June 2, 2007
U.S. Puts Limits on Lenders’ Ties to Universities
By JONATHAN D. GLATER, NY TIMES

The Education Department, criticized for lax oversight of student loans, released proposed rules yesterday that would set new standards for universities and ban lenders’ marketing practices that have resulted, in some cases, in loan company payoffs to university officials.

The 225-page package represents a change in direction by the department, which for years had ignored calls by its inspector general, Democratic lawmakers and even some loan-industry officials for it to be more aggressive in policing the $85 billion student loan industry.

The rules would for the first time require universities to include at least three loan companies on any list of lenders they recommend to students and would ban many of the gifts and payments to financial aid officials that lenders have been offering to win student loan volume. The rules would bar everything from travel and entertainment expenses to providing staffing for college aid offices.

They would modify the existing framework, which applies only to federally guaranteed loans, “to strengthen and improve the administration of the loan programs,” the proposal states. The agency said the rules had been sent to the Federal Register for a 60-day comment period. If approved, they would take effect next summer.

Education Secretary Margaret Spellings created a task force in April to draw up the rules after an effort to win consensus on a similar package among representatives of students, lenders and academic institutions in a process known as “negotiated rule making” collapsed.

In the past few months, investigations in Congress and in the states, led by Attorney General Andrew M. Cuomo of New York, turned up an array of undisclosed relationships between universities and lenders, and conflicts of interest on the part of aid administrators. Some university officials who were promoting particular lenders had received stock on favorable terms, consulting payments or gifts from loan companies.

Just this week, the Education Department’s own inspector general reported to Congress that the department had made “minimal” progress in dealing with complaints about abuse in the nation’s government-backed student loan program.

Lenders by law have long been barred from offering inducements to gain loan applications. But what is an inducement is not entirely clear. In 2003, an assistant inspector general criticized the department for not giving any updated opinions about what kinds of incentives were barred since 1995, even though competition for loan business had escalated sharply since then.

Department officials have said in the past that they did not have the authority to oversee many of these practices because they involved private loans — those not guaranteed by the government. They had said they wanted aid administrators and the loan industry to police themselves.

The proposed regulations would still cover only federally guaranteed loans. They identify specific practices that would be barred, including “offering, directly or indirectly, any points, premiums, payments or other benefits to any school or other party to secure” student loan volume. Lenders who offer inducements run the risk of losing the federal guarantee on affected loans, under the proposal.

The rules would also ban a college’s “access to a lender’s other financial products, computer hardware, and payment of the cost of printing and distribution of college catalogs and other materials at less than market rate.” They also make clear that lenders cannot try to get around them by offering benefits to “school-affiliated” groups, like alumni organizations.

In addition, they would require that a university’s list of recommended or “preferred” lenders exclude any that provided incentives. Perhaps most importantly for students, universities would be required to explain how and why they recommend specific lenders and to ensure that all students, not just a few, receive the benefits offered by a lender on a preferred list.

In explaining the need for the regulations on inducements, the department stated that “this guidance, and the general requirements of the law, may no longer be generally known and understood by lenders and other participants” in the federally guaranteed loan program, because the last guidance was provided in 1995.

The rules appeared to be unlikely to meet much resistance. The Consumer Bankers Association indicated that it would seek minimal changes, particularly since Congress is already moving to enact even tougher restrictions.

John Dean, special counsel to the Consumer Bankers Association, said, “I think that you’ll have a series of largely technical comments.”

Lenders, he said, “have come to embrace the inevitability of reform and in many cases welcome it.”

And on Thursday the trade group representing college financial aid officers agreed to bar its members from accepting most gifts and to stop allowing lenders to sponsor its conferences.

Democratic lawmakers in both the House and the Senate who have championed legislation on the student loan industry offered cautious support but also criticized the Education Department for not acting more quickly. So did Mr. Cuomo.

“It has taken far too long for the Department of Education to act,” Mr. Cuomo said in a statement. He noted that the proposed rules would not require preferred lenders to be selected solely on the basis of the best interests of student borrowers. “This seems to be a gaping hole in the regulations,” Mr. Cuomo said.

