Cuomo’s Widening Net

Anyone in the student loan industry or financial aid world who was banking on New York Attorney General Andrew Cuomo coming up dry in his investigation into sweetheart deals between lenders and colleges could not have been happy today.

At a press conference this morning, Mr. Cuomo announced that he has uncovered “deceptive practices” in the college loan industry and that, as a result, he is widening his probe. More than 100 colleges are already under investigation, Mr. Cuomo said, and his office has sent a letter to 400 colleges warning them to end or fully disclose potential conflicts of interests in their relationships with private lenders.

Meanwhile, the Attorney General has requested information from six lenders, including loan giants Sallie Mae and Nelnet. The others are the CIT Group, which owns Student Loan Xpress; the College Board, which makes private student loans; EduCap, which received a lot of bad publicity in the Fall for inviting financial-aid administrators on an all-expense-paid, four day trip to the Caribbean to promote its loan product Loan to Learn; and Education Finance Partners, which offers some colleges a share of the revenue the company makes on each private loan taken out by their students.

“There is an unholy alliance between banks and institutions of higher education that may often not be in the students’ best interest,” Mr. Cuomo stated. “The financial arrangements between lenders and these schools are filled with the potential for conflicts of interest. In some cases they may break the law.”

In his letter, Mr. Cuomo revealed the following “problematic” practices:

• Lenders pay financial kickbacks to colleges based on a percentage of the loans that are directed to the lenders. The kickbacks are even greater if the schools make the lender their “exclusive” preferred lender.
• Lenders like Loan-to-Learn fund trips for financial aid directors and their spouses to fancy resorts like Pebble Beach, as well as exotic locations in the Caribbean. Lenders also put aid administrators on their advisory boards in order to curry favor with the schools.
• Lenders set up funds and credit lines for schools to use in exchange for schools putting the lenders on their preferred lender lists.
• Lenders offer large payments to schools to drop out of the federal Direct Loan program so that the lenders get more business.
• Lenders set up call centers for schools. When students call the schools’ financial aid centers, they actually get representatives of the lenders.
• Lenders on preferred lender lists agree to sell loans to a single lender so there is actually no real choice for the student.
• Lenders sell loans to other lenders, often wiping out the back-end benefits originally promised to the students without the students ever knowing.

Mr. Cuomo didn’t reveal the identities of the colleges that are under investigation — although, according to the Associated Press, he said that some are in the Ivy League — or provide specifics about any questionable arrangements he has found. But he said he is still considering taking legal action against lenders and colleges that have acted improperly.

Stay tuned.