Colleges to Return Money to Students in Settlement of Loan Probe

April 02, 2007 3:11 PM

As financial aid award letters arrive in the mailboxes of next years' college freshmen, two top-tiered colleges have agreed to make financial settlements as a result of a law enforcement probe into practices, which, authorities say, enriched schools while deceiving students into thinking they got the best interest rates for their student loans.

New York University (NYU), University of Pennsylvania (Penn) and four other colleges have reached a settlement with New York Attorney General Andrew Cuomo as a result of Cuomo's probe into the so-called "preferred lender" lists, the attorney general's office said. According to Cuomo, those lists give the impression they include lenders that will give students the best rates when in fact the lists often are made up by lenders that offer the best "sweeteners" -- cash and other incentives -- to universities and their personnel.

NYU agreed to return $1.4 million to students while Penn agreed to $1.6 million. As for the other four colleges, who agreed to settle rather than face possible litigation, Syracuse University agreed to return $164,084, St. John's University $80,553, Fordham University $13,840 and Long Island University $2,435.

St. Lawrence University also signed a settlement with no money attached to it.

All six colleges also agreed to abide by a new "College Code of Conduct," which prohibits revenue sharing and the acceptance of more than nominal gifts and tips by college employees. It also requires the colleges to clearly explain their preferred lender criteria and prohibits lender personnel from staffing a financial aid office.

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In reaching the settlement, none of the institutions admitted wrongdoing.

"At NYU, we have and will continue to select our private lender through a competitive process," NYU spokesman John Beckman said in a statement released today. "While we and the Attorney General's Office do not see eye-to-eye on this, we were able to agree on an industry-wide Code of Conduct, particularly as many of recommendations in the Code are practices in which NYU already engages."

The colleges and student loan lenders had 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 Attorney General Andrew Cuomo.

"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 told ABC News in March when he made an earlier announcement in the ongoing probe.

These questionable practices include choosing preferred lenders based on benefits given to the schools, not to 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 at the time.

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.

"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.

In addition to the settlements by by the six colleges, Citibank's student loan corporation, which was also implicated in the probe, has agreed to abide by the new code of conduct and to set up a $2 million fund to educate students on how they can obtain the best student loan deal, according to the attorney general's office.

In a statement, Citibank, which conducts a student loan business at 3,000 colleges, said, "We are pleased to work with the New York Attorney General...Citibank Student Loan Corporation has been and continues to be a leader in raising the standards of good practices."

Citibank, in a letter to Attorney General Cuomo, said it had not provided gifts of "significant value" to college employees. It also said it believes its inclusion on preferred lender lists is a reflection of the quality of its loan products.

Other lenders investigated 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. They have all been the subject of prior news reports and press releases regarding the attorney general's investigation. The status of those investigations is ongoing.

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 News reviewed a copy of the aid letter.

In a letter sent to several hundred schools in March, Cuomo advised school officials to review financial aid business practices and examine potential conflicts of that, including 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 aid 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.

According to senior staff members of the attorney general's office 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 News 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.