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NY's Cuomo Blasts "Unholy Alliance" of Colleges, Lenders

Warns Colleges to Clean Up their Act or Face Prosecution

March 16, 2007

Student Aid • Grounded Helicopter Students Win Some Financial Relief • Bankrupt Helicopter School Shoots Down Student Aspirations • Student Loan Company Agrees to End Kickbacks to Schools • Nelnet Agrees to End Payoffs to Alumni Associations • Cuomo Corrals More Student Lenders • Johns Hopkins Settles Student Loan Probe • Wells Fargo Agrees to Clean Up Student Loan Practices • New York Sues Drexel Over Student Loans • Sallie Mae Settles Student Lending Probe • Financial Aid Probe Focuses On Johns Hopkins Official • Colleges Agree to Clean Up Student Lending Practices • NY's Cuomo Blasts "Unholy Alliance" of Colleges, Lenders • Scams Target Students Seeking Financial Aid • Cuomo Widens Probe of Student Loan Industry • House Approves Cutting Student Loan Interest Rates • Study Endorses Cutting Student Loan Rates in Half • January is Time to Submit Student Aid Info • Congress Jacks Up Cost of Student Loans • About Student Financial Aid • Timeline --- • Why Does College Cost So Much?

New York Attorney General Andrew M. Cuomo says a nationwide investigation finds deceptive practices in the college loan industry and warned universities to clean up their "unholy alliance" or face prosecution.

In a letter sent to every college and university in New York state, and certain other schools across the country, Cuomo warned them to end or fully disclose potential conflicts of interests in their relationships with private lenders. He also cautioned students and their families to protect themselves against these practices.

"There is an unholy alliance between banks and institutions of higher education that may often not be in the students' best interest," Cumo said. "The financial arrangements between lenders and these schools are filled with the potential for conflicts of interest. In some cases they may break the law."

Industry practices revealed by the probe include:

• establishment of so-called "preferred lender" lists without disclosing the basis for selection or the specific benefits associated with these preferred lenders;
• revenue sharing and other financial arrangements between schools and lenders;
• denials or impediments to a student or parent's choice of lender based on the borrower's selection of a particular lender or guaranty agency; and
• impediments to competition in the lending industry that stifle better loan terms for students and parents.

"I do not want another college-bound class to be taken advantage of by schools or by lenders," Cuomo said. "Students and their families need to know about the practices in the industry so they can better protect themselves when being steered toward a lender by a college or university. With this knowledge, students have the power to select the lender that is truly best for their situation."

Cuomo has been leading an investigation into the $85 billion-per-year student loan industry. In February, he requested information from more than 60 public and private colleges and universities nationwide regarding the standards they use to determine which lending companies are included on their "preferred lender" lists.

Financial aid administrators often produce such lists to direct their students toward the lenders that are most preferred by the schools but may not be the best deals for students and parents.

Today, Cuomo notified over 400 colleges and universities throughout the country, including all in New York state, to end relationships with lenders that have the potential to mislead students and compromise their ability to obtain the best rate for their student loans.

In his letter, Cuomo revealed the following problematic practices in the student loan industry:

1. Lenders pay financial kickbacks to schools based on a percentage of the loans that are directed to the lenders. The kickbacks are designed to be larger if a school directs more student loans to the lender. And the kickbacks are even greater if the schools make the lender their "exclusive" preferred lender.

2. Lenders pay for all-expense-paid trips for financial aid officers (and their spouses) to high-end resorts like Pebble Beach, as well as other exotic locations in the Caribbean and elsewhere. Lenders also provide 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 set up funds and credit lines for schools to use in exchange for schools putting the lenders on their preferred lender lists.

4. Lenders offer large payments to schools to drop out of the direct federal loan program so that the lenders get more business.

5. Lenders set up call centers for schools. When students call the schools' financial aid centers, they actually get representatives of the lenders.

6. Lenders on preferred lender lists agree to sell loans to a single lender so there is actually no real choice for the student.

7. Lenders sell loans to other lenders, often wiping out the back-end benefits originally promised to the students without the students ever knowing.

Rebecca Weber, Executive Director of the New York Public Interest Research Group (NYPIRG), said, "NYPIRG, as a consumer group and a student group, is particularly concerned about deceptive lending practices that appear to target students and their families. The Attorney General is alerting the colleges to the dangers of doing business with predatory lenders and we think that's a crucial move as this investigation continues."

Cuomo also urged students and parents to use these findings to consider whether a college or university is currently engaged in questionable practices. The Attorney General's office has prepared a pamphlet to help those seeking student loans make more informed decisions. The pamphlet is being distributed to every high school in New York State. It is also posted on the Attorney General's website at www.oag.state.ny.us.

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