-lender lists come as financial-aid officials are facing increased pressure from members of Congress and others to explain how they choose the lenders they recommend to their students.

In late October 2006, Sen. Richard J. Durbin, an Illinois Democrat, sent a letter to the department's inspector general asking him to investigate whether colleges have received "financial or other benefits" for steering students to certain lenders. The letter cited news reports that describe financial-aid officers' receiving expense-paid trips, iPods, and bonuses based on how much students borrow.

Then, in November, New York's attorney general, Eliot L. Spitzer, opened an investigation into "potential conflicts of interest" in the student-loan industry. When he became governor, his successor as attorney general, Andrew M. Cuomo, took over the investigation. In the first legal step in that inquiry, Mr. Cuomo announced two weeks ago that he planned to sue the lender Education Finance Partners over its revenue-sharing agreements with more than 60 colleges. Under the terms of those agreements, colleges that put the company on their preferred-lender lists would get a percentage of the net value of the loans that it made to their students.

In an effort to stave off the lawsuit, Education Finance Partners announced last week that it would begin fully disclosing its payments to borrowers. But Mr. Cuomo's office said it would file the lawsuit unless the payments stop.

Meanwhile, Democrats in the U.S. House of Representatives and the Senate have introduced legislation that would require colleges to establish a process to ensure that lenders are placed on preferred-lender lists on the basis of the benefits they provide to borrowers. The Student Loan Sunshine Act, as it is called, would also require colleges to list at least three lenders and explain to students and parents why they have chosen each lender.

The bill's most controversial provision would bar colleges from accepting any gifts worth more than $10 from lenders or guarantee agencies. Financial-aid officers say they resent the implication that they have been "bought" by lenders. Most of the gifts they receive are insubstantial, they say — canisters of popcorn or chocolates, a box of pens, sticky notes. "Have I received the occasional box of doughnuts? Yes," says David R. Gelinas, financial-aid director at the University of the South. "Does that mean I'm going to sell my institution's collective soul? No."

The Education Department joined the fray last fall when it announced that it was forming the panel to review changes in the regulations governing inducements. In late January, it released a draft set of proposed regulatory changes that would place strict new limits on how colleges use preferred-lender lists and provide an exhaustive list of what lenders would and would not be able to offer colleges and prospective borrowers loan applications.

Department officials say the rules are necessary to clear up the confusion that surrounds the existing regulations. They describe the draft regulations as restating guidance contained in a pair of letters issued in 1989 and 1995. Mr. Bergeron, of the Office of Postsecondary Education, says the department answers at least 50 e-mail messages and letters every year regarding inducements, and responds to many more questions at conferences.

But critics have argued that the department doesn't need new regulations — it just needs to enforce the existing rules.

They accuse department officials of turning a blind eye to problems that have occurred in the industry. "Through benign neglect, they have allowed these issues to surface," says one loan-industry official who asked not to be named because his company is regulated by the agency. "This has been a look-the-other-way department."

Cracking Down

Allegations that the Education Department has not done enough to enforce the law are not new. Over the past several years, Democratic lawmakers, student-loan watchdog groups, and even some loan-industry officials and the department's own inspector general have urged it to be more aggressive in ensuring that lenders observe the ban on illegal inducements.

The Higher Education Act gives the department the authority to kick lenders out of the guaranteed-loan program if they violate the ban on inducements. But the department has exercised that power only once.

In 1995 it tried to penalize Sallie Mae for entering into a deal with the Dr. William M. Scholl College of Podiatric Medicine in which the college, which is part of the Rosalind Franklin University of Medicine & Science, would make loans to its students and then sell them to Sallie Mae at a profit. But the department's decision was overturned by the U.S. Court of Appeals for the District of Columbia, which concluded that there was nothing illegal about the school-as-lender arrangement.

Since then the department has issued a handful of cease-and-desist letters but has made no attempts to kick lenders out of the guaranteed-loan program. Mr. Bergeron says the department is reluctant to remove lenders from the program, since doing so could hurt students who have borrowed from those companies.

Recently, however, the department has begun to step up its enforcement of the law, creating an eight-person team to conduct "targeted" program reviews and investigate complaints from parents and lenders. That team is reviewing Florida International University's contracts with its preferred lenders to see if they violate existing regulations. The review is focused on the requirement that the lenders make telephone calls to students on the institution's behalf, says Mr. Bergeron.

Often, though, what looks like a violation turns out not to be one, says Terri S. Shaw, chief operating officer in the department's Office of Federal Student Aid. The department has looked into every complaint submitted by MyRichUncle, along with 11 complaints submitted by Goal Financial LLC, another lender, and found only a few cases where colleges and lenders may have crossed the line, she says.

"The short story is that we've narrowed it down to a small number of schools that we're going to continue to work with," says Ms. Shaw. "The vast majority of participants in the program do their best to comply with the statute, regulations, and policies established by the Department of Education."