Robert Shireman, a higher education policy adviser in the Clinton administration who is executive director of the Institute for College Access and Success, said that the rules could still allow philanthropic gifts by lenders to universities that might not be explicitly linked to loan volume.

“There can be the same kind of wink and a nod that occurs around campaign contributions,” Mr. Shireman said, adding that some of the proposals in Congress are stricter.

Separately, the Education Department announced Friday that Ms. Spellings had named Lawrence Warder as acting chief operating officer of the office of Federal Student Aid, previously overseen by Theresa S. Shaw, who stepped down.

Mr. Warder, who has been chief financial officer of the education agency since July 2006, previously worked for years as a management consultant at Deloitte Consulting.

Investigations of conduct in the student loan industry are not over. Yesterday, Senator Christopher J. Dodd, the Connecticut Democrat who is chairman of the Banking Committee, announced plans for a hearing on Wednesday to explore ties between lenders and colleges and universities.

Agreeing to Code of Conduct on Student Loans
By JONATHAN D. GLATER

Wells Fargo, one of the largest companies in the student loan business, has agreed to follow a code of conduct developed by the New York attorney general’s office governing relationships between lenders and universities. The code, which came as a result of a continuing investigation by the attorney general, Andrew M. Cuomo, prohibits practices including giving a university money or other incentives in exchange for steering students to a particular lender. Mr. Cuomo’s investigation identified instances in which loan companies paid universities based on the amounts borrowed by students, as well as questionable ties between financial aid administrators and lenders. The latest agreement means that the five largest student loan companies in the country have agreed to follow the code.

May 16, 2007
National Briefing | Education: Settlements Under Student Loan Inquiry
By JONATHAN D. GLATER, NY TIMES

The New York attorney general, Andrew M. Cuomo, has reached agreements with two more universities under which they will adopt a code of conduct governing relations they may have with student loan companies. Mr. Cuomo's office found that Drexel University, in Philadelphia, was due to receive more than $250,000 from a loan company. That money will now be distributed to students who borrowed from that lender, according to Mr. Cuomo's office. The investigation also found that Timothy Lehmann, the director of financial aid at Capella University, an online institution based in Minneapolis, received more than $12,000 as a consultant to one lender. Twenty-four colleges and universities have adopted Mr. Cuomo's code of conduct. JONATHAN D. GLATER

Capella delays new stock offering
Minneapolis / St. Paul Business Journal - April 17, 2007by Carissa WyantStaff Writer

Capella Education Co. said Tuesday it will delay its secondary stock offering, due to a recent investigation into the company's student loan practices.

The Minneapolis-based online university (Nasdaq: CPLA) last week suspended financial aid director Timothy Lehmann after it became known that he received more than $13,000 in consulting fees from Student Loan Xpress, a student loan company named as one of Capella's "preferred" loan providers.

New York Attorney General Andrew Cuomo has been conducting an investigation into such practices, and Capella is doing its own probe, as well. Lehmann was put on paid administrative leave.

In a press release, Capella CEO Stephen Shank said, "Until we have fully completed our internal review and filed our response to the New York Attorney General's office, we believe it is prudent to defer our offering of common stock at this time."

Capella said its partnership with Student Loan Xpress lasted from late 2005 to early 2006.

The company also detailed that it is currently gathering facts in response to an April 9 request by the State of New York Office of the Attorney General, focused on potential conflicts of interest in the student loan industry. It plans to share findings of its internal review with investors.

Capella, which went public last year, announced in March that it planned to offer about 3.1 million shares in a secondary offering, including about 500,000 new shares. The rest would come from current shareholders.

Based on Capella's current share price of about $33, that could make the total value of the offering about $102 million, though most of that would be accounted for by the shareholder sales.

cwyant@bizjournals.com | (612) 288-2108

Lenders court colleges' favor on student loans
By Jonathan D. Glater The New York Times
WEDNESDAY, OCTOBER 25, 2006
LINK

One student loan company in the United States has invited college and university officials, and their spouses, to attend an education conference - in the Caribbean in February 2007, all expenses paid. Another pays universities bonuses based on how much their students borrow. Others gave away gifts like iPods at a recent conference for financial aid administrators.

