House Backs New Reins On Student Lenders
By Amit R. Paley, Washington Post Staff Writer
Thursday, May 10, 2007; A01

LINK

The House voted overwhelmingly yesterday to bar student loan companies from offering perks and financial incentives to universities to drum up business, the first federal legislative response this year to mounting criticism of the $85 billion-a-year industry.

The bipartisan bill, approved by a 413 to 3 vote, would increase federal regulation of student loan companies. The industry has come under scrutiny from federal and state investigators over its financial ties with schools and government officials.

The measure drew support from advocates of students and from some key players in the loan industry -- a rare overlap of views for the interest groups.

"This legislation would protect students and families from the corrupt practices and abuses that for too long have been allowed to run rampant within the student loan industry," said Rep. George Miller (D-Calif.), chairman of the House education committee and the bill's lead sponsor.

The Senate is likely to approve a similar measure soon, congressional aides said. The Bush administration is "generally supportive" of the legislation, said spokesman Scott Stanzel.

Passage of the bill, the Student Loan Sunshine Act, came as Education Secretary Margaret Spellings prepared to face questions today from Miller's committee over the student loan controversy and other matters. Critics say the administration has been lax in its oversight of the industry, a charge Spellings rejects.

The bipartisan support for tighter control of the industry reflects the growing political potency of the issue since an investigation by New York Attorney General Andrew M. Cuomo revealed alleged conflicts of interest among university financial aid officers and questionable business practices by lenders. The nation's four largest lending companies and 22 schools have agreed to abide by a code of conduct, developed by Cuomo's office, that bans many of the most controversial practices.

The legislation passed by the House would forbid lenders to offer gifts to financial aid officials, to provide staff members for school financial aid offices or to pay schools for steering student business their way. The measure also would require schools to disclose financial relationships with loan companies.

An industry trade group, America's Student Loan Providers, issued a statement endorsing the legislation's core principles. Kevin Bruns, the group's executive director, said the rules would "help guide student loan marketing so that questionable practices are eliminated."

But some in the industry said they were worried that parts of the bill go too far. Shelly Repp, general counsel for the National Council of Higher Education Loan Programs, said a portion of the bill that would prohibit university officials from sitting on lender advisory councils would make it difficult for loan companies to get advice from schools.

Proponents said the legislation would increase the transparency of the student loan system, giving students better information for borrowing decisions that can affect their finances long after they graduate.

Several lawmakers and student advocates, though, said the legislation did not address what they see as the biggest problem: the billions of dollars a year in federal subsidies given to private lenders instead of students.

President Bush has proposed a major cut in subsidies, and Congress might slash them further. Some lawmakers hope any money saved will be used to increase aid for needy students.

"The real test of our resolve will be whether we settle for yet another band-aid on a broken system," said Rep. Tom Petri (R-Wis.), "or if we work to redesign this system to ensure that critical tax dollars in federal student loans provide the best return on the taxpayers' investment."

Some universities also fear that the bill might unintentionally hurt low-income students. Harris Miller, president of the Career College Association, which represents for-profit schools, said loan companies often agree to provide loans to poor students if the companies are included on a school's list of preferred lenders. But he said the legislation might consider such an arrangement an illegal gift.

Also yesterday, Miller announced that his investigators had found that J.P. Morgan Chase, the nation's third-largest student lender, had hired officials at five schools. Investigators also found that the lender spent more than $70,000 to take 200 university aid officers on a harbor cruise in New York City in 2005.

Miller and others on his committee are expected to question Spellings today about the Education Department's oversight of student loan programs. One official was suspended last month after revelations that he held more than $100,000 worth of stock in a loan company while helping to oversee the industry. This week, the head of the department's student loan office announced her resignation.

Lawmakers also have criticized the department for security lapses involving a database with confidential information on tens of millions of students; for not establishing rules to restrict gifts from lenders to schools; and for allowing a lending company to reap hundreds of millions of dollars in subsidies through an accounting loophole.

Spellings intends to point out the department's extensive oversight activities in a forceful response to critics, said her chief of staff, David Dunn.

