July 22, 2009
An investigation by the states of Massachusetts and New York found Boston-based Emerson College unfairly steered students to borrow from certain lenders that gave inducements to Emerson's financial aid staff.
In many instances, these lenders failed to provide Emerson's students with competitive loan terms, the investigation found.
The settlement is the first student lending resolution to directly reimburse students for the extra costs they incurred by following their school's misleading lending advice. Under the terms of the settlement, Emerson will pay $775,859 to students who took Stafford loans from either Citizens Bank or JP Morgan Chase & Company during academic years 2004-2005, 2005-2006, or 2006-2007.
The probe determined that between 2004 and 2007, Emerson designated Citizens Bank and Chase as "preferred" lenders and led students to borrow from these lenders even though Citizens and Chase provided more expensive Stafford loans than other lenders. Over 4,000 present and former undergraduate and graduate students will receive payments ranging from $50 to $839.
"Our investigation into the student loan industry has revealed some troubling practices that increased the cost of borrowing for students," said Massachusetts Attorney General Coakley. "Our office will continue to hold accountable schools that exploit students' trust by needlessly steering students into expensive loans. We are very pleased that Emerson cooperated with our investigation and that it is the first Massachusetts school to enter into a settlement that compensates borrowers."
"When we began our investigation into Emerson College, a list of the activities that were carried out by their financial aid office and former director could have served as a list of exactly what a school should not do," said New York Attorney General Andrew Cuomo. "Their financial aid office put personal preferences for expense-paid trips and free giveaways over the best financial interests of their students. The director of financial aid was even getting paid thousands of dollars from one of the lenders the college was recommending to students. With this agreement, Emerson has changed its practices to better serve its students, and I am pleased to resolve this investigation."
In addition to paying restitution, Emerson has agreed to conduct reforms aimed at preventing conflicts of interest, bringing transparency to the student loan process, and preserving students' ability to use the lender of their choice. Among other things, the conduct reforms require Emerson to put the financial interests of its students first when choosing to recommend a lender and prohibit Emerson's financial aid employees from accepting anything of value from lending institutions, joining lender advisory boards, or entering into joint ventures or consulting agreements with lenders.
As part of its investigation, the two states took testimony from Emerson's financial aid employees and reviewed emails, contracts, and other documents. The Attorney General's investigation found that:
Emerson failed to prevent the gifts, gratuities, free and discounted services that Emerson and its financial aid staff received from influencing Emerson's decision making process in choosing its "preferred" lenders.
Emerson made inaccurate statements to students regarding the advantages of using its "preferred" Stafford lenders.
Emerson created a Stafford loan process that made it difficult for students to choose lenders that Emerson did not recommend as "preferred," failed to provide students with information as to how to select a non-preferred Stafford lender, and actively discouraged students from using non-preferred lenders.
In certain years, Emerson assigned students who did not designate a "preferred" lender to Citizens Bank, even though Citizens offered a more expensive loan than Emerson's other "preferred" Stafford lender at that time.
Between 2001 and 2003, Emerson purported to operate a financial aid hotline that was actually staffed and operated by national lending giant Sallie Mae. At the time Sallie Mae operated the "Emerson" hotline, Sallie Mae was dictating the loan terms and repayment benefits that Citizens and Chase offered to Emerson borrowers and purchasing the loans that Citizens and Chase made to Emerson borrowers.
The investigation also confirmed previously public information that Emerson employee Daniel Pinch received consulting fees from "preferred lender" Collegiate Funding Services and that Emerson received revenue sharing payments from its "preferred lender" EFP.
Emerson's Vice President for Communications Andy Tiedemann said the college's acceptance of the agreements "does not constitute an admission by Emerson of any fact or noncompliance with any state or federal law, rule, or regulation." He noted that the college cooperated fully in the investigations and has implemented all of the program changes that the Attorneys General have recommended, including adoption of a strict code of conduct governing the activities of its student financial aid staff.