With rising tuition and lagging government aid making private student loans a big and increasingly competitive business, these are some of the ways lenders are courting universities in hopes that they will steer students their way.

Students took out nearly $13.8 billion in private loans in 2004-5, more than 10 times the amount borrowed a decade ago, according to the College Board. The key to this business is university financial aid offices, which compile lists of "preferred" lenders, sometimes as few as two. Students rarely comparison shop and rely on those lists.

Financial aid administrators say they pick lenders with the most competitive terms, not the most appealing giveaways. But some have questioned such arrangements - and whether students are getting the best deals.

"I don't think you have to be a bona fide ethicist to recognize the potential for a conflict of interest," said L. Katharine Harrington, dean of admissions and financial aid at the University of Southern California, which she said had no financial ties to lenders.

"I'm not in the business of generating outside-fee revenue" for the university, Harrington said. "Nor am I in the business of recommending a particular lender because of what they do for me. Rather, it's because of what they do for the student."

It is hard to determine how widespread these incentives are. Some of the practices were publicized this summer in newspaper advertisements by MyRichUncle, a relative newcomer to student lending trying to increase its business.

Neither universities nor lenders disclose the arrangements, and several loan companies declined in interviews to identify which colleges had them. Congress made it illegal in 1986 for lenders to use inducements to get applicants for federally backed student loans, but the law does not apply to private loans.

Institutions that say they receive payments from lenders include Boston University and Monmouth University. New York University, Fordham University and Purdue University in Indiana have different arrangements in which a lender sets aside a sum for loans to international students and those with poor credit, determined partly by how much other students at the institution borrow.

It is also hard to assess statements by officials that they recommend only those lenders with the most competitive rates, because only one official, out of more than a dozen interviewed, would disclose the average loan rate that students pay. Some said that they did not even track the interest rates students ended up paying.

Companies go to great lengths to build relationships with university officials. The Caribbean conference, an "Education Summit" planned for a long weekend at a Four Seasons resort , is sponsored by EduCap, a nonprofit financial services company that has done billions of dollars' worth of student loan business. The "special invitation" conference this year offers a chance "to participate in the 2007 Loan to Learn Summit (with your spouse or guest) as an all-expense-paid complimentary guest of EduCap."

George Pappas, a senior vice president of EduCap, said that it sponsored a similar weekend last year and that fewer than 100 people attended. Pappas declined to identify university attendees. He said EduCap paid expenses because "it would be difficult for them to come if we didn't," and it paid for spouses, he said, because "we're asking people to leave their families over the weekend."

He said that the purpose of the conference was to remind "everybody of what the real goal of education is" and that student loans were not discussed.

A students' group has filed a complaint with the Federal Trade Commission, saying that the EduCap Loan to Learn program used deceptive marketing to discourage students from applying for federal grants and loans. EduCap calls the accusations "false and contrary to EduCap's philosophy and business practices of 20 years."

Other lenders offer cash payments directly to universities.

Education Finance Partners of San Francisco pays several universities such a bonus. The more students borrow, the more money the institution gets. The company declined to say how many such arrangements it had.

At Monmouth, which has taken such payments for about two years, the payment last year was less than $2,000, said Claire Alasio, associate vice president for enrollment management.

"Clearly that's not enough money to influence decision-making," Alasio said. She added that the university did not track the interest rates students paid.

Christine McGuire, director of financial assistance at Boston University, which only recently entered such an arrangement with Education Finance Partners, also said payments were "not enough to make a difference," although she declined to say how much they were. McGuire said officials reviewed loan rates each year when assembling the preferred lender list.

"We're very aggressive advocates for our students to get the best rates," said McGuire, who has another connection to Education Finance; she says she is a member of an informal, unpaid advisory board.

"It's essentially a mechanism for giving feedback," she said.

The House Votes To Bar Student Loan Companies From Offering Perks and Financial Incentives To Universities