"She has been probably the most activist secretary on higher education issues ever," Dunn said. "Secretary Spellings is very positive and upbeat and really looking forward to the opportunity to tell her story and set the record straight."

Student Loan Justice website writes about the Student Loan scandal as follows:

The Problem

In 1997, under intense lobbying from student loan companies, The Higher Education Act (HEA) was amended, and defaulted student loans became among the most lucrative, and easiest to collect type of debt. These amendments allow for huge penalties and fees to be attached to defaulted student loan debt, take away bankruptcy protection for student borrowers, dissallow refinancing of the debt, and also provide for draconian collection and punitive measures to be taken against student borrowers, including wage garnishment, tax garnishment, withholding of professional certifications, termination from employment , social security garnishment, and others. According to Harvard Professor Elizabeth Warren in a Wall Street Journal piece by John Hechinger , "Student-loan debt collectors have power that would make a mobster envious."

This legislation has reaped massive fortunes for well connected executives in the private sector. This is particularly true for the Sallie Mae Corporation, whose executive officers invested personal fortunes in lobbying activities in support of the legislation. According to opening comments made in their 2003 Annual report, Former CEO (Now Chairman) Albert Lord (who with his wife personally contributed over $250,000 to senators and Congressmen in support of education legislation in just the last election cycle) boasts that the company's 29% core cash earnings-per-share growth could be attributed largely to fees collected from defaulted loans, as well as loan origination growth.

Lord recently attempted to PURCHASE A MAJOR LEAGUE BASEBALL TEAM with wealth he has extracted from defaulted borrowers (his compensation since 1999 was $225 million, not including appreciation of his stock). Collectively, Albert Lord and current CEO Tim Fitzpatrick have taken about $367 million from the company since 1999. Since 1997, Sallie Mae has registered $3.6 Billion in stock for offering to employees. Sallie Mae CEO's regularly top the list of highest paid executives in Washington D.C.

Sallie Mae Stock Performance Since 1997

Sallie Mae staff have also given themselves extraordinary, staggering, obscene amounts of money in the form of stock bonuses. Since 1999, Albert Lord and Tim Fitzpatrick together, have extracted about $367 million in Stock options from the company. In Total, Sallie Mae has set aside $3.6 billion in stock for offering to employees since 1997. This legislation has also paid great dividends for the Department of Education. According to the article mentioned above, the Department projects that it will retrieve every dollar of principal, plus almost 20% in fees and overdue interest for defaulted student loans. Whats worse, this legislation has given rise to an extensive network of non-profit, tax exempt corporations, and also for profit companies dedicated to collecting defaulted student loans- corporations who's executive staffs (both non-profit and for-profit) also have funneled vast sums of money into lobbying members of Congress in support of education legislation, and also funneled vast sums into their own pockets! The earnings, and executive pay of both Sallie Mae, and these non-profits have escalated wildly since 1998.

Sallie Mae stock registered to be offered to employees since 1997 (According to S-8 filings)

Meanwhile, the borrowers suffer. Defaulted student loan debtors quickly find themselves unable to function in society, and are faced with a decision to either continue the paralysis and live in fear, or begin making payments on a massively inflated amount- often double, triple, quadruple, or more than what they originally borrowed. StudentLoanJustice.Org has received thousands of stories from citizens who's lives have been shattered by their student loans. These stories are from decent citizens who have been forced to live "off the grid", had their livelihoods taken away from them, are being forced to postpone marriage and children, and are even fleeing the country and committing suicide.

People who default on student loans are typically decent citizens, who for one reason or another, were not able to capitalize on their education. Most agree that they are responsible to pay back what they borrowed, but most cannot afford to pay back the wildly increased amounts that the Federal Law has allowed to be imposed upon them. Defaulted borrowers are among those in society least able to pay back their debt. Yet, they are being forced to pay far, far more than their fair share--and largely to private corporations who don't actually earn this wealth!

The Student Loan system in America has been hijacked by Albert Lord and his friends. Let there be no mistake: These are not creative geniuses who invented a new product or service. These are not captains of industry who built markets, and competed their way to the top. Rather, these are nothing more than well connected executives who took an existing market, and used their unfair weight in Congress to profit from a vulnerable segment of American Society, and erect insurmountable barriers to competition for their own personal benefit. This CANNOT be what Congress intended when the Higher Education Act of 1965 was created.

