NY Attorney General expands student loan investigations

Katie Paul News Editor

College and university financial aid offices received national attention this week as New York State Attorney General Andrew Cuomo expanded his investigation into what he deemed “deceptive practices” in the student loan industry. On April 2, Cuomo announced that his office had signed settlements with Citibank, one of the country’s most prominent lenders, and a number of universities.

Citibank currently conducts student loan business at approximately 3,000 schools, including Vassar. Director of Financial Aid Michael Fraher stated that Vassar’s relationships with Citibank and its other preferred lenders were not characterized by any of the deceptive practices described in the Attorney General’s allegations.

Though neither Citibank nor the universities admitted to any wrongdoing, six schools agreed to reimburse a total of $3.27 million to their students, while Citibank committed $2 million to fund a new program sponsored by Cuomo’s office that will educate college-bound students and their families about the loan process.

The settlements also required Citibank and the schools to sign a new College Code of Conduct, in which they agreed to disclose the standards they used to craft “preferred lender” lists, to cease all revenue sharing, to ban all gifts from lenders to university employees, and to prohibit lenders from staffing college financial aid offices or external “call centers.”

The announcement came on the heels of Cuomo’s March 22 decision to file suit against another lending company, Educational Finance Partners (EFP), the first proposed legal action in his ongoing five-month investigation into the “unholy alliance” between financial aid offices and private lenders. He identified the student loan industry as an $85 billion-per-year business, and accused EFP of conducting a scheme to buy its way onto the coveted preferred lender lists—from which approximately 90 percent of students choose their lenders—of more than 60 schools across the country.

“A preferred lender ought to mean that the lender is preferred by students for its low rates, not by schools for its kickbacks,” said Cuomo. “With the cost of college rising every day, the last thing students want to hear is that their lender may be muscling aside a more competitive loan package.”

EFP Founder and Chief Executive Tamera Briones responded that she was fully prepared to defend the company’s practices. “We question whether the Attorney General’s office is seriously interested in learning all of the facts and whether there has been an actual violation of law,” she said in a written statement posted on the company’s Web site.

While the state’s case against EFP is still pending, some of the schools accused of involvement with its “kickbacks” were among those committing to the April 2 settlement. The overall investigation is now looking into over 100 schools and six lenders.

Cuomo had first requested student loan information from 60 colleges and universities in February, then broadened his investigation on March 15 by warning over 400 colleges and universities—including every institution in New York state—to “end or fully disclose potential conflicts of interest in their relationships with private lenders.”

Fraher said that the Attorney General’s warning was a “blanket letter” and that Vassar has not been singled out for investigation.

The Vassar Office of Financial Aid (OFA) does not recommend EFP on its preferred lender list, which consists of four companies: T.H.E. Northstar, Chase, Citibank and Nellie Mae. The latter two companies, however, are among lenders that the OAG has been investigating since November.

The recent settlements addressed relationships through which schools received payments from Citibank on the basis of loan volume. But compared to the large universities in question, said Fraher, Vassar’s loan volume is “rather small” and of little interest to profit-focused lenders.

“We don’t get a piece,” said Fraher. “We have no arrangement like that, nor would we have accepted one. And chances are, lenders wouldn’t have offered one to us anyway because—despite that fact that our default rate is excellent—Vassar is a relatively small school. Not a huge number of students need to take out these loans because we meet 100 percent of need as we determine it, so the only time that students participate in alternative private loans is to refinance family contribution.”

According to the 2007-2008 Course Catalogue, during the 2006-2007 academic year, around
sixty percent of the Vassar student body received financial aid, totaling more than $35 million from the College, federal, state, and private sources.

Fraher claimed that Vassar’s financial aid office had never engaged in any of the practices described in Cuomo’s warning. “We only go to business lunches with lenders already on the preferred lender list because we feel it’s unfair to other lenders, since they won’t get on the list unless they can beat the terms and conditions already offered by the four companies there now,” he said. “There was a loan firm that once offered Broadway tickets, but we turned them down, as is our policy.”

By contrast, explaining NYU’s relationship with Citibank, NYU Assistant Provost for Enrollment Management Barbara Hall said in a statement posted on the University’s financial aid Web site that Citibank had offered to return to NYU 0.25 percent of the value of certain private loans after it had already competitively won a place on the school’s preferred lender list.

“We placed this return of Citibank’s profits in an account for financial aid use only,” said Hall. “We believed it made good sense to use money that would otherwise go into Citibank’s pockets to give more financial aid to NYU students. The Attorney General’s Office, however, has advised us that they don’t see it the same way.”

When asked what he thought about criticism of the investigation, Fraher expressed concern about student trust, explaining that “anytime something like this happens, it can undermine faith in the process.”

“As far as we can tell from the investigation, relatively few universities have been involved in this, and that doesn’t mean that everybody else is doing these kinds of things,” said Fraher. “I would take it personally if parents saw our preferred lender list and felt they couldn’t trust it, because everything we’ve done has been related to trying to make Vassar as affordable as possible and helping people through the complexities of financial aid.”