Financial aid offices at 60 colleges investigated by N.Y. State Attorney

Brian Farkas News Editor

New York State Attorney General Andrew Cuomo is expanding a nationwide investigation examining the relationships between colleges and the private lenders recommended to students applying for loans.

On Feb. 2, 60 colleges and universities received letters from the Attorney General’s office requesting information about the process by which their “preferred lender” lists are created. The office did not identify the institutions that received the letters, nor did they explain why they were chosen. Vassar College did not receive a letter.

“The Attorney General is requesting information pertaining to any financial arrangements the schools have with lenders that help the lenders get placed on the preferred lists, including records of any compensation lenders have given in exchange for placement on the lists,” Cuomo’s office said in a Feb. 1 press release. “The Attorney General is also asking for the terms of the loans taken out by students, and for information regarding any benefits offered to individual financial aid officers from lending companies.”

Of the institutions that received the letters, 10 are in California, nine are in Pennsylvania, eight are in Massachusetts, and seven are in New York. Colleges in Rhode Island, New Jersey, South Carolina, and Texas, among other states, were also sent letters. All of the colleges enroll students from New York.

New York Governor Eliot Spitzer, the former Attorney General, began the investigation in November 2006 by requesting information from six different student-loan companies across the nation. This latest expansion of the investigation is just one more example of an intensifying government focus on the economics of higher education.

On Jan. 17, for example, the House of Representatives passed the College Student Relief Act, which cut students’ interest rates in half. Additionally, the Bush administration’s 2008 budget plan cuts federal subsidies to student-loan companies.

Cuomo fit his new agenda into the newly popular rhetoric of a national look at education costs. “Across New York and throughout the nation, people are struggling to keep up with the rising costs of college tuition, and allegations of trips and gifts from lenders to higher education officials raise significant concerns,” he explained. “When making recommendations on how to make tuition more affordable, there must be absolutely no conflict of interest at the expense of students and their families...My office is seeking to ensure that students are being steered toward lenders offering the most competitive rates, not those who offer the best perks to schools or financial aid administrators.”

Vassar President Catharine Bond Hill is confident in the College’s own policies. “The lenders on our list are there because they offer the best disbursement and repayment terms to our students and parents,” she said. “They participate in an electronic process that facilitates the certification and disbursement of loans for us.”

Director of Financial Aid Michael Fraher believes that none of the foul play suspected by the Attorney General occurs at Vassar. “The selection of lenders has been based solely on two important points,” he explained. “First, the ability to offer terms and conditions that help lower the cost of borrowing to families. And second, the ability to provide support and services to the school in the processing of education loans, which ultimately benefit our families.” Such support includes significant customer service as well as web-based applications to manage data.

“It has been our policy to not enter into an exclusive contract with a single lender. Competition has benefited our families,” said Fraher. Vassar currently has four preferred lenders: Citibank, Chase, Nellie Mae and T.H.E.- Northstar.

Fraher also noted that the issue of inducements is just one part of an intense debate over the future of the Federal Family Education Loan Programs (FFELP) versus the Federal Direct Student Loan Program (DL).

The Higher Education Act of 1992 first authorized the Department of Education to provide student loans directly through schools rather than through private lenders. “From the perspective of congressional advocates, it was expected that Direct Lending would be less costly in light of incentive fees and guaranteed interest payments to commercial lenders for their participation in FFELP,” said Fraher.

The College’s choice to stay with FFELP, rather than migrating to DL, was a complex one. According to Fraher, there were two critical faults in the DL program. “First, the conciliation process of paperwork and payments between the school and the feds appeared to place considerable administrative pressure on the Office of Student Accounts that would require additional staffing,” he said. “And second, [we were] concerned about the implementation of brand new systems to be developed by the federal government. Could the feds actually pull it off?”

For several years, these concerns proved valid, with colleges experiencing significant delays in receiving loans from federal government. “In the meantime the FFELP commercial lenders collaborated on the development of a common application and new electronic processes that streamlined FFELP,” said Fraher. Many lenders started to offer interest rate reductions to borrowers, and by the time the government had worked the kinks out of its DL program, the reduced costs offered by Vassar’s preferred lenders made staying with FFELP the better option.

Fraher believes that “most of these points are lost in the midst of the accusations of improper inducements from FFELP lenders to schools, as is the fact that some commercial lenders have been lobbying very heavily to keep FFELP running.”