Questionable Practices in the Student Loan Industry

March 15, 2007 11:16 AM

According to senior staff members of the Attorney General for the State of New York directly involved in overseeing the student loan investigation the following five questionable practices are among the key findings to date in the probe begun in November 2006:

1.   Financial kickbacks from lenders to schools.  Often the kickbacks  were tiered – so that the kickbacks  were larger if the school directed more students to the lender.  And the kickbacks  were even larger if the schools made the lender their 'exclusive' preferred lender, investigators said.

2.  The Attorney General for New York and his investigators have told ABC that lenders  have paid for all-expense-paid trips for financial aid officers (and their spouses) to high-end resorts like Pebble Beach and the Four Seasons in Nevis.  Investigators have found that lenders also have provided schools with other benefits like computer systems and put representatives from schools on their advisory boards in order to further curry favor with the schools.

3.  Lenders  have  set up funds and credit lines for schools to use in exchange for schools putting the lenders on their preferred lender lists, the Attorney General's office states.

4.  Lenders  have set up call centers for schools.  When students called  the schools’ financial aid centers, they actually got representatives of the lenders, senior staff members of the AG's office said.

5.  Without students' knowledge, lenders on preferred lender lists had agreed in advance to bundle all the loan applications  they sold and  then  resell  them to a single lender – in effect removing any  real choice for the student, the Attorney General's office said.

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New York's Attorney General Thursday sent a letter to the presidents of several hundred universities and colleges, his senior staff said, outlining the questionable practices including conflicts of interest that his four and a half month probe of the cozy relationship between banks and schools had found, and urging the school officials to review their own practices.

A key paragraph of that letter, a draft of which was obtained by ABC News states: "Moreover, we have found the financial arrangements and relationships between lenders and schools, such as revenue sharing and referral fees, to be troubling as a whole and burdened with a strong potential for conflicts of interest.  Of particular concern are so-called "preferred lender" programs, some of which may involve deceptive practices."

The letter does not accuse any individual school of deception or misleading information but makes clear that legal action could be forthcoming by advising school officials to be sure their practices "comply with the Higher Education Act, the Truth in Lending Act and other relevant federal law, and that there is no deception or illegality in violation of New York  Executive Law §63(12)and General Business Law §§ 349 and 350 and other relevant state law."

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