Education Secretary faces student loan questions
5/10/2007 By: Associated Press

Education Secretary Margaret Spellings will face questioning in the House today on conflicts of interest in the student loan industry and a reading program for young children.

Spellings defends her agency against criticism from New York Attorney General Andrew Cuomo. An investigation by Cuomo found that some colleges received a percentage of loan proceeds from lenders who were given preferred status by the schools. It also was revealed that some college loan officers received gifts from lenders to encourage them to steer borrowers their way.

Spellings says she has asked an Education Department task force to come up with recommendations for new regulations to better protect against conflicts of interest.

The reading program, Reading First, has been criticized for conflicts of interest and mismanagement.

NY adds 13 more lenders to student loan probe
Mon Apr 16, 2007 6:08PM EDT
By Joseph A. Giannone
LINK

NEW YORK (Reuters) - The office of New York Attorney General Andrew Cuomo expanded a sweeping investigation into the student loan industry with subpoenas and information requests to 13 more lenders, including some of the largest U.S. banks.

Cuomo's office and New York state's two top lawmakers also unveiled legislation to regulate student loan practices. The Student Lending, Accountability, Transparency and Enforcement Act, or SLATE, would require all New York colleges to adopt Cuomo's code of conduct for student loans or face fines.

With the new inquiries, sent on Friday, Cuomo's investigation has expanded to include the top 20 student lenders commanding more than 80 percent of the $85-billion-a-year U.S. student lending business.

The latest requests were sent to 10 of country's the largest banks: Bank of America; Citizens Financial Group, a unit of Royal Bank of Scotland; JPMorgan Chase; National City; PNC Financial Services Group; Regions Financial; SunTrust Banks; US Bancorp; Wachovia and Wells Fargo.

Cuomo's office also sent inquiries to three closely held student lenders: Access Group, College Loan Corp. and EdFinancial Services.

The subpoenas seek information about revenue-sharing programs as well as stock grants, gifts and trips bestowed by lenders on school officials to win more referrals.

REVOLVING DOOR?

The attorney general's office also said it wants to explore whether current or former employees of these lenders worked for the U.S. Department of Education in the past six years amid concern a revolving door at the department has led to lax oversight of student loan practices.

JPMorgan declined to comment. Wachovia said it has not engaged in revenue-sharing agreements. Although Cuomo's office has contact Wachovia in connection to a review of several school, it has not made a formal information request of the bank, said spokeswoman Kathleen Von Bergen.

William Eiler, a spokesman for National City, said his bank does not engage in the practices outlined by Cuomo.

Bank of America spokesman Joe Miller said the bank had seen reports saying that it had received a "request for information" from Cuomo's office, and the bank is in the process of receiving the request.

SunTrust spokesman Hugh Suhr did not know if the bank received an inquiry, but said the bank's internal rules prohibit inappropriate gift giving to win business. An internal review has not found any violations of that policy, he added.

Officials at the other lenders that received the latest inquiries could not immediately be reached for comment.

New York for the past six months has investigated financial arrangements between student lenders and about 100 colleges and universities. Cuomo said lenders have offered payments, shares and a variety of perks to schools and school officials to secure a place on preferred lender lists and win more business.

These and other arrangements were not disclosed to students, who may not get the best deal possible on their loans, Cuomo said.

Previously the state had probed the activities of Citigroup , Sallie Mae (SLM Corp.), CIT Group, NelNet Inc., EFP, Educap and The College Board.

In the past two weeks, Cuomo reached settlements with Citi and Sallie Mae and announced a settlement on Monday with Education Finance Partners. The state has collected a total of $6.5 million in payments into a fund to educate students about financial aid.

The three lenders also promised to adopt a code of conduct drafted by Cuomo's office, halting deceptive and questionable practices such as gifts and fully funded trips for school officials, greater disclosure about "preferred lender" lists, loan resale disclosures and a ban on lenders staffing school-affiliated call centers.

(Additional reporting by Christian Plumb, Dan Wilchins and Ed Leefeldt)